If you’ve been keeping an eye on the U.K.’s government, then you’ve noticed there has been an unprecedented amount of change over the last few months. In recent months, there have been several prime ministers and chancellors, which has meant that policy impacting the payroll profession has subsequently also seen significant change.
Let’s explore some of the changes the profession has recently been exposed to. Some of those changes remain, but the majority have been reversed.
The ‘Mini-Budget’
Liz Truss was appointed prime minister on 6 September 2022, and Kwasi Kwarteng became chancellor of the Exchequer on the same date. Kwarteng delivered a statement on 23 September 2022, which has been referred to as the “mini-budget” or the “Growth Plan.”
The key announcements made related to National Insurance (NI), the health and social care levy, tax, investment zones, and off-payroll working rules, and include the following:
Kwarteng confirmed the increase to NI of 1.25%, implemented from 6 April 2022, would be abolished from 6 November 2022. He also confirmed that the health and social care levy, which was due to be ringfenced (i.e., used for investment in health and social care only) and introduced as a new tax from 6 April 2023, would no longer come into effect.
According to Investopedia, a ring-fence is “a virtual barrier that segregates a portion of an individual's or company's financial assets from the rest.”
The NI changed from 6 April 2022. It changed again on 6 July 2022 (with an increase to the primary threshold). It changed once again on 6 November 2022. This meant three changes to NI for tax year 2022-2023. This has been unheard of in payroll history.
A bombshell within the speech was that the additional rate of tax (which sits at 45% for earnings over £150,000) would be abolished on 6 April 2023. It was also confirmed the basic rate of tax would decrease from 20% to 19% within the same timeframe. This had been promised by previous chancellor Rishi Sunak, but not until the following tax year (2024-2025).
We also learned the off-payroll working reforms that were implemented in the public sector in 2017 and the private sector in 2021 would be repealed. The off-payroll working reforms shifted the onus of determining employment status from the individual contractor or personal services company (PSC) to the end engager. The repeal of the rules would have meant that the responsibility shifted back to the individual or PSC, who would need to make status determinations and deal with the resulting tax consequences.
Finally, we were advised that new investment zones would be established to drive growth and unlock housing. Employers would pay a zero-rate of NI contributions on the salaries of new employees working within the zones for a minimum of 60% of their time on earnings up to £50,270 per year.
As you can imagine, this was anything but a “mini-budget” for payroll professionals. There was arguably more payroll-related policy confirmed here than in a standard budget. However, more change was yet to come.
All Changes
On 3 October 2022, we saw the first of a plethora of U-turns on plans unveiled by the mini-budget. Kwarteng reneged on the pledge of removing the additional rate of tax on April 2023. This was because the mini-budget was not accompanied by a fiscal forecast from the Office for Budget Responsibility (OBR), so the changes weren’t costed for.
Kwarteng was dismissed as chancellor on 14 October 2022, and replaced by Jeremy Hunt on the same day. On 17 October 2022, Hunt delivered a statement, in which he confirmed most of the measures introduced in the mini-budget would be scrapped. The reduction of NI rates by 1.25% on 6 November 2022 would still happen as legislative steps had already taken place. However, the basic rate of tax wouldn’t be cut to 19% and would remain at 20% “indefinitely until economic circumstances allow for it to be cut.” The off-payroll working rules would no longer be repealed, meaning that the responsibility for determining employment status would remain with the end engager. Hunt was silent on the topic of investment zones during this speech.
20 October 2022 saw yet more change when Liz Truss resigned as prime minister. Following a leadership contest, previous chancellor Rishi Sunak was appointed as the new prime minister on 25 October 2022. There was a huge cabinet reshuffle, but Hunt retained his position as chancellor.
A “medium-term fiscal plan” was due to be held on 31 October 2022, but it was soon confirmed this would no longer take place due to market stabilisation. At the time of this writing, the latest news was the plan would now be delivered on 17 November 2022, and the “medium-term fiscal plan” upgraded to a full-blown autumn statement, to be released alongside an OBR fiscal forecast.
What’s Next?
Payroll professionals wait with bated breath to hear what the autumn statement delivers. There’s media speculation that the U.K. can anticipate tax hikes and cuts to public spending, but nothing will be official until Hunt delivers the autumn statement. Will we hear more about investment zones, an area that we haven’t heard anything on since the mini-budget? Will the health and social care levy be reintroduced as a new tax from 2023-2024? It was, after all, originally introduced when Sunak was chancellor.
What we do know for sure is that we need consistency. Payroll teams and wider organisations will have begun preparing for the changes announced in the mini-budget, and it will have caused substantial work when the changes were subsequently scrapped in such rapid timeframes. Hopefully, businesses will get the certainty they need from the upcoming autumn statement, so they can start planning for next tax year and beyond. Working in payroll in 2022 really felt like we were riding on a rollercoaster.
Editor’s Note: For the latest updates, read the 17 November 2022 U.K. Autumn Statement published on HM Treasury website.