QUESTION: Can you recap on what were the key tax announcements in last Wednesday’s spring Budget?
ANSWER: Against the backdrop of calls by businesses to be incentivised to invest, Jeremy Hunt delivered his first spring Budget as Chancellor of the Exchequer. Many of the key tax announcements made were predicted in advance and indeed had been announced in last autumn’s statement with the focus of the main measures centring around the four pillars of industrial strategy - enterprise, employment, education and everywhere.
The biggest announcement made by the Chancellor was the scrapping of the lifetime allowance on tax-free pension savings to encourage people to keep working. The allowance represents the amount you can build up in your pension pot before incurring any charges. The policy aims to stop people from reducing their hours or retiring early due to the tax charges.
The annual allowance, which is the amount people can save each year before incurring tax, will rise from £40,000 to £60,000. The combined cost of the increased allowances is expected to be £2 billion a year. The lifetime allowance has been cut heavily since it was introduced in 2006, dragging large numbers of professionals into a tax trap. It was due to remain at £1.07 million until 2026.
The Budget abolishes the existing £1.07 million lifetime limit on pension savings and increases the annual limit on pension saving from £40,000 to £60,000 for most people (and from £4,000 to £10,000 for the very highest earners). While there will be no limit on the size of the pension pot that can be accumulated without a tax penalty, the tax-free 25 per cent will continue to apply to only the first £1.07 million of pension savings.
The planned rise in corporation tax will go ahead, kicking in from April 6. The shake-up will see businesses pay more corporation tax, which will climb from 19 per cent to 25 per cent. This is expected to bring in an extra £18 billion for the Treasury. The tax rise will hit businesses with profits of more than £250,000. Companies with profits of between £50,000 and £250,000 will get marginal relief and for those companies with profits of less than £50,000, there will be no change. These businesses will continue to pay corporation tax at 19 per cent.
Corporation tax has changed almost every year since 2010. An endless string of temporarily more generous allowances is not a good way to set policy. For any level of allowance, investment would be higher if the system were stable. We desperately need a stable corporation tax regime, with a properly reformed tax base, that improves investment incentives and lays down the conditions for higher business investment in the long run.
In last week’s Budget, the Chancellor confirmed that the temporary super-deduction, which allowed companies to claim a deduction of 130 per cent on plant and machinery acquisition costs, would come to and end on 31 March 2023 as anticipated. However, it will be replaced by a temporary full expensing capital allowance of 100 per cent. This is in addition to the annual investment allowance (AIA), which allows the first £1m of expenditure on plant and machinery to be deducted in the year of purchase.
Full expensing starts in April, and for the next three years, businesses will be able to deduct 100 per cent of all plant and machinery investment spending immediately when calculating taxable profits. This increased generosity of capital allowances will boost business investment in the short run.
Additionally, the Chancellor announced that R&D tax relief would be enhanced for R&D intensive small and medium sized enterprises (and whilst the announcement of enhanced relief may be welcomed by those SMEs who benefit from it, it is not quite the giveaway it first appears.
For those SMEs that qualify as ‘research intensive’, the proposed increase will, in reality, only partially offset the effect of previously announced cuts in relief. Whilst it will restore the payable credit available to loss making companies to the level it was before those cuts were announced, it will not increase the additional tax deductions available to their previous level.
Those SMEs who do not meet the high bar of spending 40 per cent of their total expenses on R&D required to be classed as ‘research intensive’ will receive nothing from the Budget.
:: Malachy McLernon (firstname.lastname@example.org) is a partner at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies