The Chancellor Kwasi Kwarteng has confirmed that the government has U-turned on its plans to scrap the 45p rate of income tax
Kwarteng announced the U-turn on Twitter this morning, saying: ‘We are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened.
‘It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country.
‘This will allow us to focus on delivering the major parts of our growth package’, including the Energy Price Guarantee, ‘to support households and businesses with their energy bills’.
The plan was announced in the tax-slashing mini-budget last Friday, which included scrapping the 45p tax rate, which would cut tax by 5% to 40% for those earning over £150,000 a year.
However, the plan was criticised as unfair amid the current cost-of-living crisis, and required a vote before it could be approved.
Several Tory MPs have voiced their criticisms of the plan, including Grant Shapps who warned that the prime minister would likely lose a Commons vote on the proposal.
Shapps told the BBC: ‘Let’s not muddy the water with tax cuts for wealthy people right now, when the priority needs to be on everyday households.’
The news follows as the tax cuts in the mini-budget was criticised by the International Monetary Fund (IMF) on Friday, which warned it would stoke ‘inequality’ and risked increasing interest rates, as well as benefitting high income earners.
The Bank of England also reacted with a £65bn emergency intervention in temporary and targeted purchases in the gilt market to restore ‘orderely market conditions’ and prevent a ‘material risk’ to UK financial stability.
Jamie Morrison, head of tax at accountancy firm HW Fisher, said: ‘It was a bold move by the Chancellor to cut the top rate of income tax in his mini-budget – and one that has not paid off.
‘Tackling the UK’s cost of living crisis should be the government’s top priority, and it was hard to see how the abolition of the 45p tax rate would have benefitted anyone apart from the UK’s highest earners.’
The pound jumped against the dollar in overnight trading on Monday as reports emerged that the government would abandon the decision to axe the 45p tax rate.
Sterling hit $1.125, recovering to levels before the mini budget, but slumped back in early morning trading to $1.119.
Christy Wilson, associate at Katten UK LLP, said: ‘The removal of the 45% income tax rate was not anticipated before the budget. There was discussion that the Chancellor may announce some amendments to the income tax rates, including the higher rate income tax threshold being moved to £80,000 – but the removal of the 45% tax band was unexpected.
‘Even though the government has maintained since the budget that the tax cuts were the correct approach for economic growth, it is not surprising that the government felt compelled to make some amendments to the announced tax cuts given how serious the backlash to the budget has been.
‘The concerning element of this ‘u-turn’ is that only a couple of days ago Liz Truss and the Chancellor maintained that cutting the 45% income tax rate was the right thing to do, but now they have abandoned these plans. This calls into question other tax cuts that were announced – will these be reversed too?’
Paul Johnson, director of the Institute for Fiscal Studies (IFS), added that the decision to scrap the 45% rate on earnings was the ‘smallest part’ of the mini-budget, representing around £2bn of the £45bn in tax cuts.
‘The direct impact of the government’s U-turn on the abolition of the additional 45p rate of income tax is of limited fiscal significance. At a medium-run cost of around £2bn a year, it represented only a small fraction of the Chancellor’s mini-budgest announcements. His £45bn package of tax cuts has now become a £43bn package – a rounding error in the context of the public finances.
‘The Chancellor still has a lot of work to do if he is to display a credible commitment to fiscal sustainability. Unless he also U-turns on some of his other, much larger tax announcements, he will have no option but to consider cuts to public spending: to social security, investment projects, or public services.’
As trailed, the Chancellor confirmed that the planned 6% rise in corporation tax will not go ahead in April 2023 with rates set at 19%
The current 19% corporation tax rate was confirmed in Kwasi Kwarteng’s statement to the House, which he said means that the UK has the lowest corporation tax rate in the G7.
The measure will reduce projected tax take by £13.5bn in 2023-24, rising to £16.5bn in 2024-25.
The Chancellor said that ‘competitive business taxes are important to growing the economy as they can incentivise investment and enterprise. The government wants to grow the economy by creating the conditions for businesses to thrive, which will create jobs and increase investment in the UK’.
Matthew Hodkin, tax partner at Norton Rose Fulbright, said: ‘The new Chancellor has announced a reversal of the planned increase in corporation tax from 19% to 25%. While this would appear to be a “nothing” announcement – as the 25% rate had not yet come into force – there are likely to be knock-on effects for companies having to deal with the accounting implications of the reversal.
‘Given the timings, companies would have already been making changes to their accounts to prepare for the increase to 25%. Banks will be disappointed (but not surprised) that the bank surcharge has not been reduced.
‘This can have knock-on effects on the level of deferred tax assets and liabilities, which affect companies’ balance sheets and can be of particular concern to banks, insurance companies and other regulated businesses that are required to maintain a certain level of regulatory capital on the balance sheet. It can also affect other liabilities that are tax-variable, such as payments under tax-based finance leases, where the net present value of the impact of changes can be brought through the income statement of the lessee.’
Glenn Collins, head of ACCA said: ‘“The government’s decision to keep corporation tax at 19% will encourage businesses to invest. With the main rate of corporation tax previously set to increase to 25% next April many businesses were becoming more nervous already feeling the strain of a rise in inflation, cost of living and energy prices, putting unnecessary pressure on businesses. Now more than ever businesses are looking at the ease of doing business and where investment opportunities lie.’
The Chancellor Kwasi Kwarteng is likely to present his fiscal statement to MPs on Friday 23 September, although this is not confirmed.
As parliamentary time is hugely limited by the Queen’s funeral and then the party-political conference season, the Chancellor has only a few options to update MPs and the country on a number of pressing issues, from how the energy bill support will be financed and whether the promised reversal of the 1.5% National Insurance contributions (NICs) hike will go ahead.
The energy bill support will kick in from 1 October for households with little detail available as yet about the plans to help business with soaring energy bills. Yesterday there were indications that detailed plans for business will not be available before the beginning of November, although any measures will be backdated to the beginning of October for businesses, important as the support will only last for six months.
It is worth noting that any changes to NICs would not be instant as they would require the third update of the year to HMRC systems and PAYE software. Some experts are indicating that a minimum of two to three months would be required to ensure a smooth transition to the lower rate. It is also not clear whether the NICs reversal will include employer NICs on top of the employee changes.
The autumn should see a full Budget so it gives the Chancellor some leeway as he could limit any announcements next week and hold them for late October or early November, whenever a Budget is scheduled. This would also give the Office for Budget Responsibility the time to produce a full economic forecast, which takes around 10 weeks to produce.
The UK economy saw growth of 0.2% in July, following a sharp fall of 0.6% in the previous month, according to the Office for National Statistics (ONS)
The UK economy grew slower than expected in July as worker shortages and inflation weighed heavily on activity amid the growing risk of recession.
According to the ONS, gross domestic product (GDP) rose by 0.2% in July, after a sharp fall of 0.6% in June 2022. Though 1.1% above pre-coronavirus levels, GDP was flat in the three months to July compared with the previous three months.
The services sector was the biggest contributor to growth, seeing a rise of 0.4%, following a 0.5% drop between May and June.
Yael Selfin, chief economist at KPMG UK, said: ‘The feeble 0.2% bounce back in July was driven by weak GDP in June due in part to the loss of working days from the Jubilee long weekend.
‘More concerning, July’s GDP remains below the level seen in May, pointing to an overall contraction over the first two months of summer.
‘This ties into a downbeat outlook for the UK economy which could see another shallow recession from the end of this year, driven by the ongoing squeeze on households’ income and a rising cost burden for businesses
‘While nearly £170bn worth of fiscal measures announced last week may be sufficient to avoid a deeper economic slump, these will be partly offset by tighter Bank of England monetary policy focused on combating the high levels of inflation.’
The figures come amid growing concerns over Britain’s economy as soaring inflation and rising costs weigh heavily on households and businesses. The Bank of England warned that the UK will likely fall into recession at the end of the year, which could last until early 2024.
The information and communication sector grew by 1.5%, the largest contributor to services growth in July. The main driver was computer programming, consultancy, and telecommunications.
Production fell by 0.3% after a fall of 0.9% in June, mainly because of a drop of 3.4% in electricity, gas, steam, and air conditioning supply.
Jake Finney, economist at PwC, said: ‘Looking beneath the headlines, it’s clear this positive growth rate was primarily led by the performance of the services sector. Two of the other main engines of economic growth – production and construction – contracted in July.
‘Despite today’s positive growth figures, our expectation is that the UK economy will contract in the third quarter of 2022, following its 0.1% contraction in the second quarter. This would mean that the UK enters a technical recession for the first time since lockdown restrictions ended.’
Following weeks of hustings and debate, the members of the Conservative party have elected Liz Truss as their party leader and new prime minister
The popular vote was won by home secretary Liz Truss with 57% of the vote with a share of 80,326 votes, while former chancellor Rishi Sunak took 43% at 60,345 votes.
In a short speech before MPs, Truss promised to govern as a Conservative for the next two years, prioritising cutting taxes and dealing with the energy crisis, long term energy supply issues, and National Health Service.
In earlier interviews, Truss said that she would set out her economic plans within the next week to address the energy crisis and cost of living issues.
The official handover will take place at Balmoral when the Queen invites Truss to form the new government following the resignation of Boris Johnson.
The new Cabinet will be confirmed in the next few days with key appointments likely to be confirmed late on Tuesday.
In contrast to her opponent Sunak, Truss has focused on tax cuts as a central plank of her policy.
Simon Rothenberg, a director at Blick Rothenberg, said: ‘Liz Truss has led with the promise of significant tax cuts such as the reversal of Rishi Sunak’s 1.25% National Insurance, likely to be targeted at basic rate taxpayers only.
‘Truss is also said to be favouring a substantial increase to the basic rate threshold, possibly as high as £80,000 – a promise Boris Johnson led with during the 2019 Conservative Party leadership campaign but never materialised during his tenure. These will help, but they are not immediate fixes.
‘I expect a budget in the coming weeks with a lot of promises before this around helping households with energy prices and the cost-of-living crisis – help is urgently needed, and it will be at a very significant cost to HM Treasury.
‘There was little or no promise to help, in the immediate future, the businesses who are being crippled by the complete lack of any energy price cap – tax cuts (including stopping the proposed increase in corporation tax to 25%) and a stronger economy will help tomorrow, but they need help today.
‘Pubs, restaurants, shops, hairdressers, along with all other businesses, are receiving their energy bills which, in some cases, show over a 500% increase over the previous bills. This is before they head into winter and while temperatures are still mild.
‘Without any targeted support I fear our retail and hospitality sector will severely struggle over the winter months as households reduce their discretionary spend to afford their own increased prices.’
The package of tax cuts promised in Truss’ campaign appealed to Conservative voters but will be costly to implement without cutting public services to balance the books.
Adrian Young, a tax partner at Hurst, said: ‘Ultimately, the real challenge the new prime minister will face is to maintain public services while delivering tax cuts. The ones she proposed on the hustings alone have been costed at £30bn in some estimates. It was no doubt easy to make these promises as part of a plan to win the premiership.
‘However, the reality for Truss of managing the public finances in the current economic climate will be much more problematic.’
A further increase on interest paid to HMRC for late payment of taxes will hit taxpayers who are not up-to-date, warns Blick Rothenberg
Nimesh Shah, CEO at the firm said: ‘Following another Bank of England base rate to 1.75%, HMRC has confirmed that it will raise its interest rates on late tax bills to 4.25% on 23 August – a level not seen since January 2009.’
He added: ‘Since the start of 2022, the HMRC’s interest rate has increased by 1.5% – that’s the equivalent of an extra £225 per annum on a £15,000 tax liability. On the same £15,000 tax liability, you would suffer almost £650 of interest per annum.
‘With continuing rising costs rising across the board, HMRC have hiked up interest on late tax payments at the latest opportunity. It sets a worrying trend for some taxpayers who are struggling to pay their outstanding taxes, against the backdrop of other rising costs.
The threat of further interest rate rises this autumn, coupled with rising inflation, will likely see further increases in HMRC rates.
Shah said: ‘The worst is yet to come on this front, with some economists projecting the Bank of England could decide to increase the base rate to 2.5% by the end of 2022 – this could see HMRC increasing their interest rate on late paid tax to 5% by the end of the year.
‘Taxpayers who have outstanding tax liabilities should be mindful to settle as much as they can afford before there are further rate rises.
‘HMRC have also finally increased the repayment supplement rate by 0.25% to 0.75% – the first increase in this rate in over a decade. It’s quite shocking that HMRC have quickly increased the rate on late paid tax by six times the amount the equivalent repayment interest rate has gone up by this year.
‘HMRC’s meagre 0.75% repayment supplement rate means there is not any great incentive for HMRC to release repayments. There continues to be one rule for money owed to HMRC and another for taxpayers who are due a refund. Many taxpayers have seen significant delays to repayments over the last 12 months, but HMRC can continue to drag their heels with little cost to the Treasury.’
In the drive to catch bounce back loan fraudsters, bankruptcy restrictions totalling 48 years have been given to five individuals who took £198,894 in Covid-19 financial support
In each of the five cases, the bounce back loans were either wrongfully obtained through overstating their businesses turnover, or on behalf of a company that had already ceased trading prior to the pandemic, or were simply misused for personal use rather than legitimate business spending, the Insolvency Service said.
Charlene Wilson was a self-employed beauty therapist based in Jarrow. She received a £50,000 bounce back loan by overstating her turnover and spent around £15,000 on personal expenses. She has accepted bankruptcy restrictions for eight years.
Georgiana Cercel ran a beauty business from her home in Lincoln while studying full-time. She received a £50,000 bounce back loan by overstating her business turnover, and gave £10,000 to her sister. She is subject to bankruptcy restrictions for 10 years.
Florin Bodale worked as a building contractor through his company Varga Construction. He obtained a £50,000 bounce back loan by overstating his turnover, although he told investigators he believed he had been asked for total turnover for the previous three years. However, this amount would still have been less than half the turnover he stated. He has accepted a 10-year bankruptcy restrictions undertaking.
Sarah Sweeting ran a farm shop home delivery service from October 2020. She obtained a £22,000 bounce back loan despite not being eligible as businesses had to have been trading prior to March 2020. Of the £22,000, she transferred around £14,000 to her husband. She has accepted a 10-year bankruptcy restrictions undertaking.
Abbas Moradmand ran a tyre business from 2018 to 2019 then worked as a taxi driver. After a short closure the business re-opened and continued to trade under new ownership. However, Moradmand secured a bounce back loan of £26,894 to which he was not entitled as it was based on an application on behalf of his former tyre business. He has accepted a 10-year bankruptcy restrictions undertaking.
Their bankruptcy restrictions mean none of the individuals are able to borrow more than £500 without disclosing their bankrupt status. They also cannot act as a company director without permission from the court.
In each of the above cases the local official receiver is working on potential recovery action.
Kevin Read, official receiver at the Insolvency Service, said: ‘In all of these cases it was obvious, or it should have been obvious, that they either misused the bounce back loan for personal benefit, took a larger loan than they were eligible for, or weren’t eligible for a bounce back loan at all.
‘This is taxpayers’ money they have abused and we will not hesitate to impose bankruptcy restrictions in these circumstances.’
he level of financial distress in companies jumped by 37% in the last quarter compared to the same period last year
Bars and restaurants, retailers and construction sectors were the main sectors affected by tough trading conditions, with year-on-year rises of 70%, 48% and 36% respectively.
The latest Red Flag alert from Begbies Traynor showed that the number of companies rated as being in ‘critical financial distress’ continued to rise, increasing by more than a third in Q2 2022 – edging up 3% compared to Q1 2022.
Julie Palmer, partner at Begbies Traynor, said: ‘Having emerged from the pandemic, many companies were hoping for an economic boom but that has simply fizzled out, as supply chain issues and the invasion of Ukraine have taken their toll by driving up raw material and energy costs and reducing both business and consumer confidence.
‘We are now in a very high inflationary environment that’s piling pressure on businesses that were already weakened by the shock of the pandemic.
‘Sectors most exposed to discretionary consumer spending – bars and restaurants, and general retailers – are feeling the pain most.’
SMEs are also affected, with more than 582,000 companies in significant financial distress, although this figure was unchanged from the previous quarter.
Businesses continue to be impacted by rising inflation, far exceeding the official rate of more than 9%. With high labour, material and energy prices and faltering consumer and business confidence, companies are facing a difficult economic backdrop.
Palmer added: ‘I am also particularly concerned for those SMEs who operate in energy-intensive sectors, such as manufacturing, as some could simply become unviable. Without the benefit of an energy price cap, business energy tariffs have at least trebled, and for many it will be much worse.’
Evidence of this financial distress comes from county court judgement (CCJ) data, which revealed 46,235 rulings in the first six months of 2022, up 5% on the first quarter, as creditors tried to recover debt – there were 59,042 CCJs during the whole of 2021.
CCJs are leading indicators of insolvency, and as the courts return to normal, there are fears this number could rise much further.
Sectors with the highest number of critically distressed businesses include construction, real estate, general retailers and restaurants, automotive and industrial transportation.
Ric Traynor, executive chairman of Begbies Traynor, said: ‘The combination of macro-economic risks is now taking its toll on UK businesses, as evidenced by this latest Reg Flag Alert data.
‘With inflation nearing 10%, and showing little sign of abating, there can be no doubt that things are going to get worse for UK businesses before they get better. This, combined with a deteriorating geo-political landscape, is likely to have serious consequences for the UK economy.
‘Rising insolvency rates, combined with our own evidence from speaking to the directors of distressed companies, highlight the impact of rising costs on businesses. The very same directors, who benefited from government-backed Covid support loans to get them through the pandemic, are now telling us that they are simply unable to repay these debts, plus they are having to deal with rising wage demands and higher input costs.’
At the height of the wedding season, HMRC is reminding married couples and people in civil partnerships to sign up for the marriage allowance tax break
Marriage allowance allows married couples or people in civil partnerships, including those who have been together for many years, to share their personal tax allowances if one partner earns below the personal allowance threshold of £12,570, and the other is a basic rate taxpayer.
Eligible couples can transfer 10% of their tax-free allowance to their partner, which is £1,260 in 2022/23. It means couples can reduce the tax they pay by up to £252 a year. They can apply any time and, if eligible, could backdate their claims for up to four previous tax years to receive a payment of up to £1,242.
Marriage allowance is one of a number of benefits and reliefs available to boost family finances at a time when many are concerned with the rising cost of living.
Angela MacDonald, HMRC’s deputy chief executive, said: ‘We want to ensure people are receiving vital financial support at a time when they need it most. Married couples or those in a civil partnership could potentially receive tax relief worth up to £1,242, meaning extra cash in their pockets.
‘To find out if you are eligible and how to apply search ‘marriage allowance’ on gov.uk.’
More than two million couples currently benefit from marriage allowance, but there could be thousands more who are eligible to claim.
Even if couples do not qualify for marriage allowance when they first get married, a change in circumstances years later could mean they become newly eligible. These include:
- one partner retiring and the other remaining in work;
- a change in employment;
- a reduction in working hours which means their earnings fall below their personal allowance;
- maternity, paternity, or shared parental leave;
- unpaid leave or a career break; and
- one partner studying or in education and not earning above their personal allowance.
If a spouse or civil partner has died since 5 April 2018, the surviving person can still claim by contacting the income tax helpline.
Marriage allowance claims are automatically renewed every year. However, couples should notify HMRC if their circumstances change.
HMRC has confirmed plans to modernise its direct debit payment system for employer PAYE so a recurring direct debit can be set up for the first time
Currently employers can only set up a direct debit to collect a single payment, but not a recurring direct debit.
As part of its payment modernisation programme, HMRC is going to offer a recurring direct debit to employers. This is part of a wider project to create a consistent set of payment methods for all taxpayers across the tax authority, rather than the current limited service, which varies depending on the type of tax payable.
The service will be available from mid-September this year, HMRC said.
Once available, there will be a change to the business tax account (BTA) and the employers’ liabilities and payments screens. There will be a new link for ‘set up a direct debit’. This will allow client companies to set up a direct debit instruction once, authorising HMRC to collect directly from their bank account based on their return submissions.
After an employer has set up a direct debit, the link will change to ‘manage your direct debit’ and an employer will be able to view, change or cancel the direct debit online.
Payments which will be covered by direct debit will show within employers’ liabilities and payment screens for both employers and agents.
This service is not available for agents and only employers will be able to create, view, amend and cancel a direct debit.
Employer PAYE liabilities and payments viewer update
HMRC also confirmed that it has been extending employer PAYE for the agent online service on a rolling basis and that the expansion is ‘progressing well’. This service allows agents to see employer liabilities and payments records held by HMRC.
All previous restrictions will be removed by the end of July and in future all agents will be able to access the service. This will include those with the assistant as well as administrative roles.