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Medium Term Fiscal Plan Update

Thursday 20th October 2022

The new Chancellor of The Exchequer Jeremy Hunt has brought forward a number of measures from his planned 31 October’s Medium Term Fiscal Plan announcements.

These include a commitment to fiscal discipline, with the basic rate of income tax to remain at 20% until economic conditions allow for it to be cut, and IR35 and dividend tax rate reforms no longer to go ahead. In addition, the Chancellor announced a Treasury-led review of energy support after April 2023.

The latest announced changes follow on from the reversals of the planned removal of the additional rate of income tax and reduction in corporation tax announced on Friday 14 October by the Prime Minister. The Chancellor is to publish the government’s fiscal rules alongside an OBR forecast and further measures on 31 October.

In his statement the Chancellor announced a reversal of almost all of the tax measures set out in the Growth Plan that have not been legislated for in parliament. The following tax policies will no longer be implemented:

  • cutting the basic rate of income tax to 19% from April 2023. While the government aims to proceed with the cut in due course, this will only take place when economic conditions allow for it and a change is affordable. The basic rate of income tax will therefore remain at 20% indefinitely. This is worth around £6bn a year.
  • cutting dividends tax by 1.25% from April 2023. The 1.25% increase, which took effect in April 2022, will now remain in place. This is valued at around £1bn a year.
  • repealing the 2017 and 2021 reforms to the off-payroll working rules (also known as IR35) from April 2023. The reforms will now remain in place. This will cut the cost of the government’s Growth Plan by around £2bn a year.
  • introducing a new VAT-free shopping scheme for non-UK visitors to Great Britain. Not proceeding with this scheme is worth around £2bn a year.
  • freezing alcohol duty rates from 1 February 2023 for a year. Not proceeding with the freeze is worth approximately £600m a year. The next steps of the Alcohol Duty Review announced in Growth Plan 2022 will continue as planned. The alcohol duty uprating decision and interactions with the wider reforms to alcohol duties under the Alcohol Duty Review will be considered in due course.

The government’s reversal of the NIC increase and the Health and Social Care Levy, and the cuts to SDLT will however remain.

The previously announced continuation of the £1m Annual Investment Allowance, and changes to the Seed Enterprise Investment Scheme and Company Share Options Plan will be unaffected.

Within its Growth Plan to protect households and businesses from high energy prices, the Energy Price Guarantee and Energy Bill Relief Scheme will continue to support millions of households and businesses with rising energy costs. However, the Chancellor announced that they will only continue to do so until April next year.

A Treasury-led review will be launched to consider how to support households and businesses with energy bills after April 2023. The objective of the review is to design a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need. The Chancellor also said in his statement that any support for businesses will be targeted to those most affected, and that the new approach will better incentivise energy efficiency.

The Chancellor announced that there will be more difficult decisions to take on both tax and spending in order to lower debt in the medium term and to ensure that taxpayers’ money is well spent, putting public finances on a sustainable footing.

In light of this, government departments will be asked to find efficiencies within their budgets. The Chancellor is expected to announce further changes to fiscal policy on 31 October to put the public finances on a sustainable footing.

Projections of the total benefit of the tax policy reversals are shown below:

Policy (£bn) 2022-23 2023-24 2024-25 2025-26 2026-27
Re-instate plans to raise corporation tax to 25% from April 2023 +2.3 +12.4 +16.6 +17.6 +18.7
Suspend 1p reduction in the basic rate of income tax 0 +5.3 +5.9 +5.8 +5.9
Maintain additional rate of income tax +2.4 -0.6 +0.8 +2.2 +2.1
Maintain 1.25% increase in dividends tax rates 0 +1.4 -1.0 +1.1 +0.9
Maintain 2017 and 2021 reforms to off-payroll working rules (also known as IR35) 0 +1.1 +1.4 +1.7 +2.0
Cancel VAT-free shopping scheme for non-UK visitors to Great Britain 0 0 +1.3 +2.0 +2.1
Cancel one year freeze to alcohol duty rates +0.1 +0.5 +0.6 +0.6 +0.6
Total +4.7 +20.1 +25.4 +30.9 +32.3

Final costings will be set out as part of the Medium Term Fiscal Plan on 31 October.

It is also understood that the Chancellor is considering the introduction of a further levy on bank profits and extend the windfall tax on oil and gas companies.

 

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