Getting people back to work –
a Budget aimed at productivity and growth

Lifetime Allowance (“LTA”)

In a Budget aimed at getting people back to work, perhaps the biggest surprise was the abolishment (as opposed to a mere increase) of the Lifetime Allowance for tax-relieved pension savings.

Under current rules, where the LTA is exceeded, a charge is applied to the excess. The charge will either be 25% if the money is left in the pension pot, or 55% if the money is taken out of the pension pot. Introduced in April 2006 at £1.5 million, the LTA currently sits at £1,073,100 and has done since 2020/21 where it was expected to remain until 2025/26.  However, it was thought that the LTA had an adverse effect on productivity by prompting people to reduce hours or retire early in order to avoid it.

The Chancellor has announced that the LTA charge will be removed from 6 April 2023 in the first instance, with legislation to abolish the LTA fully from 6 April 2024 being included in a future Finance Bill.

Pension Commencement Lump Sum

The maximum Pension Commencement Lump Sum, which refers to the maximum amount that an individual can take out of their pension pot as a tax-free lump sum, will be retained at its current level of £268,275 (for those who do not have any relevant protections allowing them to take a higher tax-free lump sum from previous rule changes) and will be frozen thereafter. Lump sums currently taxed for some individuals at 55% above the LTA will be taxed at an individual’s marginal rate of income tax. These measures will take effect from 6 April 2023.

Annual Allowance (“AA”)

As part of the back to work push and to further incentivise individuals to stay in work, the Chancellor also increased the limit of the AA from £40,000 to £60,000, again from 6 April 2023. The AA refers to the yearly limit in place on the amount of tax-relieved pension savings an individual can make in a year out of earnings.

Tapered Annual Allowance (“TAA”)

Introduced in April 2016, the TAA currently places further limits on the amount of tax relief that high earners can claim on their pension pots by reducing their AA to a minimum of £4,000. For the taper to apply, an individual must exceed the £200,000 limit of threshold income and the £240,000 limit of adjusted income. For every £2 of adjusted income over £240,000, an individual’s AA is reduced by £1.

Announced in the Spring Budget was an adjustment to the TAA, increasing the minimum allowance from £4,000 to £10,000. We also saw an increase in the adjusted income threshold at which the TAA kicks in from £240,000 to £260,000. Both of these changes to the TAA take effect from 6 April 2023.

Corporation tax increase going ahead

The much-discussed increase of the main rate of corporation tax from 19% to 25% (which has already been legislated for) will go ahead on 1 April 2023 as planned.  The UK will still have the lowest rate of corporation tax in the G7, but only by a small margin.  Further details on this increase and some consequential measures can be found in our summary of the 2022 Autumn Statement.

Capital allowances

To counter the effect of the corporation tax rate increase, at least to some extent, the Chancellor announced a replacement of the temporary ‘super-deduction’ which currently allows companies to claim a 130% deduction in respect of expenditure on new plant and machinery which would otherwise have qualified for writing down at the 18% main rate of plant and machinery allowances.

The ‘super-deduction’ is due to end on 31 March 2023, but will now be replaced with ‘full expensing’ by way of a 100% first year allowance, which will allow UK companies to write off the full cost of qualifying main rate plant and machinery expenditure in the year of investment (thereby achieving a £0.25 tax saving for every £1 invested). Companies investing in special rate (including long life) assets will benefit from a 50% first-year allowance. Full expensing will initially be available from 1 April 2023 until 31 March 2026, although the Government intends to make it permanent if economic circumstances allow.

Separately, the 2022 Autumn Statement had already confirmed that the annual investment allowance (AIA) will be permanently set at £1 million.  The AIA provides 100% relief for qualifying expenditure on plant and machinery (not including cars).  Unlike ‘full expensing’, the AIA is not limited to companies and the asset purchased does not have to be new.  Companies may have a choice between claiming ‘full expensing’ or the AIA and will then need to consider which route gives the more favourable outcome.

Research & Development (R&D) – additional tax relief for R&D intensive SMEs

The Government will legislate to provide additional relief for loss-making R&D intensive small and medium-sized enterprises (SMEs). The changes will be introduced with effect from 1 April 2023, but claims for the additional relief can only be made once legislation has been passed (in a Finance Bill 2023-24, as this measure will not be ready for inclusion in the Spring Finance Bill 2023).

SMEs whose R&D expenditure constitutes at least 40% of their total expenditure will be able to claim a payable tax credit rate of 14.5%, instead of the 10% credit rate available to companies claiming support under the current SME scheme.

The Government has published a technical note setting out further information on this additional tax relief, including details on how the relief works, here.

Investment zones

The Chancellor announced the launch of the refocused investment zones programme which will see the establishment of 12 investment zones across the UK, including four across Scotland, Wales and Northern Ireland.

A more extensive programme had previously been announced at the 2022 September ‘Mini Budget’, but subsequently put on hold.  The refocused programme is again intended to soften the impact of the corporation tax increase. It will come into effect when the Spring Finance Bill 2023 receives Royal Assent.

Subject to successful proposals, each investment zone will have access to £80 million over a five-year time period. The Government will legislate to allow for special tax sites in or connected with investment zones to be created, which will benefit from a range of tax reliefs for a limited period of time. The exact end date for these tax reliefs will be confirmed at a future date however there will be provisions for this date to be amended in the legislation. The tax reliefs include:

• Stamp Duty Land Tax relief – this will be for purchases of land and buildings that are acquired for a qualifying commercial purpose and are used for such purpose in a control period of up to three years.
• Enhanced capital allowances – 100% of qualifying expenditure by companies on new plant and machinery primarily used in a special tax site will qualify for this allowance.
• Enhanced structures and buildings allowances – an enhanced rate of 10% per year for ten years will be available for qualifying expenditure on non-residential structures and buildings situated in special tax sites.

Secondary Class 1 National Insurance contributions relief – this will be available for employers with physical premises in a special tax site and on the earnings of any new employees who spend 60% or more of their working time within these sites. It will be applied on earnings up to £25,000 per year for three years.

As previously confirmed at the 2022 Autumn Statement, the Government will implement the globally agreed G20-OECD Pillar 2 framework in the UK, which will be legislated for in the Spring Finance Bill 2023. The Pillar 2 framework will apply to large groups with over €750 million in global revenues and will take effect in relation to accounting periods beginning on or after 31 December 2023.  It will include the following measures.

• Introducing a multinational top-up tax which will require large UK headquartered multinational groups to pay a top-up tax where their operations in a foreign jurisdiction have an effective tax rate of less than 15%. The measure will also apply to non-UK headquartered groups with UK members that are partially owned by third parties or where the headquartered jurisdiction does not implement the Pillar 2 framework.
• Introducing a supplementary domestic top-up tax which will require large groups, including those operating exclusively in the UK, to pay a top-up tax where their UK operations have an effective tax rate of less than 15%.

A policy paper describing this measure in more detail was published alongside the 2023 Spring Budget and can be found here.

Electricity generator levy

In keeping with the announcement at the 2022 Autumn Statement, the Government will maintain and legislate for the newly introduced electricity generator levy which came into force on 1 January 2023. You can read more about the levy here.

Energy profits levy

As also announced at the 2022 Autumn Statement, the increase in the energy profits levy from 25% to 35% which came into force on 1 January 2023 will remain in place until 31 March 2028. You can read more about the levy here.

The Government has stated that the use of the decarbonisation investment allowance will be reviewed (in consultation with relevant stakeholders) to ensure the benefit of this remains purely in relation to a company’s ring fence trade. This will be legislated for this in a future Finance Bill if necessary.

Expansion of qualifying R&D expenditure

As previously announced, the Government will legislate in the Bill to expand qualifying expenditure for R&D to include data licences and cloud computing services and require companies to inform HMRC of their intention to make a claim for R&D tax relief using a new digital form (unless they have claimed R&D tax relief in the previous three years). These measures will apply to claims for accounting periods starting on or after 1 April 2023.

For all claims made on or after 1 August 2023, companies will also be required to provide a digital additional information form with their claims, supporting HMRC’s compliance work.

Additional tax relief for R&D intensive SMEs

See above under ‘Headline tax measures’.

Consultation on merging R&D schemes

Alongside these changes, the Government continues its review of the existing R&D schemes, following its recent consultation (which closed on 13 March 2023) on merging the SME scheme (for small and medium-sized enterprises) and the Research and Development Expenditure Credit (RDEC) scheme. A decision on this has yet to be made, although the Government intends to keep open the option of implementing a merged scheme from April 2024. In light of this review, the previously announced restriction on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023, to allow the Government to consider the interaction between this restriction and the design of a potential merged R&D relief.

The Budget confirmed that the extensions to the Seed Enterprise Investment Scheme (SEIS) and CSOPs, which had been first announced at the 2022 September ‘Mini Budget’, will take effect from 6 April 2023, as confirmed in the 2022 Autumn Statement.

For SEIS, the following limits are set to be increased:

• The ceiling that applies to the investment a company can raise in the relevant period and on which investors can claim relief – from £150,000 to £250,000.
• The limit that applies at the date of investment on the “gross assets” a company can have – from £200,000 to £350,000.
• The age limit that applies to the definition of a company’s “new qualifying trade” at the date of investment – from two years to three years.
• The annual limits that apply to the investment amount on which individuals can claim income tax and CGT re-investment reliefs – from £100,000 to £200,000

For CSOPs, the current limit of £30,000 per employee is set to be doubled, and the ‘worth having’ restriction on share classes within CSOP will be removed.

The process of granting EMI options will be simplified. From 6 April 2023, companies will no longer be required to set out details of share restrictions within their option agreements. Companies will also no longer have to declare that an employee has signed a working time declaration.

Existing EMI share options granted before 6 April 2023 which have not been exercised will also benefit from the change.

VAT relief for energy saving materials

The Government has published a call for evidence on options to reform VAT relief in relation to the installation of energy saving materials in the UK. It will consider the inclusion of additional technologies and the possibility of extending the relief to include buildings used for a relevant charitable purpose.  The call for evidence will close on 31 May 2023.

Review of VAT on fund management and financial services

The Government had engaged in a consultation on the proposed reform of the VAT rules on fund management in an attempt to improve legal clarity and certainty. The consultation recently closed in February. The Government is now considering the responses and will continue proposal discussions with the relevant stakeholders with the aim to publish its responses in the coming months. Possible reforms to simplify the VAT treatment of financial services, reducing inconsistencies and providing businesses with greater clarity and certainty are also being considered.

VAT registration threshold

As confirmed in the 2022 Autumn Statement, the VAT registration threshold will remain at £85,000 for a further period of two years from April 2024.

Film, TV and video games tax reliefs will be reformed, becoming expenditure credits instead of additional deductions from 1 April 2024.  This will be legislated for in a future Finance Bill.

The current headline rates of Theatre Tax Relief, Orchestra Tax Relief and Museums and Galleries Exhibitions Tax Relief will be extended by two years, until 31 March 2025.

The Government has announced a consultation on reforming the cash basis for the self-employed. ‘Cash Basis’ is a simplified accounting method for smaller businesses running on a self-employed basis to calculate taxable profits for income tax purposes.

The Government is keen to find out how to increase the number of eligible businesses, how best to increase the use of the cash basis and how to ensure as many businesses as possible would benefitting from this reform.

The thresholds and allowances for income tax will remain as announced at the 2022 Autumn Statement.  The income tax personal allowance will be frozen at £12,570 until April 2028. The dividend allowance will be reduced from £2,000 to £1,000 from April 2023, and then be further reduced to £500 from April 2024.

The 0% starting rate for savings will be frozen at its current value of £5,000, enabling individuals with less than £17,570 in employment income to receive up to £5,000 of savings income which is free of tax.

Further, annual subscription limits for Junior Individual Savings Accounts (ISA) and Child Trust Fund accounts will remain at £9,000 and the annual subscription limit for adult ISAs will remain at £20,000. These measures will apply to the entirety of the UK.

The Chancellor announced the publication of a discussion document on modernising HMRC’s income tax services as part of the Tax Administration Framework Review to enable better digital communication with taxpayers and reduce administrative burdens.

In particular, the Government will seek to integrate and modernise Income Tax Self Assessment and Pay As You Earn processes to allow taxpayers to quickly and easily manage their own tax affairs online, reducing their need to contact HMRC.

As previously announced in the 2022 Autumn Statement, the annual exempt amount for capital gains tax will be reduced from £12,300 to £6,000 from April 2023, and then be further reduced to £3,000 from April 2024. You can read more about it here.

The Government is introducing a new elective accruals basis of taxation for carried interest. This will allow UK resident investment managers to accelerate their tax liabilities in order to align their timing with the position in other jurisdictions where they may obtain double taxation relief. This will apply retrospectively from 6 April 2022.

Although there have been recent calls for a wider review of the carried interest rules, no such review has been announced so far.

The Government has announced that it will legislate in the Spring Finance Bill 2023 to merge the five powers that allow AEOI regulations to be implemented. These powers include the MDR, the Common Reporting Standard, Foreign Account Tax Compliance Act, Country by Country Reporting and Reporting Rules for Digital Platforms regulations. The powers all perform similar functions and are found in various Finance Acts.

This measure will consolidate these powers into one provision to simplify the legislation, and the previous powers will be repealed once this consolidation has happened. It will take effect from the Royal Assent of the Spring Finance Bill 2023.

The Government will consult on the introduction of a criminal offence for promoters of tax avoidance who fail to comply with a legal notice from HMRC to stop promoting a tax avoidance scheme. The proposed measures will include expediting the disqualification of company directors who are involved in enabling or promoting tax avoidance.

Further, the Government will double the maximum sentences for the most heinous cases of tax fraud from seven years to 14 years, as well as invest a further £47.2 million to improve HMRC’s capabilities to collect tax.

As previously mentioned in our piece on the 2022 Autumn Statement, legislation in the Spring Finance Bill 2023 will provide that shares and securities in overseas companies acquired through an exchange for securities in a UK close company will be regarded as located in the UK. The measures will have an effect on those individuals that have a material interest in both the relevant UK and overseas companies. This measure will take effect where share exchanges are carried out on or after 17 November 2023.

The Government has stated that it will close an avoidance loophole that has seen HMRC run out of time to assess tax due on capital gains when an asset is disposed of under an unconditional contract. This measure will apply for CGT where the conveyance or transfer of an asset takes place after the date six months after the end of the tax year in which the disposal is treated as taking place, and for corporation tax the date one year after the end of the accounting period for the disposal. It will apply to contracts entered into on or after 1 April 2023 for corporation tax, and 6 April 2023 for CGT.

The rise in popularity of cryptoassets and cryptocurrency has seen the Government announce changes to the self-assessment tax return forms. As of the 2024/25 tax year, those submitting their self-assessment tax return forms will be required to separate and identify their cryptoassets amounts from their other types of income.

The rates of fuel duty will be maintained at current levels and the 5p fuel duty cut will be extended extending the 5p fuel duty cut, in each case for a further 12 months from 23 March 2023. Fuel duty will be kept under review in the long term.

The Government continues its reforms of the duty structure for alcoholic products. While duty rates are set to increase as previously announced, tax relief of 11p has been announced on draft drinks served in pubs from 1 August 2023.

The closure of the Office for Tax Simplification (“OTS”), which was announced at the 2022 September Mini Budget, has been confirmed to take effect when the Spring Finance Bill 2023 receives Royal Assent.