On Friday 23rd September 2022 the UK’s new Chancellor, Kwasi Kwarteng, delivered a ‘Mini-Budget’ outlining the UK’s plan for growth. Precisely six months to the day since the March 2022 Budget, the announcements represent a fundamental policy shift to taxation with a clear focus on UK competitiveness. Off the back of the Bank of England’s interest rates rises the previous day, unprecedented levels of inflation and sterling dropping to record lows against the dollar, bold action was required. The new Prime Minister, Liz Truss, promised tax cuts in the Conservative leadership race and her government has wasted little time in delivering on their promises.
- 45% → 40% Additional rate of income tax rate abolished from April 2023.
- 20% → 19% Basic rate of income tax rate from April 2023.
- 35% → 32.5% Decrease in effective rate on dividends for additional rate taxpayers from April 2023.
- 15.05% → 13.8% NIC rise of 1.25% reversed from 6th November 2022.
- 25% → 19% Corporation Tax was due to increase in April 2023, but the rise has now been scrapped.
- 28% → 27% Corporation Tax for banks was due to increase in April 2023, but the rise has now been scrapped.
- 31% → 25% Diverted Profits Tax was due to increase in April 2023, but the increase has now been scrapped.
- £125k → £250k Stamp Duty starting point has increased immediately.
- £300k → £425k Stamp Duty starting point for first time buyers has increased immediately.
- IR 35 Rules Reversed Meaning that responsibility to determine employment status will rest once again with contractors.
- Banker’s Bonuses Cap removed Meaning that banks will once again have greater flexibility on compensation.
- Office of Tax Simplification Introduced in 2010 will be wound down.
Full details of the Growth Plan can be found here.
The reduction to basic rate income tax from 20% to 19% was announced earlier in the year by the Chancellor’s predecessor, who promised the cut before the end of the Parliament (in 2024). However, the other announcements represent a seismic shift in the taxation, particularly for HNWIs and the financial services sector. The Institute of Fiscal Studies described it as the biggest tax cutting event since 1972.
There has been growing concern that London’s status as a global financial services centre had suffered in recent years as the UK began to look decreasingly competitive. With other jurisdictions (US, Singapore, Italy, France and Germany) actively seeking to attract talent and the taxes they bring the Chancellor’s announcements are likely to be seen as a necessary defensive measure. His intentions were made clear: “A strong UK economy has always depended on a strong financial services sector. We need global banks to create jobs here, invest here, and pay taxes here in London, not Paris, not Frankfurt, not New York.”
UK asset managers will again be looking at the comparison between LLP and Ltd structures and re-evaluating their position. From April 2023 effective tax rates for members of LLPs, employees and shareholders in UK companies will all fall significantly, albeit the differential between profit allocations to self-employed individuals and employees will remain. As such, HMRC’s interpretation of the salaried and mixed member rules and associated scrutiny placed on managers is likely to continue. The gap still feels ripe for filling with something equivalent to the employer’s NIC, albeit this needs to be balanced with the lack of optionality to roll-up profits under the mixed membership rules.
Disappointingly there was a missed opportunity to provide the asset management industry with greater support on the VAT treatment for UK fund structures. The absence of such measures hampers the UK’s ability to expand the industry further still. The action taken to support the industry with new fund vehicles and regimes is to be applauded, but if the fundamental issues remain then little progress can be made.
Nonetheless, the headline tax rate reductions and promise of further regulatory changes in the Autumn send a clear message to the financial services sector. The new leadership wants to reaffirm the UK’s status as the world’s financial services centre and is prepared to adopt potentially unpopular policies to achieve this. Politically it feels like a gamble, but with the next general election not due until January 2025 (unless one is called earlier) they have a little over two years to convince the electorate that these policies will succeed.
NOTE: On Monday 3rd October 2022 the Chancellor announced that the proposed abolition of the top rate of tax (45%) will be dropped. The impact on the graph and table above is that effective tax rates will return to 2021-22 levels.