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Budget Newsletter 2022

Hi Everyone,

One year ago, in the last Spring budget we had a budget full of Covid related support measures and extensions to the existing ones as well as a glimpse into how this may all start to be repaid in the future with an announcement of rises in corporation tax for Companies with profits over £50,000. 

We are still a year away from the start of those corporation tax rises from 1st April 2023 but we have a new set of announcements via this years Spring budget. 

Thankfully it is completely free of talk of Covid grants and furlough extensions. Whilst these support measures where lifesavers at the time for many businesses we would all much rather be back to trading as usual so it’s a good sign that these are deemed unnecessary now!

It was also announced in the Autumn that a new 1.25% levy will be introduced on income from April 2022 which is, for all intent and purposes, a 1.25% tax rise for individuals.

I’m sure you will all know the effects of Covid aren’t over, paired with the Russian invasion of Ukraine amongst other things the cost of living is rising at a very high rate, with inflation expected to hit 8-9% by the end of the year.

Whilst today’s budget won’t completely combat all of the above, I suspect there are at least some announcements that will help to soften the burden. The main points being:

Contents

  1. 5p Fuel Duty Cut
  2. Employee NI Threshold increase
  3. Income tax cut to 19%
  4. Increase in Employment allowance
  5. Tax on Dividends
  6. National Minimum Wage
  7. Directors Payroll
  8. 0% VAT on energy saving materials
  9. Increase in Household Support Fund
  10. Other announcements

  1. 5p Fuel Duty Cut

Fuel duty will be cut from now until March 2023 by 5p per litre. The RAC say this will be an average reduction of £3.30 on filling up a standard 55 litre fuel tank on your car. Not a lot you might say! Labour agrees with one MP shouting ‘Is that it?’ at the chancellor when he made the announcement.

Rishi’s response was that he was limited in what he could do and that because of the situation in Ukraine he wanted to leave some room to manoeuvre, whatever that means! 

But I suppose it’s at least something, a few more extra miles for your pound.

  1. Employee NI threshold increase

As mentioned above, in the Autumn a 1.25% levy was announced which effectively is a rise in national insurance, although it will be separated out as a levy from 2023/24 tax year.

Given the current circumstances the chancellor has come under pressure in recent weeks to scrap this planned levy, or at least postpone it until times are more stable. 

The chancellor has not done this and the 1.25% levy will remain and come into force in April 2022. 

However, the chancellor has instead chosen to raise the level at which Employees NI begins to be paid from £9,500 a year to £12,570 per year. This brings it in line with the tax threshold and represents a £330 a year saving for anyone earning above £12,570 per year. 

However, because of the implementation of the levy above, this means in real terms that anyone who earns up to £12,570 would be better off by up to £330, whilst people who earn up to £50,000 would be a maximum of £100 worse off. The estimate is that people earning below £36,000 will get a net benefit overall from the above 2 changes in NI.

However, it is more beneficial for lower paid workers. Assuming the levy will also start at £12,570 which isn’t entirely clear at the time of writing, then for example an employee earning £12,570 per year will get an absolute saving of £330 per year. Once earnings are above £12,570 the saving will taper off until the additional cost of the 1.25% levy will outweigh the £330 saving.

This will start in July, mainly to allow time for payroll software and systems to be updated accordingly, so actually there are going to be a few months were this saving isn’t made.

So it appears Rishi is trying to offset the cost of the new levy for people whilst saving face and not having to backtrack on it,with a tailoring towards benefitting people with lower earnings.

  1. Income tax cut to 19%

On the face of it this is quite a big announcement by the chancellor and not one that was expected. The basic rate of income tax hasn’t been cut for 16 years. 

Little bit of a red herring this one as this won’t take effect straight away, only at some point by 2024. With the tax free threshold being frozen until 2026 also and just a 1% reduction in tax then the savings in real terms by then probably won’t be a lot. 

Again though at least it’s something.

  1. Increase in Employment Allowance

Businesses with employees have to pay Employers NI to HMRC on top of their staff’s wages.

Businesses can claim what’s called the ‘Employment allowance’. This currently is a maximum of £4,000 and means that businesses don’t need to pay the first £4,000 of employers NI that is due in a year.

This will be increased to £5,000 for the tax year 2022/23. 

This means a saving of up to £1,000 for businesses who employ staff. 

For those who don’t know, if we run your payroll for you, we automatically claim this allowance if you are eligible, most businesses are eligible with 2 or more staff. So there isn’t anything you need to do as we will take care of this.

The threshold from which Employers NI starts will rise from £8,844 to £9,100 from 1st April 2022.

  1. Tax on Dividends

The first £2,000 of dividends are chargeable to tax at 0% (the Dividend Allowance). 

For 2022/23 and subsequent tax years the rate at which dividends received above the Dividend Allowance are taxed has increased across all rates by 1.25% to the following rates:

8.75% for basic rate taxpayers

33.75% for higher rate taxpayers

39.35% for additional rate taxpayers.

Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the Dividend Allowance.

To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed.

Therefore, over the coming months when we are compiling your year end accounts up to and including the 31.03.22 it may be worth maximising your dividends if possible as they will be taxed at the old rates of 7.5%, 32.5% and 39.35% respectively.

Although the rise in dividend tax seems small at 1.25% for those that pay it actually represent an almost 17% hike in the dividend tax 

For Example someone who takes £30,000 of dividends would currently pay tax of 

£30,000 – £2,000 Allowance = £28,000 * 7.5% = £2.100 

Under the new rates above this would change to 

£30,000 – £2,000 Allowance = £28,000 * 8.75% = £2,450

Real rise is £350 / £2,100 = 16.66%

  1. National Minimum Wage

Don’t forget the national minimum wage will increase as follows from the 1st April from £8.91 to £9.50 per hour, a rise of 6.6%. Other age related national minimum wages will also increase.

For clients who we do payroll for we will advise you of any changes needed for your payroll.

  1. Directors Payroll

For Directors who pay themselves via payroll we are advising for future tax years that they pay themselves £12,570 (£1,047.50 per month). This will be adjusted down slightly for the 2022/23 tax year to accommodate the Ees NI threshold increase starting in July rather than April, finer details to be confirmed.

At this level of pay no tax will be due and no employee NI.

From April 15.05% Employers NI will accrue (normally for director’s payrolls payable towards the end of the tax year) but this will be offset by a potential 19% corporation tax saving (or more than 19% from 2023 if your profits are over £50,000) so still worth doing.

The above will be subject to individual circumstances and we may contact you on this prior to implement this on your behalf.

  1. 0% VAT on Energy Saving Materials

VAT is to be reduced on home installed energy saving products to 0% (from 5%) in an effort to make green energy more affordable and combat the rise in non-renewable energy prices.

The government was keen to point out that previously they were tied to EU VAT regulations on this and could not reduce it but now can after Brexit.

This means that things such as solar panels will now have 0% VAT added to the price making the capital outlay needed for such energy solutions slightly more affordable.

This is planned to stay for the next 5 years.

  1. Increase in household Support Fund

The government had previously announced that they were issuing local councils with £500m of funding to help support vulnerable households with rising living costs.

This will now be increased by a further £500m to £1bn. It will presumably be up to the local councils on how they use this funding but it is to be targeted at those most vulnerable to the cost of living increases.

  1. Other announcements

Green relief for business rates – The government had already announced between April 2023 and March 2035 business rates exemptions were to be made for eligible plant and machinery used in onsite renewable energy generation and storage. This has now been brought forward to start from April 2022.

R&D Tax relief reform – This is to be reformed to promote R&D within the UK rather than outside of the UK. It will now also include all cloud and data costs associated with R&D (previously it had said only some).

Additional funding to tackle fraud – Additional investment in the DWP, Tax credits and other areas to reduce fraud in these areas. Also investing in setting up a new public sector Fraud Authority.

Additional funding for HMRC – mainly in the tax compliance and debt management areas in order to increase support to taxpayers hoping to pay off accrued tax debts, and also ensuring medium and large businesses pay what they owe.

Annual Investment allowance threshold extension – The temporary annual investment allowance cap increase to £1m that allows businesses to claim 100% relief on qualifying expenditure on business assets in the year of purchase has been extended to last until March 2023.

With all of the announcements mentioned above finer details will be given over the coming days/weeks. These are the basics of what we know from the budget statement yesterday.

Please recommend us or refer us to anyone you know who needs an Accountant or could benefit from our services. At the very least leave us a Google or Facebook review if we have helped you in any way. 

As always, please feel free to call Paul, email or whatsapp us anytime for help and assistance on any of this or anything else.

Kindest Regards

APH Accountants

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