How will the autumn statement 2022 impact solicitors, firms and clients?
In stark contrast to September’s infamous ‘mini budget’, this autumn statement reverted from a budget favouring business to one of increased costs and taxes.
We look at some of the announcements in detail and explore what they mean from a personal tax perspective and for businesses. We also set out suggestions that could help reduce ever-increasing business costs.
Personal taxes and fiscal drag
As expected, the chancellor did not make changes to the rates of income tax, national insurance (NI), inheritance tax or capital gains tax (CGT).
Jeremy Hunt froze the threshold on each one of these except CGT, meaning the rates paid today will be the same rates that apply after April 2023.
However, whilst the thresholds remain the same, the chancellor is relying on a concept known as ‘fiscal drag’ to raise the level of tax taken from these levies.
As wages increase, taxpayers are dragged into a new, higher tax band.
The ONS estimates wage growth as 5.5% to July 2022. It is this impact that then generates increases in the tax revenue for the government.
This apparent ‘tax magic’ allows the government to state that it has not increased the rates of tax – a manifesto pledge – while increasing the tax take and plugging an element of the ‘black hole’ left after the mini budget.
Reduction to higher rate income tax threshold
As widely trailed, the chancellor reduced the additional tax rate threshold so that it starts where the personal allowances are fully removed from a taxpayer, at £125,140.
This means tax rates for individuals run from 20%, once the personal allowance is exceeded, to 40% on amounts above £50,270.
This increases to an effective 60% rate on amounts between £100,000 to £125,140, before dropping back to 45% on all earnings above this level.
The full impact of the tax increases – except for those earning over £125,140 who could be £1,243 worse off – will not be felt immediately, but over time as wages increase.
Reduction to dividend allowance
Many people use the dividend allowance, which is currently set at £2,000, to shelter small amounts of income they receive.
The chancellor halved the allowance to £1,000 from April 2023, before halving it again to £500 from April 2024.
This will have an effect on business owners who draw an element of their remuneration in the form of dividends.
However, undoubtedly its greatest impact will be on those taxpayers who, having just received a modest uplift in their income following the increase in interest rates, will see their investment income cut by this change.
There will be an increase in the number of taxpayers having to complete a tax return because their dividend income exceeds the new lower thresholds.
It seems unlikely that this is what HM Revenue and Customs (HMRC) wanted, especially when it has spent time trying to remove people from the self-assessment system over the past few years.
Remuneration for business owners
For many business owners, deciding how to remunerate themselves has been the source of much debate.
Business owners normally rely on two elements in relation to their remuneration:
- a salary to at least recognise their status within the business
- a larger return on their investment in the business, normally in the form of a dividend
As corporation tax rates change, there will be some who look to change this mix, seeking the larger corporate tax relief and reducing the overall cost of their remuneration package.
However, remuneration planning should come with a health warning because tax law, supported by case law, does not simply allow the taxpayer to swap between these two elements as the rates move.
The position is much more complex and increasing your salary significantly now because this is what the rates suggest is the ‘lowest’ tax option will likely mean the salary needs to stay at that higher rate into the future, no matter what happens to the rate.
CGT allowance reduction
It was CGT where the chancellor decided to take the hatchet, reducing the annual allowance from £12,300 to just £6,000 from April 2023, falling to £3,000 from April 2024.
The unprecedented reduction in this allowance will impact those with modest gains where no tax, and no reporting, was required.
The reduction in the allowance could see an additional £2,604 of tax due by individuals selling property from April 2024, as well as the requirement to report small gains to HMRC within 60 days of a property sale.
However, once again, it may be the unintended consequence of this change that will see taxpayers’ investment value impacted.
Previously, taxpayers would make use of this allowance to rebase shares, adding these into their ISA portfolio, reducing the eventual CGT gain on the portfolio, but this will be much more restrictive, building larger gains in portfolios for when they are eventually sold.
There is an old adage, ‘never let the tax tail wag the dog’. This has never been so true.
In all circumstances where you are looking to review your remuneration, you should take advice from a tax professional.
How the autumn statement will impact businesses
Dividends and corporation tax
This budget confirms that incorporated business owners will see corporation tax rates rising to 25% from 1 April 2023.
For shareholders, dividend tax rates will rise by 1.25% across all three bands. This is combined with tax-free dividend allowances reducing by 75% over the next two years.
Alongside the changes to dividends and corporation tax discussed above, there were other announcements that will directly impact law firms and business clients:
Increase in National Living Wage
Whilst an increase in the National Living Wage will be welcomed by lower earners, the announcement of the record-breaking 9.7% hike will result in higher wage costs for employers.
This will undoubtedly lead to higher employment costs throughout the payroll structure.
Energy price support continues until March 2023.
After that time, it is expected the government will offer more focused assistance to those businesses that need it the most.
Most businesses should prepare to see further increases in their energy costs from April 2023.
Business rates support package
There were some positives: the chancellor announced a £13.6 billion business rates support package.
Of this, £2.1 billion will specifically assist retail, hospitality and leisure properties, with reductions rising from 50% to 75% in 2023/24. This should support 230,000 properties.
Suggestions for businesses to help fend off extra costs
Reducing employment costs
Businesses might look at ways to bring down costs, such as bringing on apprentices, which will lower wage costs and benefit employees by providing qualifications. Grants of £1,000 per apprentice are available.
Businesses with up to £100,000 of employers’ NI should ensure they claim for their entitlement to the £5,000 employers’ allowance.
Investing in technology that reduces the amount of labour time required should result in costs receiving full tax relief in the business.
Reducing energy costs
For those who aren’t lucky enough to be tied into long-term cheap energy deals, investing in clean energy – such as solar panels and/or air source heat pumps – can be advantageous for corporation tax relief.
Clean energy can also significantly reduce future energy costs.
Upgrading older machinery such as fridges and freezers to more energy-efficient models can often pay for itself in a matter of years.
Smaller investments into sensor-based LED lighting and infra-red heating can also add up to significant annual savings.
Cash is king
As we head into uncertain times, remember the old saying “cash is king”.
Carry out cash flow forecasting to ensure surprises are kept to a minimum, using cash flow models to do this.
It is also essential that with interest rates rising, businesses shop around when looking for finance to ensure they receive the lowest rate possible.
Looking beyond traditional banking relationships to make use of alternative business funding options may be key.
It was always inevitable that the credit card bill for the financial support given to businesses and working people to help get us through COVID would have to be met before long.
It is especially challenging that this coincides with the energy cost crisis and wider cost of living pressures being faced.
However, it is to be hoped that the resilience of British business will drive a successful period of growth as the economic pressures ease.
Having a clear and careful understanding of your business cash flow, business and personal tax allowances, and seeking professional advice to assist throughout this period, will be key to remaining on track to attain your business and personal goals.
This article is a general guide to the issues that we see in practice. It is not a substitute for professional advice which takes account of your personal circumstances.
No responsibility can be accepted for any loss occasioned by any person acting or refraining from action on the basis of this article.
Armstrong Watson LLP is working in partnership with the Law Society for the provision of accountancy services to law firms.