Mini Budget 2022: Financial Services

*For the latest information please see our mini budget summary

A deregulatory package to support the sector has been promised later this autumn, which will include a plan for repeal of certain EU laws, including Solvency II, and their replacement of others with more tailored rules for the UK.  Ahead of then, as was well trailed in advance of today’s announcements, the Chancellor confirmed that the PRA will remove the existing regulatory cap on bankers’ bonuses.  Alongside the reduction in personal income tax rates this will undoubtedly provide a cheer to many in the sector and may help with the UK’s global competitiveness.

The key tax changes of interest to Financial Services Sector businesses are:

Corporation Tax & Bank Surcharge rate changes

The main benefit to the financial services sector is that the already legislated-for increase in the CT rate to 25% will no longer go ahead.  Groups with significant UK business profits will breathe a sigh of relief.

To reflect this cancellation of the planned increase in CT rate, the equivalent planned reduction in the Bank Corporation Tax Surcharge rate, from 8% to 3%, will also no longer go ahead.  Banks and building societies with UK profits within the scope of the surcharge will therefore see a smaller reduction in their future rate of tax than other non-banking entities and groups – together with the CT rate reduction, the combined rate of tax will return to 27% (19% plus 8%) from 1 April 2023 rather than the previously expected 28% (25% plus 3%). 

There remains an additional sweetener for banks and building societies in that the planned increase in the Surcharge Allowance will go ahead.  This will mean that the first £100m of UK taxable profits (currently £25m) will be taxed at 19% and the additional 8% surcharge will apply only to profits above this threshold. 

The immediate effect of all these changes will be to reduce the rate at which deferred tax items are recognised (subject to the date of substantive enactment of these measures), almost certainly for periods ending on or after 31 December 2022. This will include deferred tax on any IFRS 17/IFRS 9 adjustments. At any reporting date, deferred tax will have to be accounted for at the 25% currently enacted, this will change for reporting dates after the substantive enactment of today’s announcements. Groups with an October or November reporting deadline may wish to consult on the appropriate disclosure.

The changes will have a knock-on effect on valuations and capital positions.

Basic rate of income tax lowered to 19%

With effect from April 2023, the basic rate of income tax is set to reduce by 1% to 19% in England, which is earlier than previously assumed under Rishi Sunak.

Life insurers will now have to implement a rate change to ensure that policy holders are only charged the new 19% rate affecting actuarial and policy administration systems.

This could be complicated further should Scotland retain a 20% basic rate band, testing the practical application of systems allowing for differential rates in the devolved regions.

This measure will also impact the rate of withholding tax applied on interest and royalties paid offshore.

Pension cap changes

The changes to the pensions charging price cap previously announced by Rishi Sunak have been re-announced but with no new detail apart from the statement that the Government intends to accelerate their reforms.

With the basic rate and additional rate of income tax set to be respectively reduced and abolished, there may be an opportunity for people who are able to invest in pensions this year in order to secure a higher rate of relief, by investing before April.  Consideration should also be given to the timing of employee payments.

Real Estate

Following news stories over the last couple of days, the expected changes to stamp duty land tax materialised by way of a simple increase in the band below which SDLT does not apply to £250k (from £125k). In addition, first-time-buyers will now pay no SDLT up to £425k and this relief applies to a property being bought for less than £625k (rather than the current limit of £500k).

The benefits in the RE investment space would likely be limited to certain purchases. Specifically, where multiple dwellings relief may apply, the maximum price at which this relief is beneficial will increase - depending on the portfolio size, MDR may now be advantageous up to an average acquisition price of £410k vs £330k before the changes.

However, there may be a knock-on effect to properties being acquired for less than £625k as those properties may hold their value better in the face of increased demand.

From the constructors’ and developers’ perspective, the changes for first time buyers should be of more direct benefit, especially in the face of economic uncertainty.

It is perhaps a pity from an investment perspective that all the bands were not shifted upwards - the changes are not game changers by any means but positive nonetheless.

Investment Zones

The government will work with devolved administrations and local partners to introduce Investment Zones across the UK with the aim of driving growth and unlocking housing. This will be targeted with lower taxes for a 10 year period, accelerated development and wider support for local growth. Some examples under consideration for specified sites in England are:

• Business rates – Relief from business rates on newly occupied business premises and certain expansions of existing business into Investment Zone sites.
• Enhanced Capital Allowances – 100% first year allowances for companies’ qualifying expenditure on plant and machinery assets for use in Investment Zone sites.
• Enhanced Structures and Buildings Allowances – Accelerated relief to allow businesses to reduce their profits by 20% of the cost of qualifying investment per year in a straight line over 5 years.
• Employer NI relief – Zero rated employer NICs on salaries of new employees working in the Investment Zone sites (for at least 60% of their time) on earnings up to c£50k per year.
• Stamp Duty Land Tax – Full SDLT relief for land and buildings bought for use or development for commercial purposes and new residential developments.

The government are continuing to liaise with different departments in order to specify these zones through a rapid Expression of Interest programme. Although there is limited detail available today, there is potential for deployment of financial services capital into these zones. We will communicate more on the specified zones and rules throughout the UK as soon as more information becomes available.

Other items of interest:

• The 1.25% increase in national insurance rates will be reversed from 6 November.  The health & social care levy and the 1.25% increase in dividend tax rates will also be abolished and reversed from 6 April 2023.
• Annual investment allowance permanently set to £1m.
• The off-payroll working rules will be abolished from 6 April 2023, removing the obligation on engagers to determine the employment status for tax purposes of contract workers.