As the UK faces soaring energy bills and high inflation, new Chancellor of the Exchequer Kwasi Kwarteng unveiled a series of tax cuts and economic measures in his ‘mini Budget’ on Friday.
In what was described by the Institute for Fiscal Studies as the “biggest tax-cutting event since 1972,” the Chancellor has announced he will bring forward a cut in the basic rate of income tax. From April 2023 – one year earlier than planned – the basic rate of tax will be cut from 20% to 19%, which the Government said, will mean 31 million people will be better off by an average of £170 a year.
Steven Cameron, pensions director at Aegon, said the decision to bring forward the tax cut will result in millions of people keeping more of what they earn, however, he warned that over time people would still be forced into higher tax rates.
“Income tax thresholds are currently frozen until 2026 and over time, wage increases mean people are paying tax on more of their income and in some cases, are being dragged into paying higher rate tax. This is a particular issue in the current climate as soaring inflation has accelerated wage increases.
He added: “While this is a welcome boost to take-home pay, for many it will fail to compensate for frozen income tax thresholds. Unfreezing these would be a much more powerful lever to support lower and modest earning households. For anyone earning under £37,670, increasing the basic rate threshold by 10%, around the current rate of inflation, would offer a greater income tax saving than cutting the rate of income tax from 20% to 19%.”
The Chancellor also confirmed that the 1.25% rise in National Insurance will be reversed from 6 November, while funding for health and social care services will be protected and will remain at the same level as if the levy were in place. The move is expected to result in almost 28 million people keeping an extra £330 of their money on average next year, whilst 920,000 businesses are set to save almost £10,000.
The Chancellor said: “Taxing our way to prosperity has never worked. To raise living standards for all, we need to be unapologetic about growing our economy.
“Cutting tax is crucial to this – and whether businesses reinvest freed-up cash into new machinery, lower prices on shop floors or increased staff wages, the reversal of the Levy will help them grow.”
In addition, and controversially, the Chancellor has abolished the 45% additional rate of tax from April 2023. In its place will be a single higher rate income tax of 40%, which the Chancellor said would help to “attract the best and brightest to the UK workforce, helping businesses innovate and grow”, with the current 45% rate higher than countries such as Norway, USA and Italy.
Shaun Moore, tax and financial planning expert at Quilter, said the 1.25% reduction in national Insurance, means that someone earning £50,000 a year would see an extra £40 in their pocket each month, equating to £467 extra annually. Whereas the average graduate earning £27,000 would see just £15 extra a month or £180 a year. Reversing the NI hike has a much greater impact on someone earning £100,000, who would save £91 monthly or £1,092 annually.
The social care levy was also due to apply to pensioners from next year, the NI reversal will save them 1.25% of applicable earnings from 2023.
Moore said: “It is worth remembering that the national insurance primary threshold is now tied to the personal allowance, which is fixed until at least 2025/26 so the bandings will remain static for a while yet. The government previously announced that the primary threshold and lower profits limit will only increase in line with CPI from the 2026/27 tax year onwards. This means that the benefit to NICs payers will still reduce over time as wage inflation pushes people into paying more.
“Axing this additional 1.25 percentage points of NI contributions will provide a boost for consumers but leaves a gaping hole in Treasury funding plans for social care. Kwarteng says overall funding for health and social care services will be maintained at the same level as if the Levy were in place and come from general taxation. This sounds like wishful thinking and is effectively taking a gamble with social care funding in the hope the tax takes increases due to greater economic activity.
Commenting on the overall announcement, Liz Field, Chief Executive of PIMFA, said: “PIMFA hopes the measures announced by the Government today will help to counter the effects of the challenges on family finances, rebuild household financial resilience and realise a more prosperous future.
“The Government’s longer term growth target of 2.5% per year is welcome, as are efforts to support business, encourage inward regional investment and encourage further investment in small-to-medium sized enterprises such as the increased investment limits in, for example, the Seed Enterprise Investment Scheme.
“But obviously the impact of these measures will not be immediate and there will already be significant short-term pain for most average households before we see the economic growth the Chancellor hopes to achieve, have a real-terms impact on living standards.
[Main image: kate-krivanec-moW-dSe5CiU-unsplash-]
