The UK Autumn Statement was delivered to parliament on Thursday 17 November by Chancellor Jeremy Hunt.
17 November 2022
Some say that there is a £55bn ‘black hole’ in the UK finances. Others say there is no hole at all if you look at the finances through a different lens. The Chancellor obviously isn’t wearing those spectacles and has decided the hole is there and something must be done to fill it. In a two-pronged attack, he is aiming to close the gap by cutting spending and increasing the tax take.
Yet, in a continuation of the sleight of hand that has developed over successive governments, we are only seeing minor increases in headline tax rates. Instead, with inflation running very high, the Chancellor is relying on the so-called fiscal drag to do the heavy lifting for him. By freezing (or in some cases reducing) the bands at which taxes are paid on income and gains increase, with the result that a greater proportion falls to be taxed at higher rates.
Fiscal drag also works for Inheritance Tax. The Chancellor has again not moved the nil-rate band so, as inflation increases the value of assets, more estates will be subject to 40% inheritance tax.
Where fiscal drag doesn’t work quickly enough to address the financial gap, the Chancellor has restricted the bands for lower tax rates - for high earners the 45% tax rate will start at £125,140 rather than the current £150,000. Only a few short weeks ago the previous Chancellor wanted to scrap this tax rate entirely. The annual exemption for dividend income will be halved from April 2023 and then halved again the next year. For capital gains tax, the annual exemption will be reduced from the current £12,300 to £3,000 per year over the next two years.
We already knew that corporation tax will be increasing from April 2023, but the Chancellor also announced a change to the generous tax relief for companies carrying out research and development. This was badged as a reduction because there has been much publicity about suspected fraud in the scheme for smaller companies and the Chancellor has responded by reducing the headline relief significantly. However, the increase in the value of the relief because of the increased CT rate means that the real impact is much less than the headline rate change would suggest for those who use the losses to offset tax on profits, with a greater impact for those surrendering losses for a cash repayment under the scheme.
However, for larger companies there is actually an increase the benefit of the R&D relief under the R&D expenditure credit regime. If the economy is to grow significantly, productivity needs to increase, and the Chancellor is encouraging the larger companies to step up and deliver those innovative changes for us. The Government has reiterated its support for the investment reliefs for new and innovative companies through the Seed Enterprise Investment Scheme, the main Enterprise Investment Scheme and Venture Capital Trusts. The overall increase in income tax, Capital Gains Tax and Inheritance tax through fiscal drag and reduced allowances make these reliefs even more valuable.
The planned increase in corporation tax to 25% will go ahead but for some energy related industries there will be further windfall taxes. The energy profits levy will be uplifted to 35% from 1 January 2023 (increasing the overall corporation tax rate on oil & gas profits from 65% to 75%). For low-carbon electricity generators there will be a temporary levy of 45% above a set benchmark of £75 per MWh, for businesses exceeding 100GWh production over a period. The justification for this is that their cost of production remains cheap but, because of the way the energy market functions, they currently sell their output at the same rate as high-cost producers so are creating even higher extraordinary profits than those earned by the high-cost producers.
Overall, unlike the recent mini-budget, there were no real surprises in the Chancellors statement or hidden in the small print. Whilst an increase in taxes is rarely viewed as good news, the Chancellor has spread the load over the range of taxpayers and over time.
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