September 30, 2022

Volatile Reaction to UK “Mini-Budget”





Bank of England market intervention after presentation of tax package

On 23 September, the new U.K. Government conducted the emergency fiscal event it had scheduled when taking power at the beginning of the month. Many of the tax measures had been trailed in the interim, largely cancellations of previously announced rate increases. There were additional surprise announcements made during the speech by Chancellor of the Exchequer Kwasi Kwarteng, including the abolition of the top 45% rate of personal income tax. The package, implementing the sharpest U.K. tax cuts in 50 years, was presented as a growth plan to target a trend rate of 2.5% medium term growth.

It has been quite a bracing time since then, as noted below.

The key tax announcements made included the following.

  • Confirmation that the planned increase to 25% of the main rate of corporation tax would be cancelled, so that the rate will remain at 19%. The increase was initially announced in March 2021[1] and included in legislation due to take effect in April 2023, so reversal will require further legislation to be passed. The move had been widely trailed during the Conversative Party leadership contest over the summer.
  • Similarly, as expected, the 1.25% increase in national insurance (social security) contributions and dividend tax rates implemented in April 2022[2] is also being reversed, in this case effective from November 2022 for social security and April 2023 for dividends. The Parliamentary process for legislation necessary to make the consequent changes to payroll systems had commenced the day before the fiscal event. The Government stated that the funding for health and social care that was expected to be raised by the 1.25% charge will be maintained at the same level as if it had remained in place.
  • In relation to personal tax, the 20% basic rate of income tax will be reduced to 19% from April 2023, a year earlier than planned by the previous administration. It was also announced unexpectedly that the “additional” 45% top rate of income tax generally applicable to an individual’s income above £150,000 is to be abolished with effect from April 2023, so that all general income over the higher rate threshold (currently £50,270) will be subject to income tax at the 40% higher rate. When combined with the 1.25% reduction in dividend tax rates, the abolition of the additional rate income tax bracket means that the top rate of income tax on dividends received by individuals after 5 April 2023 will fall from 39.35% to 32.5%.
  • Investment Zones are to be introduced, with associated time­‑limited tax advantages lasting 10 years. These are proposed to include 100% relief from business rates on newly occupied business premises, 100% first year capital allowances for expenditure on qualifying plant and machinery, accelerated 20% structures and buildings allowances, a zero-rate salary band for employer social security contributions in respect of new employees and 100% stamp duty land tax relief for real estate purchased for commercial use or for development. Early discussions have commenced with a number of local authorities on establishing Investment Zones in their areas.
  • The cap limiting bonuses of certain bank staff at 100% of their fixed pay (or at 200% with shareholder approval) will be removed. It was also announced that a series of further regulatory reforms of the financial services sector will be brought forward later in the autumn.
  • The off-payroll working rules, which supplement the operation of “IR35” so as to treat certain contractors working through service companies as employees for payroll tax purposes, will be repealed from April 2023. Under the current system, private businesses (since April 2021) and public sector businesses (since April 2017) have been responsible for assessing the IR35 status of contractors engaged in this way, and usually for collecting the associated taxes through their payroll systems. This requirement for an assessment of the contractor’s circumstances by the contractor’s client can be burdensome and uncertain, potentially leading many to err on the side of caution. On repeal, contractors and their intermediary entities, rather than their private or public sector clients, will once again be responsible for determining their own IR35 status, and accounting for any resulting payroll taxes accordingly. While the change will no doubt be welcomed by businesses, they may reflect that the administrative costs of establishing systems to implement the current rules have largely already been incurred.
  • The temporary £1 million annual investment allowance, providing 100% relief for expenditure on qualifying plant and machinery, will be made permanent. The annual amount had been due to revert to £200,000 from April 2023.
  • The threshold above which stamp duty land tax is payable on the purchase of residential real estate property was increased with immediate effect from £125,000 to £250,000.
  • The independent Office of Tax Simplification will be abolished, with its function replaced by a general mandate to the Treasury and tax authorities to simplify the tax code.

The ad hoc fiscal event—although colloquially referred to as a “Mini‑Budget”—was not formally a Budget, and the tax cuts announced were not accompanied by the usual (for a Budget) forecasts of the tax and spending implications from the independent Office for Budget Responsibility (OBR). This may not have helped. Ensuing sterling and government bond volatility suggests that the markets were drawing their own conclusions about the potential impact on government borrowing of funding the package, on top of the recently announced energy bill relief schemes for consumers and businesses.

A further announcement was made on 26 September that, after wider supply‑side reforms had been set out during October and November, the Chancellor would deliver a fiscal plan on 23 November, including details on the medium‑term reduction of debt as a proportion of GDP, and that this would be accompanied by an OBR forecast. The formal Budget dealing with tax measures in more detail is to be deferred until the spring, with another OBR forecast at that stage. Meanwhile, the housing market has been affected, with lenders removing many fixed‑rate retail mortgage products from the market and, on 28 September, the Bank of England intervened on an emergency basis to stabilise the gilt markets, as volatile yields had acutely implicated the ability of certain U.K. pension funds to meet margin calls.

More eventful in both its content and its aftermath than most full-blown Budgets, it seems likely that there will be yet more to come on this.

For further information, please get in touch with any member of the London Tax team, or your usual Shearman & Sterling contacts.


Simon Letherman



+44 20 7655 5139

+44 20 7655 5139