Buck Bond Group
The government’s new growth plan

The government’s new growth plan

by and

Volume 2022 | Issue 21

Download this FYI as a printable PDF

Chancellor of the Exchequer, Kwasi Kwarteng, unveiled the new government’s financial plans – The Growth Plan 2022 – on 23 September 2022.

Primarily a mechanism to confirm the new Prime Minister’s tax and spending plans set out during the leadership campaign, it was slightly unusual in that it was not classed as a full Budget; neither were the usual Office for Budget Responsibility forecasts published. This “mini-budget” punched above its weight though, announcing the biggest package of tax cuts in some 50 years.

While there were few policy decisions directly affecting pensions and employee benefits, a number of the announcements could have a significant knock-on impact.

Background

During the Conservative leadership campaign, the issue of tax cuts loomed large, and the Chancellor’s package of measures certainly reflects that. Much of what was announced has been well trailed, although in true ‘Budget’ style, there were still one or two surprises.

Changes to income tax rates

The 20% basic rate of tax is to be reduced to 19% from April 2023 (the first cut in this rate since 2008). There will also be a one-year transitional period for Relief at Source (RAS) pension schemes – mainly personal pension arrangements – to permit them to continue to claim tax relief at 20%.

The additional rate of income tax of 45% which targets the highest earners with income over £150,000, first introduced in 2010 (at 50%), is to be abolished from April 2023. This could well signal a move by additional rate taxpayers to maximise their pension contributions over the remainder of this tax year, while still able to enjoy 45% tax relief.

(It should be remembered that the setting of income tax rates is devolved and so the impact will differ throughout the UK – it will apply in England and Wales but in Scotland the rates are currently unchanged.)

Reducing National Insurance contributions and scrapping the Health and Social Care Levy

As widely expected, the Health and Social Care Levy – initially introduced via a 1.25% rise in National Insurance contributions (NICs) in April 2022 – and due to come into force as a separate tax next April, is being cancelled.

The NICs increase will be reversed from 6 November 2022, effectively removing the temporary 1.25% increase for the rest of this tax year.

While good news for businesses and employees alike, this could raise questions about how the government plans to provide much needed funding for social care. However, it has been confirmed that funding for health and social care services will be maintained at the same level as if the levy was in place. Employers that have introduced salary sacrifice arrangements, or have been considering doing so, may wish to reflect on this announcement and what it means for them.

Reforming the pensions charge cap

In April 2015, the government introduced a charge cap of 0.75% of funds under management (or an equivalent combination charge) in respect of the default arrangements of defined contribution workplace pension schemes used for automatic enrolment. The charge cap has been kept under regular review since then.

An issue that the government has previously considered is the extent to which performance fees – payments made to investment managers for generating positive returns – are included within the charge cap.

The government is proposing to remove well-designed performance fees from the charge cap, ensuring that savers benefit from higher potential investment returns while providing clarity for institutional investors to help unlock investment into the UK’s most innovative businesses and productive assets.

Tax simplification?

While the focus is very much on growth and tax cuts, the government is also considering how to simplify tax. It has decided that rather than having a separate arms-length body to oversee simplification, the government will embed tax simplification into the institutions of government. The Office of Tax Simplification will, therefore, be abolished, with HM Treasury and HMRC instead being mandated to focus on simplifying the tax code. This comes as the Chancellor has announced plans to roll back on IR35 changes. It remains to be seen how effective this refocusing of tax simplification proves to be.

Changes to Solvency II

Another issue where we have an announcement, but no particular detail, is on changes to Solvency II – the EU-derived capital adequacy rules for insurance companies. Later this year, the government will unveil its plan for repealing EU law for financial services and replacing it with rules tailor made for the UK, and scrapping EU rules from Solvency II to free up billions of pounds for investment.

This could have a knock-on impact on insurer buy-out pricing, although it depends largely on what the government plans to replace it with.

Company Share Option Plan (CSOP) changes

From April 2023, qualifying companies will be able to issue up to £60,000 of CSOP options to employees, which is double the current limit. The ‘worth having’ restriction on share classes within CSOPs will be eased, better aligning the scheme rules with the rules in the Enterprise Management Incentive scheme and widening access to CSOPs for growth companies.

Comment

The immediate reaction to the government’s Growth Plan has led to significant movements in financial markets, which will impact the funding of DB pension schemes and the value of members’ DC pension savings.

Although this was not a full Budget, it represents a very bold package of measures based on tax cuts. It remains to be seen how the announcements are received over the next two years, because with a General Election expected in 2024, the reaction to the government’s plans may go a long way in determining how long the government has to see its policies through. The messaging from the Treasury since the “mini-budget” suggests this may not be the last of the tax cuts announced.