The new Chancellor of the Exchequer Jeremy Hunt has announced a U-turn on almost all of the tax changes laid out in the mini Budget in a bid to “stabilise” the UK economy and provide confidence in the government’s fiscal plan.
In a statement on Monday, the Chancellor (pictured) confirmed that the government will scrap plans to cut the basic rate of income tax to 19% in April 2023. The move was first announced by Rishi Sunak in March this year, with a view to being introduced in 2024. However, the measure was fast-tracked by Kwasi Kwarteng in his mini-Budget last month.
While the government aims to introduce the cut in the longer term, Hunt said this will only go ahead when economic conditions improve and the change is affordable for the Treasury.
The change in direction follows severe market turbulence, which saw the pound plummet to its lowest level since 1971 in the wake of predecessor Kwasi Kwarteng’s mini-Budget on September 23.
Rachel Griffin, tax and financial planning expert at Quilter, said the idea that the government can cut taxes in search of growth is “quickly being swept aside for austerity mark II.”
Griffin said: “Had the cut come into place in April 2023, an average UK earner on £30,000 a year would have paid £174 less in tax next year. However, they will still benefit from the abolition of the 1.25% increase to national insurance which Hunt has kept in place, saving them around £218 next year. A higher earner on an annual salary of £100,000 will now pay £377 more in income next tax year, while benefiting by more than £1,000 from Kwarteng’s previous national insurance hike reversal.”
Griffin said Hunt had “little choice but to act”, not only to shore up market confidence but help balance the government books following the pandemic.
“It is clear that Hunt’s emphasis will be on balancing the books, so it is likely that tax allowances and thresholds are not going to become more generous any time soon. As such, it is now even more vital for individuals to utilise the tax allowances they have as much as they can and take advantage of the situation today.”
Laura Suter, head of personal finance at AJ Bell, said the move will cost taxpayers up to £377 a year in additional tax compared to Prime Minister Liz Truss’ previous plans.
Suter commented: “The move will save the Government £5.3 billion for next year, adding to their coffers and helping to calm the markets but that clearly has a cost to the public – it means someone earning £25,000 will pay an extra £124 a year while someone on £50,000 will pay £374 more in tax a year.”
However, the decision to retain income tax rates at their current level will have benefits for pension savers, with higher income tax rates acting as a bonus for those investing money in a pension.
According to Tom Selby, head of retirement policy at AJ Bell: “If the full mini-budget package of income tax cuts had been brought forward, a basic-rate taxpayer would have needed to contribute £1 more in order to get £100 in their pension, reducing their retirement saving bonus from 25% to 23%. The announcement means Brits will pay more income tax than under the mini-Budget and therefore will get more pension tax relief than they would have if those plans had been taken forward.”
In addition, Hunt said plans to cut dividends tax by 1.25% from April 2023 will no longer go ahead. The 1.25 increase, which took effect in April this year, will now remain in place.
Suter said: “In the space of a few weeks we’ve gone from a dividend tax system where there are just two rates, back to the three-tier system and with higher rates. The move to reverse the cut to dividend rates but not change the National Insurance means we now have a more uneven playing field between those who earn money via dividends versus those who earn via a salary. It has the biggest hit for those additional-rate taxpayers who have seen their tax rate go from 32.5% back up to 39.35%.”
The Government has also changed tack with its energy bills support, stating that households can only expect guaranteed support until April 2023, despite Liz Truss’ promise to help households for the next two years.
The Chancellor said that it would be “irresponsible” for the government to continue exposing public finances to unlimited volatility in international gas prices. Instead, a Treasury-led review will be launched to consider how to support households and businesses with energy bills after April 2023.
However, Suter warned that the announcement “will send shockwaves” through households, who face soaring energy prices and the prospect of a struggle to pay their bills.
Suter added: “The indication from Hunt is that help will be targeted at those who need it the most from April onwards, rather than universal support regardless of income. However, there’s no guarantee that the support will be meaningful after April.”
The Government will also scrap plans to introduce a new VAT-free shopping scheme for non-UK visitors to Britain in a move that is worth around £2 billion a year and has reneged on a pledge to freeze alcohol duties in a move that will be worth around £600 million a year.
James Athey, investment director at abrdn, said: “The UK’s latest Chancellor is burnishing his more traditional conservative credentials with authority. The rolling back of planned tax cuts was the absolute minimum required but Jeremy Hunt is going further and this will provide greater relief to the gilt market. By introducing a more targeted approach to the energy relief package from April 2023, he is recognising the scale of fiscal mismatch which had been central to the problems in UK assets over the prior few weeks.
“The UK still faces an economically challenging year ahead with recession all but inevitable and still uncomfortably high inflation likely to feature for many months to come. That will of course keep pressure on the Bank of England to continue removing the monetary punchbowl at a rapid clip.
“Unfortunately for sterling, stagflation and lower interest rates are still not a particularly happy combination and thus with King Dollar still in the ascendency we suspect that the pound may struggle to recover further than it already has.”
Richard Carter, head of fixed interest research at Quilter Cheviot said Jeremy Hunt’s fiscal plan was helping to return “some semblance of credibility” to the government’s economic reputation, with bond markets welcoming his announcement.
Carter said: “All eyes now turn to the Bank of England and its next policy move. Hunt’s statement should reduce the need for the Bank of England to raise rates as aggressively as it might have done, but it is still struggling to bring inflation down and as such will need to act in some shape or form. With further pressure being placed on businesses and households and the long-term challenges of slowing growth, the risk of policy misstep only grows.
“In the short-term, however, this raises serious question marks over the future of the Prime Minister and as such further political volatility lies ahead for markets.”
