Mini Budget in the UK - what is the impact?
On Friday September 23, 2022, UK’s new Chancellor of the Exchequer Kwasi Kwarteng announced a new ‘Growth Plan’ in the so-called Mini Budget. Tax cuts and increased spending dominate the plan. Here are the highlights of interest to global mobility.
First, the 1.25% increase in the National Insurance Contribution (NIC) rates that were implemented in April this year will be reversed. Further, the ‘Health and Social Care Levy’ that was intended to replace the NIC increases as from April 2023 will not take place. The reduction in NIC will be effective November 6, 2022. This brings the employer NIC rate back from 15.05% to 13.8% and the employee rates back from 13.25% to 12% (and from 3.25% to 2% for higher incomes). Payroll systems will have little time to update the change, and the U.K. Treasury is expecting retroactive payroll adjustments may be necessary. Employees are expected to seek any over-withheld NIC from the employer. Mobility managers are encouraged to work with their payroll teams to make the software changes as soon as possible. Additionally, special blended NIC rates for the full tax year will apply to certain compensation payments and benefits in kind. The reversal of the NIC rates will also apply to Scotland.
Second, income tax cuts were announced. The planned increase in the corporate tax rate from 19% to 25% has been cancelled. For individuals, the basic tax rate will be reduced from 20% to 19%. In a surprise move, the Chancellor proposed eliminating the previous top marginal rate of 45% applicable on taxable incomes over GBP 150,000. The new top marginal tax rate under the proposal would be 40%.
The proposed individual income cuts would be effective from the tax year beginning April 6, 2023. The tax savings from reducing the basic rate from 20% to the 19% tax bracket will be small at only GBP 377. But the reduction in the top tax rate would be significant and benefit taxpayers with taxable incomes over GBP 150,000. Commentators have mentioned there are less than 700,000 high-income taxpayers who would benefit from cutting the top tax rate to 40%. But more on this tax cut proposal later.
The tax rate cuts will apply to taxpayers in England and Northern Ireland. The parliaments in Wales and Scotland will be setting their own income tax rates later this year. Wales has typically agreed to the English rates and brackets, but Scotland currently has a different tax schedule with a top marginal tax rate of 46%. Scotland may find itself under political pressure to make similar tax cuts to align with the proposed 40% top English tax rate.
Third, there are other tax proposals in the Growth Plan of interest to global mobility. The rules known as “IR35” that deal with contract workers providing services via an intermediary personal service company will be repealed. This means that affected workers and the intermediary will once again be responsible for determining employment status and operating PAYE requirements.
And finally, a new program was announced with the Growth Plan – Investment Zones. 38 localities have initially been identified for targeted financial and tax incentives to promote economic growth. This includes a holiday from paying employer National Insurance Contributions on salaries for new employees working in the investment zone for at least 60% of their time. The exemption is limited to the first GBP 50,270 in wages. But it is not clear yet how hybrid and remote workers will fit into the Investment Zone scheme. We are expecting guidance from the Treasury.
Reaction to the news has been mixed at best. Financial markets have reacted negatively to the Growth Plan proposals, and the financial markets responded with increased interest rates while the Bank of England intervened in the bond market. There also has been a significant drop in the value of the pound. Many observers expressed concern the tax cuts along with increased public spending will be a significant gamble with U.K.’s public finances since borrowing will be necessary to finance it. Many mentioned that tax cuts for wealthy taxpayers may not stimulate the expected growth in the economy and will not provide sufficient financial relief for most citizens dealing with inflation and rising interest rates.
On October 3, 2022, Chancellor Kwasi Kwarteng announced that plans to abolish the 45% top tax rate have been scrapped in response to the widespread criticism, including from members of their own Conservative Party. Kwarteng commented that “We get it, and we have listened.” The other elements of the Growth Plan will go forward, including the reduction in the NIC rates, the reduction of the basic rate to 19%, the repeal of the IR35 contractor rules, and the investment zones.
The next steps are for the Growth Plan to be submitted to the U.K. legislatures for debate and inclusion in the Finance Act. We expect approval of the Finance Act early in 2023. But will the revised proposals be enacted? The concern remains the government will still need to borrow to fund their spending plans. An independent analysis of the revised Growth Plan from the Office of Budget Responsibility is expected by the end of the year.