While the public debate rages over the extent and causes of the ‘black hole’ in the UK’s finances, tax experts have been pondering the changes likely to be announced by Jeremy Hunt on Thursday.
One of the areas with the highest potential impact on larger businesses is the expected increase in the dividend tax bands and the predicted decrease in the tax-free dividend allowance.
A company pays corporation tax on its profits and then shareholders are liable to income tax on dividends when those profits are paid out so with corporation tax increasing from 19% to 25%, any increase in dividend tax would be seen as a ‘double whammy’.
“The effective tax rate of someone earning over £150,000 a year is now nearly 55%,” explains Andrew Marr, Managing Partner at specialist tax consultancy Forbes Dawson. “If this band is cut to £125,000, shareholders would feel demotivated by the obligation to pay 55p tax on every extra pound earned. In comparison, any decrease in the tax-free dividend allowance would be seen as a mild irritation.”
Other mooted changes include a reduction in the annual capital gains tax allowance of £12,300, although business owners will be less concerned about this than the prospect of an increase in the 20% headline capital gains tax rate.
“The tax culture for the last 20 years has been that business owners have a right to low rates of tax on exit,” says Marr. “They will be keeping an eye out for an increase in the main 20% rate and also to any changes to the business asset disposal relief regime, whereby £1m of business gains can enjoy a preferential 10% tax rate.”
Elsewhere, the friction of multinational taxation where the location of the business can be difficult to pin down remains according to Jeremy Coker, Partner at OC Chartered Accountants and President of the Association of Taxation Technicians.
He suggests that many – if not most – of the ideas being mentioned have been the subject of previous budget forecasts, including removing main residence relief on capital gains tax, alignment of capital gains tax rates of tax with income tax so that tax is paid by individuals at their marginal rates, and reforming the non-dom tax regime.
“The simple way of increasing tax revenue over the longer term is freezing tax bands and allowances,” says Coker. “This would have the singular effect of bringing people and businesses into higher rates of tax based on any growth in their income and is almost the perfect stealth tax as it erodes the longer-term accumulation of wealth by both individuals and businesses.”
When the then Chancellor Rishi Sunak announced in spring 2021 that the personal allowance and the higher rate threshold would be frozen for the four year period 2022/23 to 2025/26, the Treasury’s budget report stated that this measure was forecast to raise £1.56bn in 2022/23, rising to £8.18bn by 2025/26. The OBR published updated estimates in March 2022 which forecast the yield from this measure to raise £2.9bn in 2022/23, rising to £18bn by 2025/26.
When asked what options businesses have at their disposal for mitigating the impact of these changes, Marr observes that various lockdowns since early 2020 have taught business owners to work ‘location-independently’ and have (along with higher tax rates) led to some of them changing their tax residence.
“We have seen an increase in shareholders seeking to move to places like Portugal, which in the right circumstances can allow them to receive dividends from UK companies tax-free,” he says. “If capital gains tax rates increase, there is also likely to be increased interest in leaving the UK before significant business sales. Simpler things like extracting dividends before tax rates change may also be an option.”
