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September 2022 - Fiscal event

Following the recent appointment of Liz Truss as the new Prime Minister, the new Chancellor, Kwasi Kwarteng has delivered his first fiscal statement on behalf of the Government on 23 September 2022.

A summary of the key announcements for employers and employees is set out below. As widely trailed this was a budget focused on tax cuts and supply side reform with the aim of driving growth.


Health & Social Care Levy
As part of the Government's plan on health and social care reform, an additional 1.25% Class 1 National Insurance Contributions (NIC) rate for both employees and employers applied from 6 April 2022 (although from 6 July 2022 the threshold at which employees started to pay NIC increased from £9,880 to £12,570 per year). This increase in the rate of NIC was due to become a seperate “Health & Social Care Levy” (HSCL) from the 2023/24 tax year.

However, in advance of today’s fiscal event, the Health and Social Care Levy (Repeal) Bill was introduced before the house in order to repeal the 1.25% NIC rate rise from 6 November 2022 and cancel the introduction of the HSCL.

Where NIC is payable on an annual basis, new blended rates are to be applied to deliver a similar economic effect. Specifically, for 2022/23:

  • Class 4 NIC is payable at 9.73% at the main rate and 2.73% thereafter;
  • Directors will pay primary Class 1 NIC at 12.73% at the main rate and 2.73% thereafter and their employers will pay 14.53% secondary Class 1 NIC;
  • Class 1A NIC and Class 1B NIC will be payable at 14.53%.

The repeal of the NIC rate increase and related transitional provisions will require a number of changes to payroll systems and broader employer compliance processes.

We are recommending that all clients should engage early with their payroll providers and in-house teams and schedule adequate time for testing to ensure that changes are made to deliver the result intended by the legislation.

Today’s announcement also confirmed that the 1.25% dividend tax rate increase due from April 2023 is also to be reversed.

Basic rate of tax and additional rate of tax
In his Spring Statement in March 2022 the former Chancellor, Rishi Sunak, announced plans to cut the basic rate of income tax from 20% to 19% from April 2024. However it has now been announced that this cut will take place a year earlier in April 2023. A 4 year transition period for Gift Aid relief will apply, to maintain the income tax basic rate relief at 20% until April 2027. There will also be one-year transitional period for Relief at Source pension schemes to allow them to continue to claim tax relief at 20%

More dramatically, it was announced that the additional rate of tax is to be abolished in entirety from April 2023, reducing the top rate of tax payable from 45% to 40%.

It should be noted that the changes in rates announced apply to non-savings, non-dividend rates in England, Wales and Northern Ireland and for savings and dividend rates UK wide. We await to hear whether the devolved administration in Scotland will follow suit and whether there may be some variation to the Welsh Rate of Income Tax on the basic rate of tax on non-saving, non-dividend income.

Thus far there is no indication that the change in rates will be accompanied by anti-forestalling measures to prevent the acceleration of tax reliefs or deferral of income. However, we await further details on the changes in the coming days.

Off payroll working rules/IR35
The 2017 and 2021 reforms to the off payroll working rules are to be repealed from 6 April 2023. From this date onwards, the responsibility for determining whether workers who provide their services via an intermediary (such as a personal service company) are employees for tax purposes will shift back from the client to the workers.

Organisations who have previously concluded that workers would have been caught by the the 2017 or 2021 rules and applied PAYE on the deemed employment income or who imposed blanket or targetted bans on the use of intermediaries as a result are advised to consider carefully any changes to engagement structure or price bearing in mind their broader regulatory obligations such as the offence of failing to prevent the criminal evasion of tax. This is because the obligation to undertake a status assessment and apply tax and NIC has not disappeared but merely shifted along the supply chain.

Investment Zones
The Government has stated that it will work to introduce Investment Zones across the UK with the aim of driving growth and unlocking housing. A number of time limited tax incentives will be attached to specified sites over 10 years including 0% employer’s NIC on salaries of any new employee working on the tax site for at least 60% of their time on earnings of up to £50,270 per year with employer’s NIC being payable at the usual rate above this level.

Office of tax simplification (OTS)
The Government has announced that the OTS is to be abolished and, instead a mandate is to be given to HMRC and HMT to focus on simplifying the tax code. It is uncertain, at this stage, whether the recently announced OTS call for evidence into the taxation of hybrid and distance working will be picked up by HMRC and HMT.


Company share option plans (CSOPs)
From April 2023, qualifying companies (broadly, independent companies and listed companies) will be able to award CSOP options to employees over shares worth up to £60,000 each, double the current £30,000 limit which has been in place since 1996. The restriction on which share classes can be used will be eased, better aligning CSOP with the Enterprise Management Incentive (EMI) regime that applies to smaller companies. While the increase in the limit will benefit all companies using CSOP, the relaxation of the restriction will particularly benefit smaller companies, making it easier for companies to move from EMI options to CSOP options and to continue to offer tax-advantaged options as they outgrow EMI (which is limited to companies with less than £30 million of gross assets and fewer than 250 employees).

Removal of banking bonus cap
The Government has announced that it will remove the so-called ‘bonus cap’ which originates in EU law and currently applies to UK banks, building societies and a handful of global investment firms. This will remove the limit on the ratio of fixed to variable pay that currently prevents these firms from paying senior executives and other high earners variable pay in excess of 100% (or 200% with shareholder approval) of fixed pay in respect of any one performance year. It will therefore give firms greater flexibility over the structure of their senior employees’ pay packages.

Further detail may be provided as part of the forthcoming ‘City package’, which the Chancellor has confirmed will be put forward in the autumn, or the Government may proceed more quickly. In any case, the PRA and FCA rules containing the bonus cap will need to be amended, and the pace at which the Treasury expects the regulators to implement the change is likely to be decisive. It seems most likely that the relevant rules will be changed during 2023.

Impacted firms will now need to consider to what extent they wish to ‘unwind’ the changes they made to implement the bonus cap 8 years ago in order to rebalance fixed and variable pay. This will raise a number of policy, legal and operational challenges.