Fiscal drag

What is fiscal drag?

The Oxford dictionary defines it as:

‘The deflationary effects of a progressive taxation system on a country’s economy. As wages rise, a higher proportion of income is paid in tax’

The recent comments made by the Chancellor in the Autumn Statement, froze most Income Tax allowance and rates at current levels until 2028.

This means that wage earners who receive pay increases until April 2028, to try and keep spending power intact, will pay income tax on any increase. In certain circumstances, they may also see their taxable income boosted into the 40%, or 45%, Income Tax bands.

If wage increases continue to lag behind inflation, then wage earners will suffer a double hit to their spending power in coming years.

Capital Gains planning

Readers may have noted that the Chancellor announced a significant reduction in the annual Capital Gains Tax allowance, currently £12,300, from April 2023.

 

It is reducing to £6,000 from April 2023 with a further reduction to £3,000 from April 2024.

 

Taxpayers who are contemplating the disposal of a chargeable asset next year, which will create significant chargeable gains, should consider organising these disposals before, rather than after, 5 April 2023; unless they have already crystalised gains during 2022-23 and fully used their £12,300 tax-free allowance.

And don’t forget, married couples and civil partners both qualify for the £12,300 allowance in which case organising joint ownership of these assets before disposal may be beneficial.

Uprating benefits and cost of living payments

Changes to these support payments were announced in the Autumn Statement last month. They include:

 

  1. State Pension – will increase in line with inflation.
  2. Cost of living payments – the government will provide households on means-tested benefits with an additional £900 Cost of Living payment in 2023-24. Pensioner households will receive an additional £300 Cost of Living payment, and individuals on disability benefits will receive an additional £150 Disability Cost of Living payment in 2023-24. These payments will be made on a UK-wide basis.
  3. Uprating of benefits – the government is protecting the most vulnerable in society by increasing benefits in line with inflation, measured by September CPI which is 10.1% this year. Around 19 million families will see their benefit payments increase from April 2023. This includes increasing the State Pension by inflation, in line with the commitment to the Triple Lock. The standard minimum income guarantee in Pension Credit will also increase in line with inflation from April 2023 (rather than in line with average earnings growth). This will ensure pensioners on the lowest incomes are protected from inflation and do not lose some of their State Pension increase in the Pension Credit means test. Some disability benefits are devolved in Scotland, so it is for the Scottish Government (SG) to decide uprating. Department for Work and Pensions (DWP) benefits are fully devolved in Northern Ireland, so it is for the Northern Ireland Executive to decide uprating in Northern Ireland.

National Living Wage changes from 1 April 2023

Employers will need to update their systems to reflect the changes in the National Living and Minimum Wage rates from 1 April 2023.

They are:

  • Increasing the National Living Wage for those aged 23 and over by 9.7% to £10.42 an hour;
  • Increasing the rate for 21–22-year-olds by 10.9% to £10.18 an hour;
  • Increasing the rate for 18–20-year-olds by 9.7% to £7.49 an hour;
  • Increasing the rate for 16–17-year-olds by 9.7% to £5.28 an hour;
  • Increasing the apprentice rate by 9.7% to £5.28 an hour; and
  • Increasing the accommodation offset rate by 4.6% to £9.10 an hour.

As this will increase the payroll costs of affected business owners these changes will need to be factored into business plans for 2023-24.

Tax Diary December 2022/January 2023

1 December 2022 – Due date for Corporation Tax payable for the year ended 28 February 2022.

19 December 2022 – PAYE and NIC deductions due for month ended 5 December 2022. (If you pay your tax electronically the due date is 22 December 2022).

19 December 2022 – Filing deadline for the CIS300 monthly return for the month ended 5 December 2022.

19 December 2022 – CIS tax deducted for the month ended 5 December 2022 is payable by today.

30 December 2022 – Deadline for filing 2021-22 self-assessment tax returns online to include a claim for under payments to be collected via tax code in 2023-24.

1 January 2023 – Due date for Corporation Tax due for the year ended 31 March 2022.

19 January 2023 – PAYE and NIC deductions due for month ended 5 January 2023. (If you pay your tax electronically the due date is 22 January 2023).

19 January 2023 – Filing deadline for the CIS300 monthly return for the month ended 5 January 2023.

19 January 2023 – CIS tax deducted for the month ended 5 January 2023 is payable by today.

31 January 2023 – Last day to file 2021-22 self-assessment tax returns online.

31 January 2023 – Balance of self-assessment tax owing for 2021-22 due to be settled on or before today unless you have elected to extend this deadline by formal agreement with HMRC. Also due is any first payment on account for 2022-23.

HMRC app is a gift for Christmas workers and employers

This year, 10 of the UK’s largest seasonal employers are expected to hire 234,700 Christmas workers – up 74 per cent on 2021.

This growth is largely being driven by the likes of Amazon but businesses of all shapes and sizes throughout the land are currently advertising for extra help to cover the busy festive season.

Vacancies range from people simply providing additional support to fabulously festive roles such as seasonal chocolate packers, Christmas chefs, reindeer handlers, Christmas tree decorators, gift wrappers, turkey pluckers and helpers for Santa.

Whatever the role might be there is one thing the people filling these positions and their employers have in common – they all need to make sure they are paying the correct amount of tax.

In the past this has often caused a bit of a headache for businesses and their temporary employees but these days help is at hand with the free HM Revenue and Customs (HMRC) app.

How does the HMRC app help?

New employees can use the app to securely access information about their personal tax affairs so they can pass the details on to their employer, without the need to call the HMRC.

New functions and capability mean customers can now access their:

  • Income and employment history
  • Salary information
  • National Insurance number or tax code via the app, whenever they need it.

The information can be downloaded and printed – so there is no need to call HMRC to ask for it to be sent in the post. Using the app rather than calling the helpline makes the process much quicker.

What HMRC says about the app

Myrtle Lloyd, HMRC’s Director General of Customer Services, said: “Whether you’re starting a new role in customer services, delivering parcels or managing warehouse logistics – the HMRC app is a secure and easy way to access your tax code, National Insurance number and employment details so you can let your new employer know.

“It’s accessible at the touch of a button and is quicker than calling HMRC.”

Victoria Atkins MP, Financial Secretary to the Treasury, said: “Christmas is busy enough – especially if you have taken on a seasonal job – so anything which can save you time is to be welcomed.

“The free and secure HMRC app is just such a thing, it makes searching for employment information quick and easy, whether you need to check your National Insurance number, find out how much you will be paid and much more.”

What do you need to use the HMRC app?

App users will need a user ID and password, so they can access their personal information. If customers need to set one up, the app will guide them through the process.

More than 3.5 million people have used the HMRC app since it launched in September 2016, and more than 1.6 million customers used it at least once in the last year.

HMRC has released a video which explains how customers can use the HMRC app to check their employment history, income, tax codes and National Insurance number.

To find out more, read the HMRC’s guide to using the app

The increasing pull of fiscal drag

This month’s Autumn Statement has led to an onslaught of headlines featuring the phrase ‘fiscal drag’.

Sometimes referred to as a ‘stealth tax’ the term doesn’t normally move beyond the Westminster bubble or the financial pages so why is it currently causing so much of a stir?

To understand why commentators are getting so animated about it, we first need to look at what the term means.

What is fiscal drag?

Fiscal drag is a term economists use to explain what happens when tax thresholds do not increase in line with the rising cost of living.

Typically, each year employees can expect to see their wages increase to some extent to help them keep up with the cost of living. This is not a pay rise, rather it is an attempt to ensure employees’ wages are keeping up with inflation.

However, if tax thresholds are not also increased you end up with a situation where more of the lowest earners begin to pay tax for the first time and other workers move into higher tax bands.

For example, currently the nil rate income tax personal allowance stands at £12,570. If this were to grow in line with wages, it should increase to £13,400 next April. If it were to grow in line with inflation it would increase to £13,965.

Without an increase to the tax threshold, someone currently earning £12,570 will be liable to pay tax for the first time if they receive a pay rise in line with inflation in 2023.

This means that although the individual has received a wage increase in line with inflation, after tax they will see a below-inflation rise.

Put simply, fiscal drag is when people pay tax for the first time – when they pay more tax – or when people are dragged into higher tax brackets – not because they are wealthier but because they are attempting to counter effects of inflation.

What happened in the Autumn Statement?

In the Autumn Statement, the Chancellor of the Exchequer, Jeremy Hunt, revealed that the nil income tax personal allowance, which stands at £12,570, would be frozen until 2028.

The Basic Rate income tax band, which goes from £12,571 to £50,270 and at which individuals are charged 20 per cent, will also be frozen until 2028.

In addition, the Chancellor announced that the threshold for when the highest earners start paying the top rate of tax – 45 per cent – will fall from £150,000 to £125,140 from April 2023.

These announcements apply to England, Wales and Northern Ireland. Scotland sets its own bands and rates.

What will the impact be?

The Government’s economic plans are independently assessed by The Office of Budget Responsibility.

It estimates that freezing thresholds until 2028 will create an additional 3.2 million new taxpayers and will mean 2.6 million more people pay higher rate tax.

Millions receive first energy bill payment

More than 27 million households across Great Britain have been given their first £66 payment towards their energy bills.

The Government’s Energy Bills Support Scheme (EBSS) has already handed out £1.8 billion in payments to 9 per cent of eligible households in England, Scotland and Wales in its first month.

This is the first payment made through the EBSS since it launched in October and will see households receive a £400 discount on energy bills paid in 6 monthly instalments. The second instalment of the EBSS will reduce households’ November energy bills, which brings the total amount spent on the scheme so far to £3.8 billion.

Vouchers have been sent to all two million customers with traditional pre-payment meters. The Government has urged consumers to redeem the vouchers as soon as possible, after figures showed only around two thirds had already done so. Suppliers will tell customers where to redeem them, for example at a Post Office branch or a PayPoint shop. Payzone outlets are unable to accept the vouchers.

Secretary of State for Business, Energy and Industrial Strategy, Grant Shapps, said: “The government is committed to supporting people facing unique stresses with the cost of living and rising energy costs. These figures show how we are making a difference in over 27 million homes across Great Britain.

“All vouchers have now been sent to customers who should have them, so I urge everyone who uses a traditional prepayment meter to make sure they receive their voucher from their supplier and redeem them promptly so they get the energy bill support they are entitled to.”

Exchequer Secretary to the Treasury, James Cartlidge, said: “We are facing a global energy crisis driven by Putin’s illegal invasion of Ukraine, and we know this is a huge challenge for people here in the UK.

“That’s why we have taken direct action, ensuring millions of households are protected this winter.”

From December onwards, the amount discounted from energy bills will increase to £67 as the scheme continues to provide support to households over the winter months.

Administered by energy suppliers, the scheme is designed so customers receive the rebate in the same way that they pay their energy bills, such as via direct debit, credit, smart meters and traditional prepayment meters. For the small minority who have not yet received the discount for October, this was down to factors such as issues around a customer’s bank details where they pay via direct debit, and customers on pre-payment meters who are yet to redeem the vouchers.

 

 

Gillian Cooper, Head of Energy Policy for Citizens Advice, said: “As winter starts to set in, this financial support should help millions of people to keep their heating and lights on. It’s vital it reaches everyone who needs it.”

Earlier this year, the Government introduced new powers that mean intermediaries, such as landlords, must pass on savings made under the EBSS and other energy support schemes to end users, who don’t pay their energy bills directly, for example tenants.

If you are facing any challenges with your finances over this period, get in touch for advice.

Minimum wage rise is good news for lowest paid workers

Low-paid workers were given a welcome boost in Jeremy Hunt’s Autumn Statement with the announcement that the National Living Wage (NLW) would rise by almost 10 per cent.

From April 1 2023, the NLW will go up by 92p to £10.42, an increase of 9.7 per cent, to go some way to protecting the poorest paid employees’ standard of living.

The Low Pay Commission’s (LPC) recommendations ensure the NLW continues on track to reach the Government’s target of two-thirds of median earnings by 2024. The recommendations were unanimously agreed by Commissioners and accepted in full by the Government.

Bryan Sanderson, Low Pay Commission Chairman, said: “The rates announced include the largest increase to the NLW since its introduction in 2016 and will provide a much-needed pay increase to millions of low-paid workers across the UK, all of whom will be feeling the effects of a sharply rising cost of living. For a full-time worker, today’s increase means nearly £150 more per month.”

Alongside the announcement, the LPC has published a letter of recommendations to the Government and a summary of the evidence that informed them. Their full 2022 Report, which sets out the evidence in detail, will be published and laid in Parliament later this year.

The increases announced in the Statement will support the wages and living standards of low-paid workers at a time when many are feeling increased pressure from a rising cost of living.

They are recommended against a backdrop of a tight labour market where unemployment is at record lows and vacancies remain high as businesses compete to recruit and retain staff.

Mr Sanderson said: “The tightness of the labour market and historically high vacancy rates give us confidence that the economy will be able to absorb these increases.

“Businesses also have to navigate these economically uncertain times and by ensuring we remain on the path to achieve our 2024 target, employers will have greater certainty over the forward path.

“These recommendations have the full support of the business, trade union and academic representatives who make up the Commission.”

Alongside the NLW, the Commission recommended significant increases in the National Minimum Wage (NMW) rates for younger workers. The 21-22-Year-Old Rate will increase to £10.18, narrowing the gap with the NLW and leaving this age group on course to receive the full NLW by 2024. NMW rates for 18-20 and 16-17-year-olds and apprentices will increase in line with the NLW increase of 9.7% in recognition of the tight labour market and strong demand for labour in youth-friendly sectors.

Autumn Statement 2022

The new Chancellor of the Exchequer, Jeremy Hunt, has delivered his Autumn Statement to the House of Commons against a backdrop of a worsening cost of living crisis and with confirmation from the Office for Budget Responsibility OBR that the UK has now entered into a recession.

The OBR has stated that the economy is still forecast to grow by 4.2% this year. GDP is then predicted to fall by 1.4% in 2023, before rising by 1.3% in 2024.

As expected, the Chancellor set out billions of pounds in tax increases and spending cuts to continue the restoration of market stability after the disastrous mini-budget.

The following summary of the measures announced by the Chancellor as part of the Autumn Statement measures is split into two sections:

  1. Taxation changes
  2. Other announcements

Please call if you need to discuss how these changes may affect your business or tax affairs in the coming months.

Taxation changes

Income Tax

The Chancellor has announced that the Income Tax additional rate threshold will be reduced from £150,000 to £125,140 with effect from 6 April 2023. This move will see an estimated 250,000 further taxpayers pay the additional rate of Income Tax of 45% from next April.

It had been previously announced that there would be no increase in the Income Tax Personal Allowance and higher rate threshold until April 2026. The Chancellor has now confirmed that the thresholds will be maintained at their current levels for a further two years until April 2028. Higher rate threshold will remain frozen at £37,700 and the personal tax allowance will remain at £12,570 through to April 2028.

This is effectively a “stealth tax” increase. Wage earners benefitting from annual increases in their earnings up to April 2028 will find themselves paying tax on the full value of any increases. This is because, with personal allowances frozen until April 2028, any increases in earnings will be taxed and, in some cases, this may push earnings into the higher rate tax bands especially for those who will now be subject to the 45% rate (with its new reduced limit).

Regional variations to Income Tax rates may apply in Wales and Scotland.

Income Tax and dividend income

The current £2,000 dividend tax-free allowance is to be reduced to £1,000 from April 2023 and to £500 from April 2024.

The 1.25% increase in the tax rates payable on dividend income, which took effect in April 2022 remains in place.

The rates that apply in all regions of the UK from 6 April 2023 are as follows:

  • Dividends that form part of the basic rate band – 8.75%
  • Dividends that form part of the higher rate band – 33.75%
  • Dividends that form part of the additional rate band – 39.35%

Inheritance Tax

No changes to present rates and allowances were announced. These rates and allowances will remain frozen at current levels until April 2028.

The nil-rate band will continue to be £325,000 and the residence nil-rate band at £175,000, for this period.

Stamp Duty Land Tax

On 23 September 2022, the then Chancellor, Kwasi Kwarteng, announced a permanent increase in the SDLT nil rate band to £250,000 (from £125,000). There was also an increase in the nil-rate threshold for first-time buyers making a purchase of up to £425,000 (from £300,000). The first-time buyers relief also increased the nil-rate threshold to £425,000 (from £300,000) for first-time buyers of properties costing up to £625,000 (from £500,000). There is no relief available for first-time buyers spending more than £625,000 on a property. There are a number of requirements that must be met in order to qualify for the relief.

These changes were one of the only surviving measures from the mini-Budget. It was announced as part of the Autumn Statement that these measures will remain but as a temporary SDLT reduction until 31 March 2025 and not as a permanent change as originally announced.

It is important to note that these measures apply to England and Northern Ireland only. Any changes to the Land and Buildings Transaction Tax in Scotland or the Land Transaction Tax in Wales would be announced separately.

National Insurance

The Chancellor also confirmed that the National Insurance contributions (NICs) Upper Earnings Limit (UEL) and Upper Profits Limit (UPL) that were already fixed at their current levels until April 2026 will now be maintained for an additional two years until April 2028.

The 1.25% rise in National Insurance contributions (NICs) that came into effect at the start of the 2022-23 tax year on 6 April 2022 was reversed on 6 November 2022. There have been no further changes announced and the cancellation of the ring-fenced Health and Social Care Levy of 1.25% due to be introduced from April 2023 remains in place and will not go ahead as originally planned.

The alignment of the Primary Threshold (PT) for Class 1 NICs and Lower Profits Limit (LPL) for Class 4 NICs with the personal allowance of £12,570 that came into effect on 6 July 2022 will stay at this level until April 2028.

The government will fix the Lower Earnings Limit (LEL) and the Small Profits Threshold (SPT) at 2022- 23 levels in 2023-24. The LEL will remain at £6,396 per annum (£123 per week) and the SPT will remain at £6,725 per annum. The Upper Secondary Threshold will stay fixed at £50,270 per annum until April 2028, to remain aligned with the UEL and UPL.

The government will use the September CPI figure of 10.1% to uprate the Class 2 and Class 3 NICs rates for 2023-24. The Class 2 rate will be £3.45 per week, and the Class 3 rate will be £17.45 per week.

Capital Gains Tax

The Chancellor announced a significant reduction in the annual exempt amount applicable to Capital Gains Tax (CGT). This rate had previously been fixed at £12,300 from April 2021 to April 2026 for individuals, personal representatives, and some types of trusts for disabled people.

The exempt amount will now be reduced to £6,000 from April 2023 before being further reduced to £3,000 from April 2024.

Corporation Tax

The Chancellor had previously announced on 17 October 2022 that the planned increases in Corporation Tax (CT) rates from April 2023 would be going ahead.

From1 April 2023, there will be two rates of CT.

  • Taxable profits up £50,000 will continue to be taxed at 19%.
  • Taxable profits more than £250,000 will be taxed at the main rate of 25%.
  • Profits between £50,000 and £250,000 will be subject to a marginal tapering relief. This would be reduced for the number of associated companies and for short accounting periods.

Corporation Tax and banking companies

From 1 April 2023, the rate of surcharge on banking companies will be 3% and the surcharge allowance will increase from £25m to £100m.

Diverted Profits Tax

The rate of Diverted Profits Tax will increase from 25% to 31% from 1 April 2023. This will maintain the 6% differential above the main rate of CT.

Corporation Tax – R&D Relief

The Research and Development Expenditure Credit (RDEC) rate will increase to 20% (from 13%) with effect from 1 April 2023. From the same date, the small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%.

R&D tax reliefs will be reformed to support modern research methods by expanding qualifying expenditure to include data and cloud costs. This will effectively capture the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK, and target abuse and improve compliance. These changes will be legislated for in the Spring Finance Bill 2023.

Windfall Taxes

The Energy Profits Levy (EPL) will increase to 35% (from 25%), effective 1 January 2023. The investment allowance will be reduced from 80% to 29% for qualifying investment expenditure thereby maintaining its existing cash value. The Levy is scheduled to end on 31 March 2028, raising £40 billion over the next 6 years. This will bring the headline tax rate for the sector to 75%.

The Chancellor also announced the introduction of a temporary Electricity Generator Levy. This will see a temporary 45% tax that will be levied on certain extraordinary returns from low-carbon UK electricity generation. The tax will apply to extraordinary returns arising from 1 January 2023.

Vehicle Excise Duty (VED)

VED will become applicable on electric cars, vans and motorcycles from April 2025 in the same way as it currently applies to petrol and diesel vehicles. This change will apply to new and existing zero emission cars.

Company Car Tax

The rates of company car tax that apply until April 2028 have been announced in order to provide long term certainty for taxpayers and industry.

The rates will continue to incentivise the take up of electric vehicles:

  • The appropriate percentages for electric and ultra-low emission cars emitting less than 75g of CO2 per kilometre will increase by 1% in 2025-26; a further 1% in 2026-27 and a further 1% in 2027-28 up to a maximum appropriate percentage of 5% for electric cars and 21% for ultra-low emission cars.
  • The rates for all other vehicles bands will be increased by 1% for 2025-26 up to a maximum appropriate percentage of 37% and will then be fixed in 2026-27 and 2027-28.

First Year allowances for electric charging points

Businesses can currently benefit from First Year allowances on qualifying electric charging points for cars and vans. To qualify for the relief the company must use the charging point in their own business. This relief was set to expire in 2023 but has now been extended for a further two years, to 31 March 2025 for Corporation Tax purposes and to 5 April 2025 for Income Tax purposes.

VAT

There will be no changes to the 20% rate. The £85,000 registration limit and the £83,000 deregistration limit will now remain at these levels until 31 March 2026.

Other announcements

National Living Wage increases

The NLW will increase to £10.42 per hour (previously £9.50) from 1 April 2023.

The full changes to the National Minimum Wage rates from 1 April 2023 are as follows:

  • The 21 to 22 year-old rate will be £10.18 per hour
  • The 18 to 20 year-old rate will be £7.49 per hour
  • The 16 to 17 year-old rate will be £5.28 per hour
  • The apprentice rate will be £5.28 per hour

Council Tax flexibility

The government is to raise the cap on the level of council tax rises by increasing the referendum limit for council tax rises to 3% per year from April 2023.

Business rates

Business rate bills in England will be updated from 1 April 2023 to reflect changes in property values since the last revaluation in 2017. A package of targeted support worth £13.6 billion has been announced to help support businesses with this change as well as increased costs.

These measures are as follows:

  • Freezing the business rates multiplier for another year
  • Extended and increased relief for retail, hospitality and leisure businesses
  • Reforming Transitional Relief
  • Protection for small businesses who lose eligibility for either Small Business or Rural Rate Relief.

Energy price guarantee scheme

The Chancellor announced that the energy price guarantee scheme which will see the average household have their energy bills capped at £2,500 a year will remain in place until the 31 March 2023.

From 1 April 2023, this guarantee will change so that the typical household will pay on average £3,000 a year (an increase of £500). This will save the Exchequer around £14 billion next year while still saving the typical household £500 a year off their energy bills, compared to the price of the energy price cap.

The government will also double to £200 the level of support for households that use alternative fuels, such as heating oil, LPG, coal or biomass, to heat their homes.

Cost of Living Payments

The Cost of Living support package to help over 8 million households in receipt of mean tested benefits is to be extended. This will see an additional Cost of Living Payment of £900 in 2023-24. The payments will be made in more than one instalment. DWP and HMRC will provide further detail on timing of these payments and eligibility dates in due course.

There will also be a new Cost of Living payment for pensioners who will receive an additional £300 and an additional £150 payment for those on non-means-tested disability benefits in 2023-24.

Benefits Uprating

The government will also raise benefits, including working age benefits and the State Pension, in line with inflation from April 2023. These payments will rise by September Consumer Price Index (CPI) inflation – 10.1%. As a result of uprating these working age and pension benefits around 19 million families will see their benefit payments increase from April 2023.