What does the Spring Budget mean for you and your business?

On 15 March 2023, Chancellor Jeremy Hunt addressed parliament and outlined the Government’s Spring Budget. I’ve highlighted below some key areas you should be aware of.

What's the position of the UK economy?

As many people grapple with the rising cost of living, the main focus has been on the inflation level. According to forecasted figures, inflation is expected to fall to 2.9% by the end of this year. Whilst this sounds more promising, considering the inflation rate in the last quarter of 2022 was 10.7% and inflation being based on the price of items 12 months prior, if you take the prices from 2 years ago, this still shows a sharp increase in prices that we are all having to factor into our budgets.

More caution was added in the forecasted figures that although the UK was predicted to avoid a recession in 2023, the economy was predicted to shrink by 0.2%, so the challenging times many are facing are not expected to go away quickly.

How will this budget affect my personal finances?

On the household bills front, the energy price guarantee has been frozen for a further 3 months, (end of July), capped at £2,500 a year for your gas and electric. The £400 winter discount has however come to an end, and there are no plans for this to be repeated next winter. You should keep in mind though, that while the cap is helpful to households, in particular those homes with poor insulation, the cap of £2,500 is still double what the bills were in the winter of 21/22. A stark reminder of the past!

The personal allowance (£12,570) and basic rate tax threshold (£50,270) remain frozen until 2028. This is known as a stealth tax, as annual increases in salaries will push more taxpayers above these thresholds, therefore resulting in additional tax to pay, whether this is in the basic rate (20%) or higher rates of tax (40%).

The main reform has come in the form of pension tax relief. The Chancellor has abolished the lifetime allowance for pension contributions, this is the limit in which an individual can contribute to their pension pot over their lifetime. The limit had previously been set as £1,073,100. This mainly came about from an issue arising whereby doctors were reducing their working hours due to the tax implications of exceeding the pension allowance. It’s up for debate exactly how many people within the UK will actually benefit from this change! What might be of more relevance is the change in the maximum amount an individual can contribute tax free into their pension pot each year. Previously the maximum was £40,000, but this has increased to £60,000. I know many owner-managed businesses look to make use of this via employer pension contributions, so this does offer a chance to increase contributions and provide further tax savings.

How will this Budget affect my business finances?

So, the planned Corporation Tax rise will go ahead. This means the top rate of Corporation Tax will rise to 25% from 1 April 2023. This will be where your profits exceed £250,000. If your profits are £50,000 or lower, your tax rate will remain at 19%. Should your profits fall within the £50,000 - £250,000 profit range, then your tax rate will receive what’s known as marginal rate relief, essentially your overall tax rate will be between 19% and 25%, depending on the size of profits you achieve in the year.

In more positive news, the Annual Investment Allowance (AIA) has been permanently extended to £1 million from April 2023. This was due to drop to £200,000, so this is good news for businesses who purchase large values of Plant and Machinery/Equipment. This news coincided with a new policy for 100% first year allowance deduction for main rate plant and machinery expenditure, and a 50% first year allowance for special rate expenditure. This policy has been brought in for three years to March 2026. The idea behind this policy is to encourage business investment in plant and machinery. This benefits those businesses who require spending large volumes on plant and machinery items, but given the increase in the AIA, I know for many of our clients, they are unlikely to spend over £1 million on new equipment in a single year, and so for many smaller businesses, this doesn’t actually offer much in the way of tax savings.

In recent times, there has plenty of focus by the Government for reform on Research & Development claims, in particular to cut down the number of fraudulent claims being made. In the last Budget, it was announced that the payable tax credit on R&D losses was to be reduced from 14.5% to 10%. In this Budget however, there has been a change of approach and those that are considered R&D intensive companies (those that spend 40% of their total expenditure on R&D activities) will still be able to cash in their eligible losses for a 14.5% payable tax credit, which is welcome news and hopefully will still encourage R&D activities by small and medium businesses.

A quick mention for changes to the Creative Industry Tax Relief Schemes. We work with many game development companies and have been eager to find out about the Government’s planned changes. The claims under the Creative Industry Schemes will change, and all the schemes available will now be moved to a refundable credit model, rather than the current scheme of receiving additional deductions on eligible expenditure. As a result of this change, the eligible credit percentages have increased to compensate for the changes. Previously for video game claims, expenditure within the EEA had been allowed. This is now to be phased out, but games that have not concluded development on 1 April 2025 may continue to claim EEA expenditure up to April 2027. The encouraging news on this front is that the Government will continue to provide support for those in the creative industry sectors, a growing and significant part of the UK economy.

What other key highlights came from the Budget?

• Childcare - currently working parents are eligible for 30 hours of free childcare per week. This is now being extended to cover younger children where both parents are in work. This will be a staged introduction, 2-year-olds from April 2024 and children 9 months old from September 2024.
• Alcohol duties - these are due to change and rise in line with the Retail Price Index Inflation rate, which may lead to price rises on certain alcoholic beverages. However, there has been an increase in draught relief to 9.2% for fans of draught beer and cider, and 23% for wine & spirit-based drinks, to help reduce the impact of the expected price rises. These changes come into effect from 1 August 2023.
• Fuel duty – these duties are set to remain at current levels for a further 12 months, so the planned rise with inflation has been cancelled for now.

Mark Horsfield is Business Services Manager at Plus Accounting. Find out more about Plus Accounting on their website here. 

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