Posted by James Pearson on 20 Mar 2023

Budget 2023

Jeremy Hunt described this budget as his ‘back to work budget’, he stated that the “Conservatives believe work is a virtue”, and so we might be forgiven for assuming this budget is aimed at introducing policies that will appease the dissatisfied public sector and NHS workers currently striking in a bid to encourage them back to work. But Hunt’s budget is instead focused on assisting those not working due to long-term sickness, early retirement, or astronomical childcare costs back to work and therefore, paying into the tax system.  

The headline-making policy of removing the annual limit on tax-free pension contributions from £40,000 to £60,000 and the abolishment of the lifetime cap on the amount that can be paid into a pension, is aimed at encouraging the higher-paid, older workers out of retirement, or to act as a deterrent for those considering early retirement. This policy is clearly of benefit to those high earners, who have reached the pinnacle of their professions and have excess income which can be invested in pensions.  One of the advantages of such a policy is to help the ailing NHS by ensuring that staff at the top of the pyramid are not hemorrhaging into early retirement and thereby fuelling staff shortages in our hospitals. Furthermore, the Chancellor’s enthusiasm to provide fiscal incentives to the highest earners will do little to allay the grievances of nurses and junior doctors, who will be left wondering why it is that the government is happy to put its hand in its pockets for those with earnings that have reached levels whereby they are able to contribute up to £60,000 a year into pensions, and who have already paid more than a £1m into their pension pots, but are unable to offer a pay rise that will counteract the real-time pay losses experienced by those less fortunate, junior employees. 

Other than the ‘gilded giveaway’ of the changes to the pension regime, Hunt’s budget lacked much of the drama and frenzy that surrounded the autumn budgets. Dubbed by some of the press as the ‘boring budget’, most of Hunt’s statement was expected or reiterations of policies already announced such as the rise in corporation tax.

Hunt claims that his budget creates the “most pro-business, pro-enterprise tax regime anywhere”; however, given that he used this opportunity to confirm the increase in the rate of corporation tax from 19% to 25%, one could argue that his policies do not necessarily stand up to his political rhetoric. Despite, the corporation tax hike, there are however some incentives for businesses looking to invest in the future. Whilst we are saying a fond farewell to the super-deduction capital allowances regime, this is being replaced with “full capital expensing” for qualifying plant and machinery, meaning a company can claim 100% FYA allowance on capital expenditure for main rate plant and machinery, and 50% FYA for a special rate. This is currently a temporary measure due to be withdrawn on 31 March 2026. The Chancellor did indicate that he hopes this will become permanent, but whether he will be in the position to make this decision remains to be seen.

According to the Chancellor, the introduction of ‘full capital expensing’, creates one of the most generous capital allowances regimes in the world, however, arguably these changes offer little difference for most businesses. The new policy does not offer an increase in relief because, as with all qualifying plants and machinery, the capital allowances regime means that eventually, capital expenditure will have received a 100% deduction, instead the new policy accelerates the relief. The new “full capital expensing’ is only available to those liable to corporation tax, for businesses that pay income tax, these deductions are not applicable. Furthermore, as the annual AIA limit has already been permanently fixed at £1m per year, most smaller corporations were already receiving a 100% deduction for plant and machinery, and not just on main rate capital items, buts also on special rate items. Thus, the introduction of this new capital allowances regime is only beneficial to those larger companies, whose annual expenditure on plant and machinery is in excess of £1m. Smaller start-ups and sole traders will see no benefit from this regime whatsoever. 

The changes to the R&D regime mean that from 1 April 2023, loss-making R&D-intensive SMEs will receive a higher rate of relief. If an SME has a qualifying R&D expenditure that consists of more than 40% of their total expenditure, they will be able to obtain an effective credit of 27p for every £1 spent on qualifying R&D expenditure. Clarification on whether or not the government will be merging the RDEC and SME R&D schemes (as previously announced) was not forthcoming and we will need to wait until the summer for a further update. However, the proposed restriction on the inclusion of overseas expenditure in R&D claims has been deferred for a further 12 months. 

Further feeding into Hunt’s ‘pro-business, pro-enterprise budget, is the announcement of 12 Investment Zones across the UK. These investment zones are intended to aid in the government’s ‘leveling up’ policy and to help enhance economic growth. Each of the zones will have, over a 5-year period, access to £80m and to a five-year tax package offering the tax benefits of freeports. 

The changes to the pension regime and the focus on business and investment are the main takeaways of this budget, however, when subject to scrutiny, both appear to be policies that offer assistance and incentives to individuals and businesses that are already on the up, for smaller business, and for individuals on lower wages, this budget offers little in the way of support to battle the rise in inflation and the cost of living. 

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