Spring Budget 2023
Jeremy Hunt has delivered his Spring Budget against the backdrop of the cost of living crisis and striking railway workers, teachers, junior doctors and nurses. With increasing demand for public services, high energy prices and a struggling economy, the pressure has been on Hunt to support families and the public sector, whilst encouraging business growth and reducing inflation and public debt.
To help households, as expected Hunt has extended the energy price cap for 3 months until July, when prices will drop in line with the fall in wholesale prices, and is keeping fuel duty frozen for a further 12 months.
The key theme of the Budget was however boosting the economy by reengaging the inactive workforce.30 hours free childcare is to be extended to under 3s to help parents return to work, whilst the lifetime allowance on pension pots is to be abolished to keep high earning over 50s in work for longer.
Hunt sweetened the looming hike in Corporation Tax with a boost to Capital Allowances by introducing unlimited full upfront tax relief on qualifying plant and machinery expenditure under the new ‘Full Expensing’ regime.A particularly welcomed announcement for farming companies where the £1m Annual Investment Allowance can be spent relatively easily.
Let’s take a closer look at how these announcements, coupled with previously announced changes coming into force from April 2023, may affect you and your business:
Individuals
Pension changes
The Lifetime Allowance will be abolished such that the punitive tax charges on those with pension pots over £1m will no longer apply.
The Annual Allowance will be increased from £40,000 to £60,000 per year from April 2023, allowing individuals to make additional tax-free contributions of £20,000.The increase will be helpful for those seeking to manage personal tax liabilities via pension contributions and build funds for retirement.
An illustration of how pension contributions can help manage tax liabilities:
A husband and wife generate taxable profits from their farming business of £250,000.With £125,000 of profits each, their Income Tax liability will be in the region of £40,000 each.Of their profits, 32% will be paid to HMRC and 68% will be retained.
If they were to make the maximum annual pension contributions of £60,000 each gross, the net cost they would pay would be £48,000 each which represents 80%, with HMRC paying the other 20% into their pension.
The threshold at which they pay 40% higher rate tax would increase by the gross contributions, from £50,270 to £110,270.This reduces their Income Tax liability to £28,000 each, which is £12,000 each lower than had they not made the pension contributions.
As a result, the couple have used their profits to increase their pension pots by £60,000 at a net cost of £36,000 each (£48,000 net contribution less £12,000 Income Tax saving). Of their profits, 13% will be paid to HMRC (net of HMRC 20% pension top up) and 87% will be retained, a significant proportion being within a pension fund.
Many farming families continue to rely on farm profits to help fund the retirement of older generations. As and when funds allow, consideration should be given to ‘breaking the cycle’ and building up a pension pot for the future, to reduce the financial pressure on the younger generation in future years and allow them to invest in the business. The earlier succession planning is started, the easier it is to create a plan that satisfies the needs of the whole family. It also provides clarity which is key to allowing to the individuals to confidently drive the business forwards.
Pensions can also provide great vehicles for investment and Inheritance Tax planning and the Budget changes could make them even more attractive. For example, investing in commercial property via a Self Invested Personal Pension (SIPP) could be a great opportunity for some, and the increase in the Annual Allowance may make this possible more quickly and abolition of the Lifetime Allowance provides for greater scope where values breach £1m.
Do speak with your pensions adviser to discuss your individual circumstances and explore the opportunities available to you. If you do not currently have an adviser, we would be delighted to put you in touch with advisers that we work with.
Tax rates and thresholds – as previously announced
The Additional Rate Threshold, at which the 45% Income Tax rates applies, will reduce from £150,000 to £125,140 from April 2023, whilst there will be no change to the Personal Allowance (£12,570) or Higher Rate Threshold (£50,270).
The NIC thresholds for employees and the self-employed will increase to £12,570 to align with the Personal Allowance. As a result, an individual can earn up to £12,570 per year without paying any tax.
The dividend allowance will reduce from £2,000 to £1,000 from April 2023 and further to £500 from April 2024, with Income Tax payable on dividends in excess of this amount (8.75% for basic rate, 33.75% for higher rate and 39.35% for additional rate taxpayers).The change will create modest additional Income Tax liabilities for basic rate taxpayers.
The Annual Exempt Amount for capital gains will reduce from £12,300 to £6,000 and is set to reduce further to £3,000 from April 2024.Capital gains in excess of the Annual Exempt Amount will ordinarily be subject to tax at 10% for basic rate and 20% for higher rate taxpayers, but if the gains are arise from the disposal of residential property, the rates are 18% for basic rate and 28% for higher rate taxpayers.
Those looking to sell or gift assets may like to consider the merits of bringing forward the disposal to make use of the higher Annual Exempt Amount.
Businesses
Corporation Tax
As announced last year, from April 2023 Corporation Tax will increase to up to 25% from the current flat rate of 19%.Whilst companies with profits of up to £50,000 will continue to pay tax at 19%, those with profits above £250,000 will pay 25%, with a tapered rate for those with profits between £50,000 and £250,000.
Capital Allowances
To offset the impact of the increase and to replace the 130% super deduction, Hunt has announced that, in addition to the existing Capital Allowances regime, ‘Full Expensing’ of qualifying new equipment will apply to companies from April 2023 to March 2026 and hopefully permanently thereafter.
For many years, the AIA limit has been set at £1m, allowing qualifying expenditure of up to this amount to be deducted from business profits before calculating the tax liability. Expenditure in excess of this limit benefits from tax relief at a rate of 18% per year via Writing Down Allowances, or 6% for special rate assets. Whilst this regime will continue to apply for partnerships and sole traders, companies will additionally benefit from ‘Full Expensing’ for the purchase of new main rate equipment, which includes tractors and typical farm machinery.
This will incentivise bigger businesses to invest in new equipment beyond the £1m AIA limit, allowing them to receive full tax relief in year 1.For example, the purchase of a £300,000 combine in could reduce the Corporation Tax liability by £75,000 for the year in which it is bought.
It is important to remember that disposal proceeds on the sale of machinery are taxable. For growing businesses, the cost of new equipment will typically exceed any disposal proceeds so this shouldn’t be a problem for many, but it is important to be mindful of the timing of expenditure and the associated tax relief for cashflow purposes.
For example, a farm business with a March year end may sell a combine harvester at the end of the 2023 harvest for £80,000 and not purchase the replacement combine until April 2024.The disposal proceeds will create additional taxable profits for the March 2024 year end, potentially adding £20,000 to the Corporation Tax liability for that year. The tax relief in respect of the new combine will then be available in the following year.
For special rate equipment, such as lighting and solar panels, a 50% First Year Allowance will be available to companies. This allows 50% of the cost to benefit from tax relief in the year of expenditure, with the other 50% being eligible for tax relief at a rate of 6% per year.
Research and Development
As previously announced, the Research and Development (R&D) additional tax deduction for small and medium sized entities (SMEs) will reduce from 130% to 86% and the credit rate will decrease from 14.5% to 10%.For large companies, the credit rate will increase from 13% to 20%.
The Chancellor has however announced in this Budget that for loss-making R&D intensive SMEs, where 40% of their total expenditure is incurred on qualifying R&D, the credit rate will remain at 14.5% whilst the additional tax deduction will be 86%.
Consultation on the taxation of environmental land management and ecosystem service markets
The Government have also opened a call for evidence on the tax treatment of the production and sale of ecosystem service units.
Alongside this, they are have also opened a consultation on the availability of Agricultural Property Relief (APR) from Inheritance Tax (IHT) for land used for environmental purposes. This mainly impacts landlords as many owner occupiers should benefit from Business Property Relief where land is environmental use, either because it forms part of a mainly farming business or the activity is trading in its nature.
Currently APR only applies to land which is in agricultural use or subject to certain historic habitat schemes. Therefore there is concern that landlords may not agree to a tenant changing land in agricultural use to environmental use as they could lose IHT relief. To remove this barrier, the proposal is ‘to ensure that land taken out of agricultural production permanently or for an extended period for this reason does not lose relief.’ This is reassuring for landlords and the consultation will help the government in updating the legislation to facilitate this effectively.
Part of this is consulting on a recommendation of APR only applying to let agricultural property where it is let on an FBT with a minimum term of 8 years or let on an AHA Tenancy, as there is a concern that short term tenancies prevent farmers entering into environmental schemes. It is acknowledged that a number of exclusions should apply and concerns have also been raised about unintended consequences, such as landlords taking land back in hand. The government are therefore consulting on the potential impact of the recommendation before making a decision.
Victoria Paley ACA CTA
Senior Tax Manager
Victoria joined the practice in July 2019 having worked in accountancy and tax in the rural sector since 2010. As a Chartered Accountant and Chartered Tax Adviser Victoria spends most of her time advising family farming businesses on Capital Gains Tax and Inheritance Tax matters primarily in relation to succession planning and capital transactions.
Outside of work Victoria spends most of her time running around after her two young children and riding her horse. Having always loved to travel, Victoria hopes to resume exploring the world with her family once the children are a little older!