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How ‘back to work’ Budget impacts employment taxes

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Ian Holloway looks at the announcements and implications of the “education, employment, enterprise and everywhere” Budget for income tax, national insurance and education.

15th Mar 2023
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The Office for National Statistics (ONS) announced that for the quarter to January 2023 ‘economic inactivity’ was 21.3%. This translates to over one-in-five of the working population between the ages of 16 and 64 choosing not to work for one reason or another. 

Being economically inactive is an issue for the UK government; the higher the numbers of people out of work, the less there are paying taxes into the Exchequer to fund public services.

There is a very clear difference why individuals are economically inactive. Some may make the deliberate choice to be inactive; for example, they have taken early retirement and have little or no incentive or intention of returning to employment (and becoming economically active again). 

Some, however, are inactive because there are barriers to entering or remaining in employment and becoming active or more active (and paying more taxes). These barriers may include things such as the cost of childcare and ill-health or mental wellbeing.

So, with employment and unemployment figures relatively stable, it is clear the Chancellor had to address the stagnation in economics, hence the Budget’s theme of “education, employment, enterprise and everywhere”. 

At the same time, he had to balance this with the reality that employment and attitudes have changed, accelerated more in recent years. It may be the desire to encourage economic activity, though not everyone wants this.

Income tax

The Autumn Statement 2022 already attempted to boost revenue to the Exchequer by extending the freeze in the value of the personal allowance to 2028 and reducing the threshold at which an individual starts to pay tax at the additional rate, subsequently mirrored for Scottish Taxpayers. 

This is known as fiscal drag, where individuals are dragged into paying tax or paying tax at a higher rate as their earnings increase but thresholds do not. So it is, perhaps, interesting to contrast previous above-inflation increases to thresholds (reducing monies to the Exchequer) with the current fiscal drag.

Whilst many taxpayers will not pay more tax in tax year 2023/24, more will be dragged in to the regime and people’s allowances will not have increased in line with inflation as a result of the freezes.

Similarly, we have to think about the concept of the Budget, which was about reducing economic inactivity, thereby stimulating growth. I would have thought that growth starts at any age and any step of a career ladder. It does seem strange, therefore, that the pensions tax limits policy paper acknowledges the increase in the pensions annual allowance and removing the lifetime allowance tax charge from April 2023 “will have a greater impact on those later in life and closer to retirement than younger age groups”. 

National insurance

The fiscal drag for employees and employers continues with the freeze to the national insurance contributions (NICs) thresholds. Both will have expected these thresholds to be inflated, lifting the amount that could be earnt before NICs were payable. The freeze means the drag will be felt in pay packets. 

The ill-fated September 2022 Growth Plan promised business tax and NICs incentives for employers of employees working in investment zones. Autumn Statement 2022 announced a “refocus” of this programme. Today’s Spring Budget announced this refocus and HMRC’s policy paper outlines the details. 

Essentially, we have to look at the existing freeports regime and apply this to the Great British designated investment zones when details are published. The announcement that “the measure will come into effect from the date of Royal Assent of Spring Finance Bill 2023” brings with it the obvious questions of administration both by employers and software developers.

Are there even enough unused national insurance category letters left to be able to affect this in tax year 2023/24?

Apprenticeship levy and skills

Education and skills are devolved areas and announcements made do not apply UK-wide (regardless of the headlines you will be reading over the next few days). 

So, I’m not quite sure how employers of employees in investment zones will be able to have access to these grants that “incentivise apprenticeships” and how that is going to work.

‘Returnerships’ will be introduced, though little detail is available such as how they will be funded.  These will be offered to the over-50s and focus on upskilling, preparing them for entering or adapting to a changed employment arena. 

This skills boost, of course, is designed to get this category being an economically active part of the workforce but does also have the admirable intention of ensuring they are equipped with the necessary skills.

With the range of incentives and initiatives around parents, individuals and employers will no doubt be confused. We already have apprenticeships, T Levels, skills bootcamps and the lifelong loan entitlement, and add to that returnerships!

Summary

I must admit, it did seem strange that this Budget for growth actually started by acknowledging “challenging” economic conditions. 

Yet, let’s not forget, politicians have jobs they want to retain. With a general election predicated in 2024, perhaps the real balancing act for the Chancellor was to provide his economic certainty and stability whilst trying to ensure that both he and his colleagues remain economically active in 2025.

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Replies (2)

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By Hugo Fair
15th Mar 2023 23:30

I'm surprised there hasn't been more comment regarding removal of the lifetime allowance tax charge from April 2023 - which “will have a greater impact on those later in life and closer to retirement than younger age groups”.

Bit of an understatement there!

I can see how the Chancellor's arm was twisted (re NHS consultants turning down work or even retiring early - albeit from the private not state practices), but personally feel little sympathy for those 'driven out of economic activity' via the size of their pension pots.
And see NO reason for this largesse being extended to ALL people in that position.

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By 2TunTed
17th Mar 2023 09:32

If the Chancellor was really interested in boosting employment and economic activity and seducing those not working, not working enough or quitting because they have had enough he will have to work very hard on his Salome act. Most of the budget is wrapping and packing and most tax payers will get bigger and better goodies from their Christmas Crackers.
Government, and particularly the treasury seem to believe that the only reason any of us are here is to contribute to the tax pot, and the diminishing PAYE pot in particular. Unsurprisingly, those who can quit do.
Successive governments have gone along with the treasury raiding pension pots, flogging the fiscal nonsense that is IR35 and constructing marginal tax hazards here there and everywhere. Happiness was basic rate but even this is under attack as allowances are frozen or cut back.
You can believe that the current situation has arisen by accident and no one realised which raises questions of competence. Or that it was all done cynically. Rotten either way. another unimaginative budget for the plebs.

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