ICAEW’s Tax Faculty summarises the key tax announcements from the Chancellor’s Budget speech, including pension and capital allowance reforms.
Chancellor Jeremy Hunt’s Spring Budget on 15 March announced some fundamental tax changes for individuals and businesses. More details are expected when the Finance Bill is published on 23 March. There may be a flurry of further announcements and consultations following the Tax Administration and Maintenance Day in the Spring, possibly including the planned consultation on tackling promoters of tax avoidance.
To tempt the over 50s back into employment, the Chancellor is increasing the pensions annual allowance from £40,000 to £60,000. The pension lifetime allowance (LTA), currently £1,073,100, is being abolished. These changes will apply from 6 April 2023.
Currently individuals gain tax relief on contributions into their pension of £3,600 or 100% of their relevant earnings, whichever is higher, up to a cap of £40,000 per tax year. Unused allowances from the previous three years can be carried forward. Pension contributions above the annual allowance incur a tax charge at the taxpayer’s marginal rate of tax.
The annual allowance is tapered down for higher earners. While the taper for higher earners will still apply from 6 April 2023, the minimum annual allowance will increase from £4,000 to £10,000. The taper will apply where adjusted income exceeds £260,000, an increase from the current £240,000 limit.
The LTA is a separate threshold limiting the amount of tax relief that a pension fund can benefit from. The value of the pension is compared to the LTA and any excess is subject to an immediate tax charge of up to 55%. This test is normally applied when an individual first accesses their pension, or reaches the age of 75, whichever is first. The LTA will not apply from 6 April 2023.
While most taxpayers can currently choose to take 25% of their pension as a tax-free lump sum, the tax-free amount will be restricted to £268,275 from 6 April 2023 unless LTA protection applies. Any excess will be subject to income tax at the taxpayer’s marginal rate of tax.
These are significant changes and may provide valuable pension planning opportunities for those who have not yet accessed their pension pot.
From 1 April 2023, the current super deduction will be replaced with “full expensing relief” for companies for three years to 31 March 2026.
The introduction of full expensing, expected to cost the Exchequer an average of approximately £9bn per year over the next three years, will provide for 100% relief for the cost of most items eligible for capital allowances. A 50% rate will continue to apply to special rate assets.
Like the super deduction, relief will only be available on new and unused assets. It will not be available on assets acquired for leasing to another party, on cars (new or used), or assets received as a gift.
Unincorporated businesses will only be eligible for the £1m annual investment allowance, or full expensing using the cash basis of taxation, which HMRC is considering extending. (Expanding the cash basis is the subject of a consultation document, published alongside the Budget).
The 50% first year allowance for “special rate assets” applies to features integral to buildings, solar panels, thermal insulation and long-life assets. The remainder of the cost is taken to the special rate pool to be written down on a reducing balancing basis at 6% each year.
In his Budget speech, the Chancellor indicated that this measure will be made permanent “when it is responsible to do so”. The measure is expected to increase business investment by 3% a year for every year it is in place.
It has also been announced that the 100% first year allowance for qualifying expenditure on plant and machinery for electric vehicle charging points will be extended by a further two years to 31 March 2025 for corporation tax purposes and 5 April 2025 for income tax purposes.
Special relief for R&D-intensive companies
The Chancellor announced a new “enhanced credit” for some R&D-intensive SMEs, aimed at encouraging growth and ensuring the UK is a competitive jurisdiction to attract investment. This will apply from 1 April 2023.
A company is considered R&D intensive where its qualifying R&D expenditure is worth 40% or more of its total expenditure (defined by reference to total expenditure in the company’s accounts, with some adjustments). This initiative will specifically target loss-making R&D-intensive SMEs. Eligible companies will be able to claim a credit rate of 14.5% compared to the 10% rate available to loss-making companies not meeting the R&D intensive criteria.
Changes to planned R&D reforms
Planned changes to R&D tax relief from 1 April 2023 have been trailed since the Autumn Budget in 2021. However, two changes were announced at the Spring Budget.
The requirement to provide additional information will apply to all claims made on or after 1 August 2023. The measure had been expected to apply to claims for accounting periods starting on or after 1 April 2023. In most cases, this will bring the introduction of the requirement forward.
The restriction on overseas expenditure will now apply from 1 April 2024, instead of 1 April 2023. This is to allow the government time to consider the interaction of this measure with its plans for a merged R&D tax relief scheme.
The government is launching a refocused investment zones programme to catalyse 12 high-potential knowledge-intensive growth clusters across the UK, including four across Scotland, Wales and Northern Ireland.
In England, the same tax incentives will be available as for tax zones in freeports. These include enhanced capital allowance rates, structures and buildings allowance, and relief from stamp duty land tax, business rates and employer’s national insurance contributions.
Audio-visual tax reliefs
Film, TV, and video games tax reliefs will be reformed from 1 January 2024.
Two models will be implemented: one for the film and TV expenditure credits, which will be merged into a single scheme – the audio-visual expenditure credit (AVEC); and one for video game expenditure credits (VGEC).
AVEC will replace the current film, high-end TV, animation and children’s TV tax reliefs. Film and high-end TV production will be eligible for a credit rate of 34% and animation and children’s TV production will be eligible for a rate of 39%. VGEC will have a credit rate of 34%.
The changes will be phased in. From 1 April 2025, claims for new productions and games must be made under the expenditure credits system. Film and TV productions that have begun but not concluded principal photography, and video game development that has started but not concluded on 1 April 2025 may continue to claim relief under the current system until 31 March 2027.
VGEC will be restricted to UK expenditure. The transition period allows developers of video games to continue to claim under the old rules for EEA expenditure.
Cultural industry reliefs
The temporary higher rates of theatre tax relief (TTR), orchestra tax relief (OTR) and museums and galleries exhibitions tax relief (MGETR) have been extended for two years until 31 March 2025. The MGETR sunset clause will be extended for a further two years until 31 March 2026.
Measures to better manage outstanding tax debt
The government is investing a further £47.2m to improve HMRC’s capability to collect tax debts. This includes supporting those who are temporarily unable to pay. The proposals include:
- using credit reference agency data to assess individuals’ financial circumstances and ability to pay;
- enhancing the existing ‘time to pay’ online services tools that allow taxpayers to arrange payment plans online themselves. ICAEW understands that this facility will be extended to VAT shortly; and
- temporarily boosting HMRC’s debt collection capacity by expanding the use of private sector debt collection agencies.
Tackling promoters of tax avoidance
The government intends to consult shortly on the introduction of a new criminal offence for promoters of tax avoidance who fail to comply with a legal notice from HMRC to stop promoting a tax avoidance scheme. The government will also consult on expediting the disqualification of directors of companies involved in promoting tax avoidance, including those who exercise control or influence over a company.