Introduction
The Spring Statement is usually just an update on the economy. However, with inflation at a 30-year high, of 6.2% in February, from an already high 5.5% in January, the Chancellor was under pressure to provide some help in his mini-Budget.
Against the backdrop of the continuing war in Ukraine, the Chancellor, Rishi Sunak, delivered his Spring Statement today, on 23 March 2022. The Spring Statement isn’t usually associated with any significant tax changes. We’ve produced a summary of the main points of his speech.
Rishi Sunak slashed fuel tax, dramatically increased the National Insurance threshold and a surprise cut in the basic rate of Income Tax from 20% to 19p in April 2024. Employees and the self-employed can now earn up to £12,570 pa without paying any Income Tax or National Insurance.
There were not many announcements, but they should help with the increasing cost of living:
Increasing employment allowance from £4,000 to £5,000 from April 2022
National insurance thresholds increase by £3,000 from July 2022
Fuel duty was cut by 5p per litre until March 2023
A 1p cut in Income Tax from April 2024
The Chancellor also announced R&D tax relief for cloud-computing costs from April 2023.
Chancellor said “This statement puts billions back into the pockets of people across the UK and delivers the biggest net cut to personal taxes in over a quarter of a century.”
Income Tax
The surprise announcement, at the end of his speech, was that “for the first time in 16 years” there will be a 1p cut in Income Tax and just before the end of the current Parliament in 2024.
The 1 percentage point cut in the rate of Income Tax from April 2024 will help offset the 1.25 percentage point increase in National Insurance / Health and Social Care Levy.
VAT
Now the UK is “no longer constrained by EU law”, the 5% VAT on energy saving insulation will be scrapped. He said this would “abolish all red tape imposed on us by EU”.
National insurance (From 5 July)
The planned 1.25 percentage point increase in National Insurance, from 6 April 2022, will go ahead to raise cash for Health and Social Care Levy. However, the Chancellor tried to soften the blow of the National Insurance / new Health and Social Care levy by increasing the National Insurance threshold by £3,000 rather than just the £300 planned increase. The increase will benefit around 30 million employees and self-employed individuals and save them over £330 pa in National Insurance, if their earnings are over £12,570.
The National Insurance threshold for employees and the self-employed will increase to £12,570, the same as the Income Tax personal allowance. This should help the low and middle income workers. The decision to raise the National Insurance threshold to the same as the Income Tax personal allowance is a long overdue simplification.
The primary Class 1 National Insurance threshold, paid by employees, and the Class 4 National Insurance threshold, paid by self-employed, (but not directors of limited companies) will both increase to £12,570. The proposed increase in National Insurance rates from 6 April 2022 and the Health and Social Care Levy will not be abolished.
The primary threshold will increase from £9,564 pa (£797 pm) in 2021-22 to £9,880 pa (£823 pm) in 2022-23, following a delay of 13 weeks. It will then increase to £12,570 pa (£1,048 pm) from 5 July 2022.
The change in National Insurance thresholds will not take effect until 5 July 2022. This will give software companies time to update their software, which would have been almost impossible by 5 April 2022. The factsheet accompanying the announcement makes it clear that for the first 13 weeks of the tax year 2022-23 the already legislated new weekly and monthly thresholds for 2022-23 will stay the same and only increase from 5 July 2022.
National Insurance is not applied retrospectively, like Income Tax. This means that directors who have an annual earning period will have a Primary Class 1 National Insurance threshold of £11,908.
For those mathematical amongst us, the £11,908 is calculated as 13/52 x £9,880 plus 39/52 x £12,570. For weekly paid employees the amounts are £190 for 13 weeks plus £242 for 39 weeks, totalling £11,908. For monthly paid employees the amounts are £823 pm for 3 months plus £1,048 pm for 9 months, totalling £11,901
This new threshold of £11,908, for 2022/23, will also apply to Class 4 National Insurance, for the self-employed.
The threshold for paying Class 2 National Insurance will also be aligned at £11,908 in 2022/23. From April 2022, self-employed individuals with profits between the Small Profits Threshold, of £6,725, and the new Lower Profits Limit, of £12,570, will not pay Class 2 National Insurance, at the rate of £3.05 pw. Where self-employment profits are below this amount, but above the Small Profits Threshold of £6,725 then no Class 2 National Insurance will be due. However, a credit towards their State Pension entitlement will be given.
The new thresholds for National Insurance, of £12,570, in 2022-23 will stay the same into 2023-24, just like the Income Tax personal allowance is forecast to remain.
The secondary Class 1 National Insurance threshold, payable for employers only, will increase from £8,844 pa (£737 pm) in 2021-22 to £9,100 pa (£758 pm) from 6 April 2022. However, the Secondary National Insurance threshold will not increase further on 5 July 2022. A small owner-managed company can therefore pay its directors up to £9,100 pa before incurring any employer’s National Insurance liabilities.
Employment Allowance
The Employment Allowance, which provides employers with a reduction in their employer’s National Insurance bill, will increase from £4,000 to £5,000. The Employment Allowances does not affect the recoverability of National Insurance paid by employees on their wages and salaries. The allowance is only available where the Class 1 National Insurance liability of the business does not exceed £100,000 in the previous tax year. You cannot however claim the employment allowance if you are a director and the only employee paid above the secondary threshold of £9,100 pa.