At last year’s Autumn Statement, cobbled together in the depths of the self-inflicted market chaos of the Trussonomics experiment, the newly installed Jeremy Hunt froze tax thresholds across the board and slashed personal allowances in an effort to bring the UK’s finances back on track. With those effective tax increases and prevailing economic conditions now swelling his coffers and brightening the OBR’s forecasts, today’s Spring Budget gave Mr Hunt an opportunity to announce a plethora of spending and investment plans designed to promote economic growth through tax breaks for business and getting more people back into work, all under the heading of the four key themes of Employment, Education, Enterprise and Everywhere.
The long-planned increase in the headline rate of corporation tax, from 19% to 25%, will go ahead following this 4Es Budget (as we all expect it will now end up being known), albeit the Chancellor was at pains to point out that only 10% of companies will pay the full rate and that it will remain the lowest headline rate among G7 countries. To take the edge off this increase and put some hard cash behind the government’s pro-enterprise agenda, the Chancellor will introduce ‘full expensing’ for the next three years for certain capital expenditure, namely IT equipment, plant and machinery, with the hope that it can become a permanent feature in the future. This will allow companies to deduct all such spending in full from their taxable profits. This is a valuable tax break and will cost the government an expected average of £9bn per year. No doubt Mr Hunt hopes that it will increase the attractiveness of the UK as a place to do business, whilst also encouraging more investment in UK companies. Following on this theme, there will be a new enhanced research and development credit for certain R&D intensive small and medium-sized business, an increased Annual Investment Allowance for small business, and 12 new ‘Investment Zones’ (which will have access to funding for skills, infrastructure, tax reliefs and business rates), with the locations still to be decided.
On the personal tax side, an important change already widely trailed in the press was an increase in the pensions Annual Allowance from £40,000 to £60,000. This is the total amount of pensions contributions a taxpayer can make which benefit from income tax relief. Targeted at NHS consultants being hammered with income tax bills on their pension contributions but of wider benefit, the threshold at which the Annual Allowance begins to be withdrawn (by £1 for every £2 earned over the threshold) will also nudge upwards from £240,000 to £260,000, allowing more higher earners to save into their pension. The minimum Tapered Annual Allowance will also increase from £4,000 to £10,000.
The Chancellor’s best-kept surprise, however, was to abolish the much-maligned pensions Lifetime Allowance. The Lifetime Allowance, originally introduced under Labour and retained by the Conservatives, is a cap on pension savings of (until now) a little over £1m which, if exceeded, leads to punitive tax charges. The rationale for this cap has never been particularly clear and pension savers will be pleased to learn that they will no longer need to gaze into their crystal ball to determine when to stop funding their pension for fear that its future growth may bust through the allowance. However, given the chaotic decision making which has been a feature of the pensions rules for some years and the continued yo-yoing of the Lifetime Allowance, taxpayers may be reluctant to place much reliance on this latest change.
An area left unexplored by the Chancellor was any change to the taxation of UK non-domiciliaries, who can currently elect to be taxed on the ‘remittance basis’ for up to 15 years of UK tax residence. No doubt the Chancellor’s lack of tinkering with the regime will come in for criticism by Labour and will prove a topic of much discussion in the run up to the next election, expected at the end of next year, but Mr Hunt may well think that the potential benefits to the UK economy – bringing in wealthy foreigners to invest and settle here for the long-term – outweigh any perceived unfairness and contribute to Mr Hunt’s goal of making the UK an even more attractive place to invest.
On the whole, and doubtless to the dismay of certain members of his party agitating for reductions in headline tax rates, the Chancellor has looked to keep matters on a steady course and has avoided being too generous in terms of tax cuts (the pre-announced freezing of personal tax allowances being likely to bring in much increased revenues in particular). However, as the current election cycle starts to heat up over the coming 12 months or so, one can be sure that there will be some pre-election tax cuts coming down the track given the historically high rates of tax, potentially in the autumn financial statement. The electorate could well be given stark choices between two distinct tax policies in the Labour and the Conservative manifestos. This Budget won’t set the tone for those manifestos but has perhaps gone some way to restoring the Conservative party’s reputation for competence.
If you have any questions about the impact of the changes in the Budget, please get in touch with your Withers lawyer or talk directly to Ceri Vokes, Charlie Tee, Chris Groves or Rachel Hawkins.
For further information, please contact:
Christopher Groves, Partner, Withersworldwide
christopher.groves@withersworldwide.com
