Spring Budget 2023 - What could it mean for UK M&A?

This week, Jeremy Hunt delivered his first full budget statement as Chancellor, following his November 2022 Autumn Statement, designed to return stability to the market in the wake of his predecessor Kwasi Kwarteng’s disastrous mini-budget.

The spring budget steered clear of too many earth-shattering announcements, with many of the major measures set to come into force in April 2023 having already been announced. However, there were still some significant measures unveiled, particularly with regards to pensions and childcare, and several developments that could have an impact on the UK’s M&A market.

Could pension measures discourage retirement sales?
Perhaps the most significant announcements contained in the spring budget concerned pensions, with the major headline being the removal (and future abolition) of the lifetime allowance on pension savings.


Previously, the lifetime allowance meant that savers would start paying tax on pension savings (for workplace and personal pensions, but not the state pension) once they exceeded a limit of £1,073,100. Once the allowance was exceeded, the excess was subject to significant taxes, including a 55 per cent rate if the excess was taken as a lump sum.

This was seen as a major factor in many higher earners choosing to take early retirement as their pension pots approached the limit, in order to avoid paying tax on savings made in excess of the allowance.

The £1.073 million rate was due to be frozen until 2026 and most advance predictions of the measures that the Chancellor would unveil in the budget forecast that it would most likely be increased to £1.8 million. However, Hunt has instead removed the limit entirely (starting April 6 2023) and it will be abolished in a future finance bill.

The intention of this change, primarily, is to encourage higher earners to continue working rather than take early retirement. As a result, the changes could have a significant impact on M&A activity driven by owners selling in order to retire.

Especially in industries in which a large amount of M&A activity derives from retirement-related exits (for example, wealth management or hotels), the changes may mean business owners increasingly pausing exit plans and working longer in order to build up bigger pension savings now that a major tax burden has been removed.

Corporation tax increase to go ahead
As is often the case with budgets, one of the most prominent aspects for business owners was something that wasn’t announced. Despite some hopes that the planned changes would be reversed, the latest statement confirmed that the corporation tax rate increase from 19 per cent to 25 per cent will indeed go ahead from next month.

From an M&A perspective, while corporation tax is not directly linked to deals themselves, the higher tax burden could still have a considerable impact on activity. At just 19 per cent, the UK’s corporation tax rate is among the lowest in Europe, with the likes of Germany and Italy having far higher rates (29.83 per cent and 27.81 per cent, respectively).

This has likely been a major contributor to the UK becoming the most attractive destination in Europe for inbound M&A activity (and the third most attractive worldwide), with foreign buyers attracted, among other things, by the UK’s comparatively low tax burden.

The increase, however, will bring the UK closer to its European counterparts. While the rate remains low in comparison to the aforementioned examples, it will soon be in line with the rates seen in economies such as France (25.8 per cent) and Spain (25 per cent).

This potentially removes a major incentive for overseas buyers to target acquisitions of UK companies, although low company valuations, economic uncertainty and the UK’s relatively weak currency will likely continue to attract opportunistic international buyers.

For incumbent UK businesses, the increase in corporation tax means a greater tax burden and, as a result, less capital for owners to invest in M&A. Therefore, the increase could have a significant negative effect on companies looking to expand through acquisitions, who may be forced to adjust their budgets or seek financing from elsewhere (easier said than done, as economic uncertainty leads to lenders tightening their financing conditions).

One potential upside, however, is the fact that the corporation tax rate will remain at 19 per cent for businesses with annual profits below £50,000. When the increase comes into effect for other businesses, this fact could mean that smaller companies seeking to expand through acquisitions may have greater funds at their disposal and a competitive advantage in the marketplace.

Greater scrutiny on asset disposals?
Finally, one point of the budget that was not explored in great detail was a promise to close a loophole related to capital gains tax (CGT). According to the government, the loophole can enable owners to avoid CGT on assets disposed of under certain unconditional contracts if HMRC is left without time to assess the tax due.

In the budget, the Chancellor announced plans to close this loophole and tighten rules around the disclosure of the disposal of assets under such contracts, giving HMRC more time to assess the CGT due.

While this may not necessarily increase the tax burden for owners making disposals, it could mean an extra layer of compliance and regulatory scrutiny, potentially complicating some disposals and impacting the timeframe within which certain assets can be sold.


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