Mini-budget to cost the treasury £37bn – where does it leave businesses?

New Chancellor Kwasi Kwarteng has delivered his first mini-budget, announcing a variety of tax-cutting measures that will cost the Treasury around £37bn in 2023-24.

Corporation tax increase scrapped

In last year’s Spring Budget, then Chancellor Rishi Sunak pledged to raise corporation tax from 19% to 25%. However, Prime Minister Liz Truss has pledged to scrap the rise. In his mini-budget this morning, Kwasi Kwarteng has confirmed it will be abandoned.

Derek Ryan, UK Managing Director at Bibby Financial Services, comments on the news: “Freezing corporation tax at 19% will doubtless be welcomed by many. But the former Chancellor’s proposal to increase corporation tax to 25% would only have applied to those making profits of £50,000 or more, which is approximately 70% of businesses. For a significant number of the UK’s 5.6 million small to medium-sized businesses, profits fall well short of this threshold.

“Consequently, today’s announcement makes little or no difference to their prospects for growth or survival. Indeed, our own data shows that 76% of SMEs are concerned that the current economic climate is killing entrepreneurialism and 26% can’t afford to invest in their businesses.

“Small to medium-sized businesses clearly need more direct, long-term support if they are to make a meaningful contribution to Mr Kwarteng’s ambitions.”

However, Gary Smith, GMB General Secretary, says the corporation tax cuts will cost the public £14 billion.

He said: “These same Tories have been in power for 12 years, presiding over a low-growth, low-productivity, low-pay economy. The country is crying out for a credible economic vision for the future.

We need to bring inflation under control and build a modern manufacturing base that creates good jobs at home and enhances our national security. Instead, the Chancellor has chosen to pour money into the hands of rich multinationals.

“The Chancellor is tough on care workers’ pay rises and soft on bankers’ bonuses – today’s announcement has set in stone an economy that’s rigged against working people.

“Our members want an economic policy that works for all, not just the spivs and speculators who have done very well out of a Tory Government. The Chancellor had a chance to set a new approach but instead, he failed his first and most important test.”

Stamp duty being cut

Stamp duty is also set to be cut from today. Kwarteng said that no stamp duty will be paid on the first £250,000 of a property, and for first-time buyers, the threshold will be £425,000. The Chancellor said these cuts are permanent and will take more than 200,000 buyers out of paying for stamp duty altogether.

Tom Jackson, Managing Director for Cooper Associates Mortgages, comments on the proposed cut to stamp duty: “Today’s mini-budget with the new Chancellor brings a glimmer of hope to the property market. The Stamp Duty cut is welcome, stimulating the property market and providing the likelihood of more housing stock. We have several clients – first-time buyers and home movers – who can move, but the lack of available housing means they are struggling to do so.

“The options given, including doubling the payable stamp duty threshold to £250,000 for home movers and increasing the first-time buyer threshold to £425,000 from £300,000, go some way to incentivise both movers and first-time buyers, therefore increasing stock for first-time buyers.

“Nevertheless, is it enough to get the market moving fully again? I’m not sure. With the base interest rate now at 2.25%, the ongoing monthly costs of a new mortgage are far larger than 18 months ago.

“During the last Stamp Duty holiday, the base rate was at just 0.1%, meaning it was cheap to move and at an all-time low to borrow. This time, buyers/movers will be far more considered in the decision to move, especially with rising costs.

“Fortunately, many mortgages offered today do provide the ability to be ported. This means that if a client has a product that is on a fixed rate with time remaining, it may be possible to port this mortgage from their current property to the property they wish to purchase. This allows them to keep their current rate, which is likely much lower than that which can be obtained today.

“As we did throughout the last Stamp Duty Holiday, I imagine we will once again see the option to port being used more regularly in the market moving forward.”

Michelle Ovens CBE, Founder of Small Business Britain, also believes today’s mini-budget will benefit small businesses. She comments: “The focus on entrepreneurship in today’s Growth Plan statement is good news for small businesses and a hugely encouraging step towards supporting this key part of the economy in a tough financial climate.

“The energy plan already announced, cutting prices for small businesses and addressing some of the astronomical rises we have seen this summer, will give businesses some reassurance over the winter months, even if there are still questions over the long-term plans.

“There is no doubt that rolling back national insurance rises, IR35 regulations and the planned corporation tax rise next year will be welcomed by small businesses and the business community more widely. In the medium to long term, this will support and encourage entrepreneurial growth, which is very welcome.

“However, there remain serious challenges in the short term as entrepreneurs battle with rising costs across all areas of the business, not just in energy and tax. Finance, input prices, export and staffing all remain challenging and we continue to see businesses failing at a high rate with little to fall back on after a very difficult few years. More will need to be done at all levels of society and government to ensure the 5.6 million small businesses in the UK can weather this winter and make the most of the supportive policies announced today.

“The direction of travel is absolutely right for small businesses. This now needs to be delivered by us all.”

National insurance rise to reverse in November

Kwarteng also confirmed that the National Insurance rise, which began in April and made workers and employers pay an extra 1.25p in the pound, will be reversed in November.

Phil Bernie, Co-founder of cloud-based payroll platform, KeyPay, comments: “Payroll teams everywhere will be pleased that the promised changes to National Insurance look to be coming in from November and not any earlier, as these alterations to tens of millions of pay packets are not simple to implement.”

“Ideally, we would not be implementing two short notice changes to National Insurance in one year, as each of these changes requires a huge amount of work to get right, and small mistakes can mean companies aren’t paying employees what they are legally required to.”

“Desktop-based payroll software will present the most complications for payroll teams as they will have to wait for an update and then make sure it is rolled out across all their machines and then tested – all of which could take hours at relatively short notice. Cloud-based platforms are better suited to keeping up with a rapidly changing regulatory environment, as it is impossible to use an out-of-date version of the software. It’s always updated – so it is always compliant.”

Matt McDonald, Partner and Employment Specialist at law firm, Shakespeare Martineau, also comments on the stress this will cause employers. He says: “This is unlikely to be a quick and seamless reversal for employers. The extra administrative burden needed to implement a change of this nature will put extra pressure on businesses and stretch HR departments.

“Although in theory, employees and business owners should feel the effects as soon as November, the reality could be quite different. It’s argued that this plan will only marginally benefit a small number of lower-earning households; Liz Truss recently admitted that some of her planned tax cuts will benefit higher earners more than lower earners. Meanwhile, SMEs in particular, who are already feeling the mounting pressure of an energy price spike, cost of living crisis and a looming recession, continue in general to struggle more than their larger counterparts.

“A lag between this announcement and having the appropriate software in place is inevitable, although there is at least a window before the introduction of the change on 6 November. More specific details are needed in order for software designers to build tools to help implement and manage the changes and to allow HR professionals to prepare appropriately.

“With already limited time to do so, businesses should act now to get the correct payroll system in place, to reduce the amount of human input required to roll out the changes and to limit any administrative and potential financial worries.”

Income tax cuts for the highest rate and basic rate

During the mini-budget, the Chancellor announced that the top rate of income tax (45% for earnings over £150,000) will be scrapped. From April next year, Kwarteng says that the basic rate will be reduced to 19% as the government will cut income tax by 1p in the pound.

Finn Houlihan, Managing Director at Arlo Group and ATC Tax comments on the announcement: “The decision to abolish the 45% tax rate will have a huge, direct impact on households. The government is clearly trying to put more money in people’s pockets. In doing so, they know that the people who are likely to see the biggest change to their income in real terms are more likely to spend it than save it and this will, in turn, boost business growth.

“With significant rhetoric around making the UK a more favourable tax environment for all, this is clearly a good chance for advisers to discuss options and tax efficiency with clients. The measures taken by the government will cushion the impact of yesterday’s rate decision, and seeking professional advice will help people see the long-term benefits of some of the solutions available that enable them to make the most informed financial decisions.”

However, Alex von Schirmeister, UK Managing Director, Xero, is unsure how much today’s mini-budget will help SMEs. He says: “This is a huge budget, but let’s hope it will work in the longer term. Will it reassure small businesses? It’s encouraging to hear the Chancellor draw the link they have to families, but today’s announcements seem better aligned with big businesses and larger SMEs.

“It is crucial that the government also considers how to give small firms what they need to drive growth. In particular, the issue of late payments has become more severe during economic uncertainty – putting smaller firms’ viability at the whim of whether their larger customers can pay them on time.”

Banker’s bonuses to be lifted

There was also confirmation that the proposed cap on banker’s bonuses, which was 200 percent of their annual salary, will be lifted. Kwarteng also said he will reform the pension charge cap so that pension funds can invest more easily in UK assets.

Moray Wright, CEO, Parkwalk Advisors, welcomes the pension reform proposals. He said: “Today’s budget was supposed to be “mini”, but for the UK’s high-growth technology businesses, it was a pivotal moment. After years of discussion, we welcome the Government’s decision to unlock investments into UK assets and innovative high-growth businesses by accelerating pension reform. This will help support the UK, which is a leader in creating intellectual property in the sectors of tomorrow including AI, life sciences, cleantech, medtech and quantum computing.

“Further to this, the looming EU sunset clause, which was set to bring an end to the Enterprise Investment Scheme in April of 2025, will now no longer happen, again giving confidence to investors to back the UK’s science and technology scaleups.”

Kiki McDonough, the Founder of the eponymous jewellery brand, believes removing the cap on banker’s bonuses is also a good thing.

She commented: “The new Chancellor Kwasi Kwarteng’s first mini-Budget includes a number of measures that will undoubtedly be welcomed by business leaders across the country. While the big question on everyone’s minds is how the Treasury will pay for so many tax-cutting measures, I believe that by lowering income tax and National Insurance contributions and essentially putting more money into people’s pockets, they will be more inclined to spend and therefore boost the economy.

“Reversing the National Insurance increase should help to prevent too much demand for pay increases, which in turn should help to level out inflation. Meanwhile, scrapping the planned increase in corporation tax will provide a lifeline to small businesses, many of whom invest all their profits back into the business to help them grow.

“Ending the cap on bankers’ bonuses is also a smart move when you consider that the greater the bonus, the more money the Government will receive in tax from these bonuses. This is a far more sensible way to tax people rather than on their income.”

However, Dr. Gordon Fletcher, retail and economy expert from the University of Salford Business School, in unsure whether everyone will benefit from today’s announcements. He commented: “This feels like a series of uncosted party pledges being made going into a general election rather than a costed, balanced management of national finances being made by a responsible government!

“The announcements primarily benefit those probably least concerned about the cost of living increases within their households and those businesses most benefitting from the current situation. It is a solution pinned to a vague objective of achieving growth without addressing the real systemic issues that confront UK business including productivity issues and upskilling the working population.

“The fiscal event has not received scrutiny from the Office of Budget Responsibility and no statement about the long-term consequences of these decisions accompanied Kwarteng’s performance. The event appealed directly to – and rewarded – the constituency that elected Truss to Prime Minister. There will be little to celebrate for those most worried about heating their home over Christmas.”

Extended tax relief for venture capital trusts and enterprise investment schemes

The Chancellor also extended the tax reliefs for venture capital trusts and reiterated government support for enterprise investment schemes (EIS).

Kwarteng revealed that from April next year, the amount companies can raise through Seed Enterprise Investment Schemes (SEIS) will rise from £150,000 to £250,000, and the annual investor limit will be doubled to £200,000. The gross asset limit will rise to £350,000, and the age limit extended from two to three years.

Sarah Barber, CEO of Jenson Funding Partners, responded to the measures: “The measures announced in today’s emergency budget are a huge boon for fast-growth businesses. Until now, it’s felt like successive governments were sleepwalking on SEIS and EIS. It felt like we’d grown complacent, as the news agenda was dominated by crisis after crisis, with limited room left for long-term planning.

“No longer. Scrapping the sunset clause will give investors and entrepreneurs alike a much clearer path to future growth, and the increase to the SEIS investment cap will let entrepreneurs raise more money in less time. The impact of the latter point cannot be overstated: entrepreneurs should now have to spend less time fundraising, and more time doing what they do best – building a business. This is a fantastic commitment to British businesses from the new government.”

New investment zones

The Chancellor also outlined plans to create up to 40 new ‘investment zones’ in England, with the potential for more in Wales, Scotland and Northern Ireland. Businesses in these zones will benefit from wide-ranging tax breaks including 100% tax relief on investments in plant and machinery, and no National Insurance Contributions will be payable on the first £50,000 earned by new employees.

Richard Godmon, Tax Partner at Menzies LLP, comments on the announcement: “The new Investment Zones are reminiscent of the former Enterprise Zones, but they will provide a much more favourable tax environment for businesses and they promise to become a magnet for inward investment. There are currently 38 areas in England on the list for consideration and we look forward to finding out which ones will be selected.”

The removal of IR35

It was revealed that the IR35 reform will be repealed from April next year. IR35 is a tax law requiring the end client, and not the contractors they hire, to decide if the working relationship resembles a self-employed engagement or employment. Under IR35, the fee-paying party (either the end client or recruitment agency) shoulderd the liability.

However, in his mini-budget, Kwarteng said workers across the UK providing their services via an intermediary, such as a personal service company, will once again be responsible for determining their employment status and paying the appropriate amount of tax and NICs.

Sarah Williams, head of employment at northwest law firm Taylors Solicitors, commented on the news: “Business owners, HR managers and workers across the UK will be relieved at today’s news that the government plans to scrap IR35.

“When it was introduced to the private sector on 6 April 2021, businesses and workers alike were plunged into turmoil, as almost every aspect of working life and, in some instances, home life was excruciatingly examined.

“HR managers and employment lawyers were asked numerous questions about avoiding the IR35 trap, hours were spent reviewing contracts, explaining the control, substitution, and ‘MOO’ test, (mutuality of obligation).

“We had to consider other ‘tests’ too, such as financial risk, provision of equipment and office space, and the old contractual ‘nutshell’ – legal intention. The list of considerations seemed to go on and on and, in relation to many contracts, no one could provide a definitive answer as to whether a contract fell outside IR35.

“IR35 was introduced as a way of raising revenue but many consultants, workers and contractors lost their ability to work. Overnight, businesses – especially those that were struggling to survive during the pandemic – lost their cost-saving ability to rely on flexible additional business support without having to increase the size of the workforce.

“The removal of IR35 will hopefully encourage people who need to work flexibly (including those who have protected characteristics) to return to the work they enjoy the most. It’s been a difficult few years with Brexit, Covid and the war in Ukraine, but scrapping IR35 is good news.”