Leaks have become the norm as to how Budgets and Autumn Statements have been delivered over the past few years. So there weren’t too many major surprises in what Jeremy Hunt announced today, given the pages and pages of press coverage we’ve already seen. This method may annoy the Speaker of the House, but it does at least have the advantage of sense-checking with the market before policies go live. It’s an approach that at least one Chancellor has regretted not using in the past three months.
So, what was announced last week and how will impact on your business and you as an individual?
First up is that corporation tax is set to stick to 25% for most of us and will be extended to 28% for banks (for profits above £100m). It’s rumoured that the Chancellor wanted more (8% more for banks, in fact), the former Chancellor (and now PM) said no, 3% additional was enough not to startle the markets.
For smaller businesses, the news of the crackdown on their use of R&D tax credits does feel a little like a sledgehammer being used to crack a walnut. The drop from 130% relief to 86% and the repayable credit rate being decreased from 14.5% to 10% will materially impact SMEs. Fraud in the system is, clearly, contemptible and needs to be addressed. But it is already being addressed, so the idea that SMEs will face a less generous R&D tax credits scheme just as the economic winds mean that they need it most is a bitter pill.
Why do these credits work so well? Firstly, businesses which would otherwise be forced to close, lay off people, reduce their investments and more can claim R&D credits and offset them to the benefit of the broader economy. The Federation of Small Businesses clearly agrees with me as this week, it described Hunt’s approach as follows: “the attempt to pull the rug out from small business innovation seemed to us a misreading of scant data points”. We need a Government in tune with market sentiment, and this looks far from it.
In another gut punch for smaller business owners, the Chancellor has cut the tax-free allowance on dividend income from £2k to £1k and then subsequently £500 over the next two financial years. The rationale is, I believe, to make tax look fairer and equate what business owners earn with what they would earn as PAYE individuals. The challenge is that the economy needs a thriving SME sector and hitting those who take the highest risk, but also employ a large number of employees (in fact, the same number as large businesses in the UK) will damage not just their personal income, but their ability to invest and employ and grow.
During his speech, there was no mention of EMI schemes and a quick scan of the Treasury documents as soon as he sat down tells us that there’s no mention either. Let’s see if any more details emerge over the next day or so. Reviewing Treasury documents after Hunt sat down appears to confirm that the previously announced increases to the thresholds for company share option plans will go ahead as will the planned increased bandings for SEIS.
Personal tax and benefits
Income tax sees more people will be caught in each tax bracket as the Chancellor has not lifted tax bandings by inflation. It’s projected that the lowering of the 45% tax threshold to be incurred at £125,140 (previously £150,000) will is projected to bring in an extra £420m of tax revenues in the next fiscal year. It’s hoped that the Government’s on/off approach to National Insurance is now a more steady affair and that we will see the commitment to keeping rates and thresholds static will last the next two years.
Fiscal drag – where more taxpayers are captured as bandings fail to rise as fast as inflation – will also hit inheritance tax, where bandings have been kept at the same levels until 2028; capital gains tax where the annual exemption will remain £12,300 from 2025-25 until 2027-8; and the pensions lifetime allowance is frozen for another two years to 2027-28 at its current rate of £1,073,100.
The think tanks are on their feet as I write this briefing note and we can expect the OBR and IFS to provide greater clarity on the overall impact on individuals and businesses over the course of the next 24 hours. I’d expect some improved projections about interest rate movements based on today’s Energy Price Guarantee announcements. This is clearly of interest to businesses as the EPG will, in no small part, drive monetary policy, which directly affects the cost of business loans.
Finally, in my experience, it’s also worth downloading the Treasury documents and searching for the phrases that most relate to the areas in which you’re doing business. A lot of detail that’s not sexy enough to make today’s speech will become the headlines for this Sunday’s papers. I find it’s worth getting ahead of the game today.