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The next budget is due to be announced on 27th October, so the big question is, what should we expect? 

We know so far that the chancellor is expected to make changes. The pandemic has seen record-breaking borrowing to support the impact of coronavirus, alongside assurances of increased funding for deprived areas. The chancellor has limited options other than to look for ways to increase funding. 

The difference between this budget and previous budgets is that there will be greater clarity for businesses where certain taxes are concerned. 

Confirmed announcements so far have been

Corporation Tax: From 1 April 2023 the main rate of corporation tax rate will be increasing from 19% to 25%.

However, for companies with profits below £50,000 there will be a small profits rate of 19%. For companies with profits below £250,000 but above £50,000, they will pay corporation tax at the main rate, reduced by marginal rate relief.

Super-deduction: Currently, companies can benefit from enhanced capital allowances on plant and machinery. This means that new general pool assets receive a deduction of 130% against profits, and new special rate assets receive a deduction of 50% against taxable profits.

The super-deduction will expire from 1st April 2023, with tax reliefs on capital expenditure returning to the standard method of capital allowances. The impact of this withdrawal should however, be counterbalanced by the increase in corporation tax.

National Insurance Contributions: From 6 April 2022 the main rates of national insurance will be increased by 1.25% for both employees and employers. This means that the rates of NIC will be as follows:
NIC Class2020/212021/22
Class 1 Primary12% / 2%13.25% / 3.25%
Class 1 Secondary13.8%15.05%
Class 1A13.8%15.05%
Class 1B13.8%15.05%
Class 49% / 2%10.25% / 3.25%

It’s important to note that this increase will also apply for those employees above state pension age. They would not usually pay NIC personally, meaning that they will need to pay 1.25% of their salary moving forward. 

HMRC are aiming to separate this surcharge from NIC out from 2022/2023, with the new tax named the ‘Health and Social Care Levy’.

Dividend Rates of Income Tax: HMRC have also increased the rates of tax on dividend income for individuals with effect from 6 April 2022. This is aimed to prevent individuals avoiding the new levy by diverting salary into dividends.

The marginal income tax rates on dividends of 7.5%, 32.5%, and 38.1% are increasing to 8.75%, 33.75%, and 39.35% respectively.

The £2,000 tax-free dividend allowance is unaffected by this change. But that is not to say that this allowance may not be curtailed in the budget.

Inheritance Tax: The nil rate band, the value of someone’s estate that is tax-free on death, is being frozen until 5 April 2026 at £325,000. Whilst this adds certainty to the future of the nil rate band, it is noticeable that it will not increase in line with inflation.


Uncertainty Remains

We do remain rather clueless on the outlook of some taxes and how they might affect us, although we do already know the future of certain taxes and reliefs. 

HMRC have recently finished consultations in relation to the future of inheritance tax. In addition to this, the office of tax simplification has also released a report on the ‘taxation of trusts’. 

HMRC has held consultations relating to operation and level of capital gains tax. As we are yet to see any findings implemented, this may be another tax increase due.

Pension relief will also be in the spotlight for many, given in the last budget, the level of income at which an individual’s annual pension contribution allowance was tapered away was increased from £150,000 to £240,000. 

The reason behind this was to remove the tax disincentive to doctors and consultants of taking on extra hours, so their pension entitlement to breach their annual allowance. 

Some may think this allowance may be on the large side, however, with covid and now increased flu cases looking to put a strain further on the NHS this winter, additional working hours still may be required. 

Finally, whilst we know the future of the dividend rates of income tax, we do not necessarily know if the main rates of income tax and the tax thresholds will remain unchanged.

We haven’t even gone into VAT or Stamp Duty!

We approach the budget with hope, that given the support given to businesses and individuals as we battled through the pandemic, that we won’t be hit too hard.

Many of us are still on the road to recovery, and with Rishi Sunak’s track record, we await the announcement of continued fair support as we move forward. 

With the potential changes in mind, speak to the Jaccountancy team for the most up-to-date tax information for sole traders and limited companies.