KPMG sets out predictions for next week’s Spring Statement and identifies issues in UK tax system
Ahead of the Spring Statement, KPMG – one of the ‘Big Four’ accounting firms – has predicted that the Chancellor is “unlikely” to cut Corporation Tax, in a potential blow to limited company contractors.
However, the firm also believes that the Chancellor “won’t be able to resist” cutting Income Tax or National Insurance, offering a glimmer of hope to some sections of the self-employed, and to taxpayers at large.
KPMG’s policy predictions, published on its website, come a little over a week before the Spring Statement (6th March). With the government in the final year of its Parliamentary term, a general election must be held by 28th January 2025, though it is widely expected to happen later this year.
As such, the Spring Statement will likely be one of the Chancellor’s last opportunities to win over voters before the UK goes to the polls. However, KPMG’s predictions suggest that this budget means some self-employed workers will be better off than others.
Corporation tax cut “unlikely”
Contractors in particular have been subject to harsh treatment at successive Spring and Autumn financial statements.
KPMG expects this to continue, stating that a cut in Corporation Tax is considered “unlikely”, as reducing the headline rate of Corporation Tax would be an “expensive” decision and “could add to the uncertainty of the UK’s tax environment”.
It may come as little surprise, considering the headline rate increased on 6th April 2023, from 19% to 25%. The increase has put a further squeeze on limited company contractors, especially in combination with other aggressive tax measures, such as the lower tax-free Dividend Allowance.
However, KPMG also notes that political developments in Northern Ireland could see its lower, 15% Corporation Tax rate adjusted to 12.5% to account “for some trading income” for limited companies. This could put “political pressure on the government to reduce the rate for the rest of the UK”, according to KPMG.
NI cut likely to be ‘scrawny rabbit’ pulled from Chancellor’s hat
The accounting firm has instead predicted that cuts to income tax and national insurance are more likely. In an election year, KPMG believes “the Chancellor will not be able to resist cutting the main rate of either”.
The Chancellor also has the option to unfreeze tax thresholds, delivering “a ‘stealth’ tax cut” rather than cutting tax rates, as “it is not clear if there is sufficient headroom” in the budget for a 2% cut to either income tax or national insurance.
Following national insurance reforms at the Autumn Statement which came into effect this year, primarily benefitting sole traders and employees, further changes would offer workers and potentially employers additional relief. KPMG believes this is more likely than income tax cuts, “as it chimes with previous messaging” and government policy.
However, with the UK tax system “full of distortions and cliff-edges that can produce unfairness, or disincentivise growth or work”, KPMG recognises “the challenge facing the Chancellor as he seeks to do the groundwork in advance of the general election”.
As such, while “tax cuts are often a near-certainty” in an election year, the accounting firm predicts just “one headline-grabbing tax cut”.
KPMG also took the view that there may be smaller, “interesting” tax decisions as well – but whether these changes “will move the opinion polls remains to be seen”.
Leave a Reply