The newly appointed Chancellor of the Exchequer, Kwasi Kwarteng, has today announced a series of Government measures in his mini-Budget. These measures are set out in the Chancellor’s ‘Growth Plan’. This blog post sets out a high-level summary of the key measures from an employment, pensions and incentives perspective.
- National Insurance: the Chancellor had already confirmed ahead of the mini-Budget that the 1.25 per cent rise in national insurance (NI) will be reversed from 6 November 2022. That rate was due to return to 2021-22 levels in April 2023, when a separate new 1.25 per cent Health and Social Care Levy was due to take effect (leaving taxpayers in the same overall position). As part of his mini-Budget, the Chancellor has also cancelled next year’s introduction of the Health and Social Care Levy.
- Income tax: in a more unexpected move, a decision has been made to abolish the additional rate of income tax, which is currently set at 45 per cent on annual income above £150,000. Instead, we will return to a single higher rate of income tax, at 40 per cent. In addition to this, a scheduled 1 per cent cut in income tax has been fast-tracked, meaning that it will come into effect in April 2023 rather than a year later as planned. Consequently, from April 2023, the basic rate of income tax will be 19 per cent as opposed to 20 per cent, and all annual income above £50,270 will be taxed at 40 per cent. The 1.25 per cent rise in income tax on dividends originally introduced alongside the above-mentioned NI increases has also been reversed from 6 November 2022. For a summary of the wider tax measures announced in the mini-Budget, please see here.
- Bankers’ bonus cap: as trailed in the media over the past week, the Chancellor confirmed today that the Prudential Regulation Authority will remove the cap on bankers’ bonuses that was first introduced in 2014 as part of a package of the CRD IV pay reforms. The cap currently operates so that a banker’s bonus cannot be higher than 100 per cent of their fixed pay, or 200 per cent with shareholder approval. In his announcement, the Chancellor said that the bonus cap only pushes up basic salaries or drives activity outside Europe. Critics of the cap also argue that the remuneration rules on deferral, malus and clawback are more effective tools for ensuring risk-management, and these seem likely to stay. The effect of the measure will ultimately depend on what is brought in instead, but the removal of the cap will require financial services firms to conduct a thorough review of the remuneration structures applicable to UK-based material risk takers. Removing the cap would likely result in a greater proportion of bankers’ pay being variable and this might create additional employment law complexities, including in relation to equal pay. More generally, this measure might prompt concerns in terms of general competition and retention of talent within the European market if the UK becomes a source of big bonuses once again.
- Strike action: there has been a significant amount of media attention on strike action in recent months. In July 2022, the Government implemented new regulations allowing companies to use agency workers to perform duties normally performed by a worker who is on strike. In the Chancellor’s mini-Budget, it was announced that the Government will legislate to require trade unions to put pay offers from employers to a vote of members to ensure that strikes can only be called once negotiations have genuinely broken down.
- Pension charge cap: the Government will bring forward draft regulations to reform the pensions regulatory charge cap. The Chancellor confirms in his Growth Plan that this change is intended to give defined contribution pension schemes the clarity and flexibility to invest in the UK’s most innovative businesses and productive assets, creating opportunities to deliver higher returns for savers.
- Off-payroll working rules: the IR35 rules were specifically designed to prevent perceived tax avoidance where individual consultants were engaged via intermediaries – most commonly personal service companies – and did not pay employment taxes on any earnings from the client. The two key IR35 changes were that: (1) the ‘end client’ was required to formally assess whether the individual consultant would be an employee had they been directly engaged, by conducting a ‘status determination statement’; and (2) if so, the ‘end client’ was required to include the individual consultant on their payroll, and account for income tax and NI contributions. Before the 2017 and 2021 reforms (affecting ‘end clients’ in the public sector and private sector respectively), these obligations sat with the personal service company and the ‘end client’ did not need to worry about those points. In his announcements today, the Chancellor confirmed that these IR35 reforms will be repealed from April 2023. Therefore, from that date, individual consultants across the UK providing their services via an intermediary will once again be responsible for determining their own employment status and paying the appropriate amount of tax and NI contributions. The Chancellor said that he will continue to keep compliance under review.
- Company share option plans: a company share option plan (CSOP) is a tax-advantaged discretionary share option plan. Currently the maximum value of CSOP options that can be granted to an employee is £30,000. The Chancellor confirmed today that from April 2023, qualifying companies will be able to issue up to £60,000 of CSOP options, doubling the current limit. The qualification requirements for a company to be able to offer CSOPs will also be eased, better aligning CSOP rules with rules for more generous enterprise management incentive schemes.
- Office of Tax Simplification: in another surprise, the mini-Budget announced that the Government will abolish the Office of Tax Simplification (OTS). Instead, it intends to embed tax simplification into the institutions of Government, mandating the Treasury and HMRC to focus on simplifying the tax code. This presumably means, amongst other things, that the OTS review into the emerging trends and tax implications of hybrid and remote working, which was due to publish its findings early next year, will no longer continue.
- Investment zones: the Chancellor also announced that the Government is in discussions with 38 local authorities to establish areas of ‘investment zones’ across England, where business will be offered targeted and time-limited tax cuts, as well as benefitting from a relaxation in planning laws. Importantly from a people and reward perspective, businesses in these zones will receive a zero rate for employer NI contributions on new employee earnings up to £50,270 per year, with employer NI contributions being charged at the usual rate above this level. Tax incentives for these new investment zones are stated to be time-limited, with a maximum duration of ten years.
Despite this not being a full Budget, the measures announced by the Chancellor today are broad and significant. The Growth Plan is intended to make growth the Government’s central economic mission and has been developed against a backdrop of high inflation. It remains to be seen whether the Chancellor will achieve his aims, but the measures announced today will certainly have far-reaching consequences for businesses and individuals across the UK. Watch this space for future blog posts looking at some of these measures in more detail, or for more information, please speak to the authors of this blog post or your usual Freshfields contact.
