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Business-positive Budget, with a pensions shake-up

Author: ICAEW Insights

Published: 16 Mar 2023

The Chancellor’s focus was fixed on business investment and growth after a better than expected OBR forecast. But much of the funding allocated for this is small fry.

In an otherwise fairly safe and business-focused Budget, the announcement of the abolition of the Lifetime Allowance on pensions – which limits the amount people can save before incurring a tax charge – was the biggest surprise. 

The measures announced by the Chancellor on pensions, which also included an increase in the Annual Allowance from £40,000 to £60,000, was a significant change that will encourage further tax planning as people look to maximise their pension pots. 

“Abolishing the Lifetime Pension Allowance is the biggest surprise to come out of today’s Budget, while the increase from £40,000 to £60,000 in the annual pension allowance is also significant,” Frank Haskew, Head of Taxation Strategy, ICAEW, says. “Together, these measures are forecast to cost more than £1bn by 2026/27. Although the government is keen to encourage people back into the workplace, these measures are likely to appeal more to those who are still in work but considering retirement.”

This was announced as a wider programme of measures to bring more people into work and keep them there for longer – the Chancellor mentioned incentivising doctors in particular to work longer. It is worth noting that it will also be welcome news to a large and active voting demographic.

Economic performance better than expected – but not great

The Office for Budget Responsibility (OBR) report shows that the UK economy has contracted less than expected, narrowly avoiding a technical recession. However, this does not mean a speedy recovery from current challenges. 

The OBR states that living standards will be lower, by 0.4%, in 2027/28 than in the pre-pandemic era. This suggests that people will be poorer for almost a decade.

The OBR also states that the tax burden will reach a post-war high of 37.7% in 2027/28. It will also see the highest ratio of corporation tax receipts to GDP since the tax was introduced in 1965. The ratio of public spending to GDP will be 43.4% – the highest sustained level since the 1970s.

“With the OBR confirming that the longer-term outlook remains challenging, the acid test for this Spring Budget is whether it injects resilience into the economy and introduces a focus on renewal for the future,” says Suren Thiru, ICAEW’s Economies Director.

“A slight improvement in the economic outlook has enabled the Chancellor to make some relatively small tax and spending commitments in today’s Budget, resulting in planned spending in 2023/24 of just under £1.2trn, only £10bn lower than in November’s forecast,” adds Alison Ring, Director of Public Sector at ICAEW. “The public finances are still vulnerable to potential economic shocks, with limited headroom against the Chancellor’s objective of bringing down debt as a share of GDP. There is little capacity for flexibility if the economic situation deteriorates, or to provide additional funding for public services that are under pressure.”

A Budget for growth

Many of the measures announced in the Budget were designed to encourage more people into work, as part of the Chancellor’s overall strategy for growth. 

“The Chancellor’s focus on a budget for growth is the right one given a flatlining economy, and the number of measures announced will be a shot in the arm for businesses,” says Thiru. “The substantial investment in employment support and the expansion of free childcare should be applauded given the chronic staff shortages businesses continue to face. However, the reduced energy support for businesses will come as a blow to many who are facing large hikes in their bills.”

The return of Levelling Up

The Chancellor mentioned the government’s mandate to level up the UK when he announced his plan to create 12 new investment zones in areas such as West Midlands, Greater Manchester, North East, East Midlands and Liverpool, with four across Scotland, Wales and Northern Ireland. These will have access to ‘interventions’ worth £80m over five years, including enhanced rates of Capital Allowance and Structures and Buildings Allowance, and relief from stamp duty land tax, business rates and employer’s national insurance contributions. Flexible grant funding will support skills, apprenticeships, business support and infrastructure. 

The Chancellor announced £200m in funding for local regeneration projects, and a further £161m for regeneration in Mayoral Combined Authorities. There will be a second round of the city region sustainable transport settlements, allocating £8.8bn over the next five years. 

Capital allowances

With the 25% rate of corporation tax still in place and the super deduction coming to an end, the Chancellor announced ‘full expensing relief’ for three years, to 2026. This will provide for 100% relief for the cost of most items eligible for capital allowances, with a 50% rate applying to special rate assets. It will only be available on new and unused assets.

It will also only apply to companies; unincorporated businesses will only be eligible for the £1m annual investment allowance, or full expensing through use of the cash basis of taxation. 

“The new full expensing investment incentive will give firms confidence to invest and grow, though the uncertainty caused by the looming increase to corporation tax may undermine the stability needed for investment planning,” says Thiru.

The Chancellor also announced that the 100% first year allowance for qualifying expenditure on plant and machinery for electric vehicle charging points will be extended by a further two years to 31 March 2025 for corporation tax purposes and 5 April 2025 for income tax purposes. 

“The big-ticket capital allowance changes are aimed at driving capital investment to improve growth and productivity,” says Haskew. “With the increase in the main rate of corporation tax to 25% from April, and the ending of the 130% ‘super deduction’ allowance, the announcement that companies will instead be able to offset the full expense of all capital expenditure on plant and machinery means that the net cash benefit of capital investment will be maintained.”

R&D credit for SMEs, reliefs for creative industries

For SMEs, the Chancellor announced an increased rate of R&D relief from 1 April 2023. Eligible companies will receive £27 from HMRC for every £100 of R&D investment if they spend 40% or more of their total expenditure on research and development.

Film, TV and video games tax reliefs will be reformed from 1 January 2024. This follows a public consultation at the autumn statement 2022. They will become expenditure credits instead of additional deductions. 

The temporary higher rates of theatre tax relief (TTR), orchestra tax relief (OTR) and museums and galleries exhibitions tax relief (MGETR) have been extended for two years. Headline rates of relief for TTR and MGETR remain at 45% for non-touring productions and 50% for touring productions. These will taper to 30% and 35% from 1 April 2025 and 20% and 25% from 1 April 2026. OTR rates remain at 50%, and will reduce to 35% from 1 April 2025 and to 25% from 1 April 2026. The MGETR sunset clause will be extended for a further two years until 31 March 2026. 

Energy: more focus on nuclear

The Chancellor extended the climate change agreement scheme for two years. More significantly, he announced that nuclear power will be included in the UK’s green taxonomy, subject to consultation. This would mean nuclear projects would have access to the same investment incentives as renewable energy. The Chancellor expressed his wish that 25% of the UK’s energy would be generated by nuclear power.

The government will launch Great British Nuclear, which will launch the first staged competition for small modular reactors. Further large gigawatt-scale projects will also be considered, subject to value for money, relevant approvals and technology readiness and maturity. 

Up to £20bn will be available for carbon capture, utilisation and storage (CCUS), and extending the Climate Change Agreement scheme for a further two years to encourage energy efficiency. 

The government will also set out plans to refresh the existing control for low-carbon levies (CLCL), as it predates the government’s commitments on net zero. It will be replaced by a new framework “to reflect energy security priorities”.

“The government’s plans for nuclear power would work if it was identified as a transition technology,” says Richard Spencer, ICAEW’s Director, Sustainability. “As an end point, it is a disaster. It isn’t sustainable, it isn’t cheap and treating it in this way creates a path of dependency to nuclear and not renewables. It’s a complete travesty.

“The budget was an empty vessel when it comes to green. Nothing on renewables, hydrogen, efficiency and planning mechanisms. Nothing about taxes being an incentive to green, which Skidmore makes so much of. Small businesses facing a cost-of-doing-business crisis aren’t helped. It felt like quick fixes with an election in sight, rather than a strategic response to the climate and energy crisis that is crying out to be developed. Maybe the Chancellor is waiting for the new Net-Zero Strategy, the green finance strategy and a response to the Skidmore Net-Zero Review – all are due soon.”

Energy schemes extended

The Energy Price Guarantee will continue for a further three months, at which point energy prices are forecast to fall. However, the Energy Bill Relief Scheme will still be replaced with the Energy Bill Discount Scheme, which will last until 31 March 2024. As ICAEW previously reported, this will take some businesses and organisations out of scope for support where they were previously receiving it.

Free childcare and changes to benefits

Elsewhere on employment, the Chancellor proposed to expand support available for free childcare. From April 2024, for 38 weeks a year, 30 hours per week of free childcare will be offered to eligible working parents of children aged nine months to three years. Additional funding will also be given to providers of childcare to support the cost of delivering the existing free hours offered in England.

He also abolished the Work Capability Assessment for disability benefits and offered work coach support for disability benefits claimants without penalty. 

An AI ‘sandbox’ and quantum computing investment

In accepting all nine of the digital technology recommendations made by Sir Patrick Vallance’s technology review, the Chancellor announced the launch of an AI sandbox to trial new technologies and accelerate the development of new AI products. Work with the Intellectual Property Office will provide clarity on IP rules so generative AI companies can access the material they need.

The Chancellor also committed around £900m of funding to implement the recommendations in the independent Future of Compute Review for an exascale supercomputer. The government published a quantum strategy setting out its vision to be a world-leading quantum-enabled economy by 2033, with a research and innovation programme totalling £2.5bn.

It will award a prize of £1m every year, for the next 10 years, to the person or team that does the most ground-breaking British AI research, which will be known as the Manchester Prize.

ICAEW members – largely positive

ICAEW members have generally reacted positively to announcements on investment and childcare. The focus on sustainability and stability was also welcomed with cautious optimism, says Simon Gray, ICAEW’s Head of Business. “However, businesses remain concerned over the pending change to energy support, which will see a discount replace a cap, and with it more potential exposure to market volatility. Today’s Budget delivered extended protection for households on energy but left business feeling somewhat out in the cold.”

One eye on the general election

“With a wide range of measures to appeal to core voters, the Chancellor clearly had one eye on a future general election,” Michael Izza, ICAEW Chief Executive, says. “In particular, the abolition of the lifetime allowance on pensions is an astonishing move, though it will remain to be seen whether this does get people back into the workforce. Announcements on quantum technology, AI and nuclear power seemed in places like a return to an industrial strategy, with a focus on growth and energy security.

“Longer-term economic challenges continue, and it was disappointing that there was no extra money to tackle the backlog at HMRC. Nevertheless, as an ‘experienced worker’ myself, I think the Chancellor has made a good start in his new career in finance.”

 

Spring Budget 2023

On 15 March 2023, Chancellor Jeremy Hunt delivered the Spring Budget. Read ICAEW's analysis and reaction.

London Westminster

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