After just 34 days in the job and having inherited a difficult situation from the previous short-lived administration, Jeremy Hunt has made his second formal statement about changes to fiscal policy. The first was on his first full day in office, when he reversed much of his predecessor Kwasi Kwarteng’s plans, including reinstating the 45p income tax rate and removing a freeze on corporation tax.
The measures aim to plug a hole in the UK’s finances of £55bn over two years. This ambition is being met by a combination of spending cuts and tax increases, in a ratio of approximately 55% to 45% respectively. The Chancellor will be keen to point out the difference between these plans and those levied by George Osbourne in 2010 which aimed to save money funded 80% from spending cuts and 20% from tax rises. These changes were called ‘austerity’, and the Chancellor clearly wants to avoid this charge. There’s no getting away from the fact that before these changes, in the UK we already faced the highest overall tax burden since the 1960’s, and tax rates are forecast to increase further.
• Income Tax and National Insurance contributions thresholds will be fixed at their current rates until April 2028. The Government will legislate for the income tax measures in Autumn Finance Bill 2022, and NICs changes through secondary legislation in early 2023
• The Income Tax additional rate threshold (ART) will be lowered from £150,000 to £125,140 from 6 April 2023. The ART for non-savings and non-dividend income will apply to taxpayers in England, Wales, and Northern Ireland. The ART for savings and dividend income will apply UK-wide
• The National Insurance contributions secondary threshold will be fixed at £9,100 from April 2023 until April 2028. The Employment Allowance will mean the smallest employers will not be affected
• The Dividend Allowance will be reduced from £2,000 to £1,000 from April 2023, and to £500 from April 2024
• The Capital Gains Tax Annual Exempt Amount will reduce from £12,300 to £6,000 from April 2023 and to £3,000 from April 2024. The government will legislate for this measure in Autumn Finance Bill 2022
• The Inheritance Tax (IHT) nil-rate band and residence nil-rate bands will be fixed at their current rates until April 2028
• The VAT registration and deregistration thresholds will be maintained at the current levels of £85,000 for an additional two years from 1 April 2024
Following the Chancellor’s earlier confirmation, the increase in Corporation Tax to 25% will proceed from April 23.
Was there any good news?
The Chancellor did also announce a £14bn tax cut on business rates. The beleaguered high street will have been pleased to see this, but it remains to see what the details of this relief will entail.
Mr Hunt’s growth measures also included confirmation of the new nuclear power plant at Sizewell C, more spending on infrastructure as part of continuing ‘levelling up’ plans, and an increase in the research and development budget. Interestingly for investors and markets, he announced reforms to the Solvency II rules which will loosen regulation around what insurance companies can invest in, potentially unlocking ‘tens of billions of pounds’ of investment capital.
Several measures aimed at supporting the cost of living were also announced, including most notably an extension of the Energy Price Guarantee, for another 12 months, although on less generous terms, where the average household energy bill will increase from £2,500 to £3,000.
The ‘triple lock’ for State Pensions also remains in place, which will please those in receipt of this benefit. For those not already in receipt of the State Pension the Government’s review on whether it plans to increase the state pension age will be published in early 2023. The age from which this benefit will be paid is only going in one direction, and soon, the only option left for politicians will be to means test it, and individuals would be wise to plan for this outcome.
Investment markets will be placated by the OBR’s involvement in this review and their independent conclusions on these new policy measures, which show that they should move the economy in the right direction, making the downturn less severe and bring inflation down faster.
This should continue to inspire more confidence from investors, with the volatility we have seen likely to continue to subside. Even energy companies and electricity producers, both in the Chancellors sights with his increased windfall tax, shrugged off the announcement.
The Chancellor appears to have succeeded in his first objective of maintaining stability.