UK mini-budget 2022 – Investment Funds

The UK government held its mini-budget on 23 September 2022 (referred to by the government as its “Growth Plan”), and it involved a significant package of corporate and personal tax cuts. Among the most significant changes affecting the Funds industry announced, are the following:

Planned corporation tax increase cancelled

The planned corporation tax increase to 25%, which was due to take effect from April 2023, has been cancelled. As a result, the UK corporation tax rate will remain at 19%.

Reduction in national insurance contributions

The recent increase in employer and employee national insurance contributions (of 1.25%) is to be reversed from 6 November, and the planned introduction of the Health and Social Care Levy from April 2023 (which was due to replace the recent rise in national insurance contributions ) is being repealed.

Reduction in dividend tax rate

The dividend tax increase of 1.25% that was due to take effect from April 2023 has been cancelled, and the additional tax rate on dividends will be abolished. The ordinary and upper rates of dividend tax will be reduced to 7.5% and 32.5% respectively.

Reduction in income tax rates

The 1% cut to the basic rate of income tax will be brought forward, with the effect that the basic rate will be 19% from April 2023. Whilst this has not been confirmed yet, this may be relevant to withholding tax as well, because the UK’s withholding rates generally operate by reference to the basic rate of income tax. That said, the UK’s wide treaty network generally means that the full withholding tax rate is not often applied (and there is generally no withholding tax on dividends either, other than eg UK REITs).

As part of the government’s commitment to lower taxes and simplify the tax system – and to improve the attractiveness of the UK as a place to work relative to other countries – the additional rate of income tax will also be removed from April 2023. This means that the top income tax rate will become 40%.

Private sector investment

The government will launch the Long-term Investment for Technology & Science (LIFTS) competition, providing up to GBP500 million to support new funds designed by institutional investors and world-class fund managers, aiming to crowd billions of pounds of private investment into UK science and technology businesses. Following a short period of industry engagement led by the British Business Bank, the government will launch a call for proposals by the end of the year to identify promising fund structures and vehicles, with the intention that funds go live as soon as possible next year.

The above changes show that the government has a decidedly pro-growth and investment agenda, which could be viewed positively by the UK Investment Funds industry. The “LIFTS” proposal to provide up to GBP500m of government support to new funds designed by institutional investors and fund managers in the UK’s science and technology business, is welcome.

UK Fund managers will benefit from reductions to national insurance and income tax cuts on their employment income. Although the carried interest tax rate on capital gains tax (of up to 28%) has not changed, UK carry holders may still benefit from reduced taxation on carried interest consisting of interest income and dividends.

The UK corporation tax rate remaining at 19% (cancelling the anticipated increase to 25% in April 2023) and the reduction in employer national insurance, means that the UK remains a more attractive jurisdiction for Funds to establish their management and operating businesses.

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