UK Mini-Budget: Part 2
Following on from our initial article covering the mini budget held on 23rd Sept 2022, we shall cover the reversal of the 1.25% increase in National Insurance introduced in April 2022, the scrapping of the top rate of income tax and the 1.25% increase in dividend tax.
Earlier this year, the former government elected to raise National Insurance by 1.25% to fund the UK’s health and social care. This meant Employee and Employer NIC rose to 13.25% and 15.05% respectively with the 2021-22 levels set to be retained from April 2023 with the 1.25% to be unveiled as a new tax altogether which was termed the “Health and Social Care Levy”. However, the mini budget has revealed that the 1.25% rise in National Insurance will be reversed from 6th November 2022 onwards whilst the Health and Social Care Levy will also be repealed and no longer take effect in Apr 2023. This should increase the take-home pay of employees whilst also enabling millions of businesses to save more in tax and increase the length of time taken to exhaust their £5000 worth of Employer’s National Insurance Allowance. Taken together, businesses can now spend their funds saved in tax through alternative means such as investing in Research & Development, expanding capacity etc.
In addition, the chancellor also announced plans to scrap the 1.25% increase in taxes on dividends from April 2023. These were introduced in April 2022 to bring parity between those remunerating themselves via dividends and those earning via traditional payroll. Dividend levels across the 3 bands of taxpayers (basic-rate, higher rate and additional rate) rose from 7.5%, 32.5% and 38.1% to 8.75%, 33.75% and 39.35% respectively. The reversal should considerably benefit shareholders of limited companies, but especially those of OMBs who opt to remunerate themselves via their company’s earnings rather than paying themselves a salary. The temptation to do so is justified by the substantial chasm between income taxes (20%, 40% and previously 45%) relative to dividend taxes.
Finally, perhaps the most controversial of the changes, was the decision to cut the top rate of income tax (applicable to individuals who earn above £150,000 in a tax year) from 45% to 40% which aligns it with higher rate of income tax (paid by individuals earning between £50,270 to £150,000). Given the existing cost of living crisis and a multi-decade high inflation rate, the move was viewed by many as exacerbating the inequality within the UK since support for the rich was deemed unnecessary. The Prime Minister has been vocal on her desire to exercise tax cuts rather than hand outs with the belief that this should encourage people to find work.
In the final part of our 3-series article covering the mini-budget, we shall look at what it had in store for homeowners through the changes in stamp duty as well as energy relief for business and domestic consumers alike.