How could the 2022 mini-Budget affect the self-employed and small businesses?

The Chancellor of the Exchequer, Kwasi Kwarteng, delivered the mini-Budget on September 23^rd, saying that the country cannot tax its way to prosperity and business needs help to boost productivity and grow the economy, but the fallout since the mini-Budget has been enormous.

• The pound has slumped against the dollar.
• Public sector workers feel let down because the tax cuts will potentially have a negative impact on the level of investment in public services.
• The Bank of England has pledged to buy £65bn of UK government bonds to ease the burden of government debt and calm market volatility.
• Opposition parties and economic experts have rounded on the recently formed Conservative government, saying the moves have been reckless and irresponsible.
• Panicked mortgage lenders have reacted by pulling their products from the market and are refusing mortgages to new applicants.

This type of response when the economy is struggling has historically indicated the start of a recession, which has all but been confirmed by the Bank of England, despite the recent small 0.2% growth in the economy.

We take a look at the mini-Budget and focus on the key points relevant to the self-employed and for small business owners.

A September mini-Budget with an enormous impact

The September mini-Budget was called by the new cabinet in response to the rapidly rising cost of living and the crisis that ensues as a result of rising prices of fuel, food, and energy bills.

The tax cuts unveiled, which have been announced to try and boost the UK economy and are predicted to cost £45bn (that’s on top of the predicted £60bn needed for the six-month energy package from October 2022), include the following:

• IR35 rules are to be simplified.
• Corporation tax hike scrapped.
• Cutting income tax.
• Scrapping the rise in National Insurance (NI) and the Health and Social Care Levy.
• Freeze on energy bills.
• Greater relief to help increase investments.
• Dividend tax hike binned.
• Stamp duty changed to provide more assistance, especially to first-time buyers.

Repeal of IR35 

Because we at Caunce O’Hara focus on the self-employed contractors and small business owners, we’re going to begin with the news of the day.

The chancellor’s ‘rabbit out of the hat’ moment came when he announced the repeal of IR35 from April 2023. New Prime Minister, Liz Truss, had previously said she would review IR35 if she were to become Prime Minister, but the announcement of it being repealed still came as a surprise to many.

IR35 was rolled-out to the public sector in 2017 and to the private sector in 2021 and changed the responsibility for status determination from that of the contractor, to that of the hiring party or end-client. This placed extra burden on the hiring party and has resulted in misinterpretation of the legislation, blanket decision-making, financial costs rising for businesses, fines for getting status determinations incorrect, and many stressed contractors closing their limited companies and going back into PAYE as employees.

The repeal will cover contractor engagements in both the private and public sectors and will return the responsibility for status determination back to the contractor.

Only time will tell if this move has a positive impact, but it will take an administrative and financial burden away from medium to large companies, whilst also giving autonomy back to contractors, and both of those points are a good place to start.

Corporation tax hike scrapped 

Corporation tax was due to increase from 19% to 25% from April 2023. This rise has now been scrapped, which will no doubt help many businesses and help to boost the economy. Indeed, a quote from former Prime Minister, Boris Johnson, in 2019 backed up this theory when he said, “Every time corporation tax has been cut in this country it has produced more revenue.”

Energy bills frozen 

Despite the significant tax relief on offer in the mini-Budget, there is still concern over the rising costs of energy bills and other fuel costs.

The Chancellor announced a freeze on energy bills, which the government claims will reduce inflation by 5 percentage points. However, this will still mean a significant rise in fuel bills on top of the already high fuel costs at the pumps. Both of which are already putting a significant strain on businesses of all sizes.

Whilst the freeze on energy bills is welcome, it remains to be seen how much it will actually help both businesses and individuals.

Greater relief to help increase business investment 

There were a few points that passed by under the radar but are no less significant for businesses and employees.

Firstly, the annual investment allowance that companies can invest tax free is to remain at £1m. This is not likely to be beneficial to small businesses, but many medium to large companies do invest, and they in turn provide business for small businesses.

There will also be a change to regulations, which will mean pension funds can increase UK investments.

A big help for new start-up companies comes in the form of being able to raise up to £250,000 via a scheme that gives tax relief to investors. Investment can be vital for start-ups, especially if they need to invest in expensive equipment.

For those UK employees who are in a financial position to invest, their share options limit has been doubled from £30,000 to £60,000.

Cutting income tax 

Currently, people in England, Wales and Northern Ireland pay 20% income tax on earnings between £12,571 and £50,270. The basic rate of income tax was cut from 20% to 19%, while the top rate of income tax, which is currently 45%* on earning over £150,000 per annum was abolished. Both of these measures will take effect from April 2023, although these measures do not apply in Scotland.

This has been met with mixed feelings. While most welcome the cut in the basic rate of income tax to 19%, they are not happy with the abolition of the additional 45% rate, which many financial experts and politicians have said should have been retained to help pay for services and the national debt.

Along with the cap on bankers bonuses being lifted, this has been a cause for many to label the mini-Budget as one for the rich, and akin to the budgets that came from Margaret Thatcher’s government in the 1980s.

*The plan to scrap the 45% of income tax has since been reversed.

Dividend tax increase scrapped 

The increase to dividend tax rates will be scrapped from April 2023, which will be good news for self-employed limited company owners and contractors, who are typically paid through different channels than that of an employee.

National Insurance increase scrapped 

The rate of National Insurance (NI) was increased by an extra 1.25pence in the pound by the previous Chancellor, Rishi Sunak, to help pay for the economic recovery after the increased borrowing that was caused by Covid-19.

The NI rise has been scrapped and will take effect from 6 November 2022, which could add £75.00 to the take home pay of workers who pay the basic rate of income tax in 2022/23. A figure that could rise to £175.00 in 2023/24.

Other benefits 

The planned increased to the so called ‘sin taxes’ that are usually levied against alcohol and have been cancelled for beer, cider, wine and for spirits.

If you are looking to buy a home, then you will welcome the change to the stamp duty threshold, which has been raised from £125,000 to £250,000. If you are a first-time buyer, the threshold has been raised to £425,000.

The new rates of stamp duty are:

• 0%:         £0 – £250,000 (£425,000 for first time buyers)
• 5%:         £250,000 – £925,000
• 10%:      £925,000 – £1,500,000
• 12%:      £1,500,000+

The chancellor also stated stamp duty for first-time buyers will apply to properties costing up to £625,000, an increase from £500,000.

The only issue you’ll have at this present time is getting a mortgage, because lenders have pulled their products from the market to give themselves time to assess how their mortgage products should be priced.

Mini-Budget summary 

The mini-Budget has ruffled a few feathers, but it is too early to say whether it will work, or whether it will cause significant damage to the economy.

What is for certain is that the UK is entering a testing 6-month period when costs will continue to rise, and the resolve of the UK population will be tested to its limit.

Sources:

https://www.bbc.co.uk/news/uk-politics-62917548

https://www.bbc.co.uk/news/business-62923994

https://www.bbc.co.uk/news/business-58090533

https://www.bbc.co.uk/news/business-62920969

https://www.bbc.co.uk/news/business-52986863

https://www.bbc.co.uk/news/business-63070445

https://www.bbc.co.uk/news/uk-politics-58436009

https://www.bbc.co.uk/news/business-48885496

https://www.bbc.co.uk/news/business-56267284

https://www.reuters.com/world/uk/uk-reverse-payroll-tax-increase-nov-6-kwarteng-2022-09-22/

www.themortgagehut.co.uk/news/140/recession-and-mortgage-market

How does the mini-Budget affect contractors?

https://www.thisismoney.co.uk/money/mortgageshome/article-11077649/UK-recession-explained-mortgage-rates-rise-means-savings.html

www.whatmortgage.co.uk/news/why-are-lenders-pulling-mortgages-and-what-does-it-mean-for-you