September’s ‘mini-Budget’ made major changes to tax and national insurance contribution (NIC) rates, which have important short-term consequences.
The ‘fiscal event’ that the new Chancellor, Kwasi Kwarteng, presented in late September was more a ‘maxi’ than a ‘mini-Budget’. It contained a raft of measures that amounted to tax cuts of nearly £45bn a year in the medium term. The more significant changes on the personal tax front included:
• A reduction in the basic rate of tax (outside Scotland) from 20% to 19% was brought forward a year and will now begin from 6 April 2023.
• The 45% additional rate of income tax in England, Wales and Northern Ireland was briefly destined to disappear from the same date, before the politics of such a reform prompted a screeching U-turn. However, even if it had been abolished, the UK’s complex tax system would have continued to generate much greater marginal tax rates, such as the 60% effective rate on the band of income between £100,000 and £125,140 subject to phasing out of the personal allowance.
• This tax year’s 1.25 percentage point increase in tax on dividends above the £2,000 dividend allowance will be removed, also from the start of the next tax year.
• The increases to NIC rates for employees, the self-employed (and employers) that took effect in April 2022 are removed from 6 November 2022.
• The 1.25% Health and Social Care Levy, which had been due to replace the NIC, increases from April 2023 will be scrapped.
These changes have a variety of consequences. For example, if you are a director of your own company, paying yourself a dividend after 5 April 2023 rather than before means you will benefit from the lower dividend tax rates. Some quoted companies may adopt a similar deferral strategy to benefit their taxpaying shareholders.
In other instances, it may be better to bring forward income because next tax year the basic rate tax credit will be lower. As is often the case, what appear to be simple changes could mean serious consequences to your financial situation, so you should be seeking advice before making any moves.
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority does not regulate tax advice.