A risky budget strategy?

In his first Budget speech as Chancellor, Kwasi Kwarteng said that “we need a new approach for a new era, focused on growth”. 

Mr Kwarteng said he would build this ‘new approach’ around three priorities: reforming the supply side of the economy, maintaining a responsible approach to public finances, and cutting taxes to boost growth. 

What followed certainly delivered on the third of these: this package has been described as the biggest tax cutting budget for half a century, following on from the earlier announcement of very substantial support for individuals and businesses coping with rising energy prices. 

The Chancellor also put forward a number of proposals to reduce costs and regulation for businesses, moving the levers of tax and legislation to encourage investment, employment and economic growth. It remains to be seen whether the UK’s productivity and national income will respond in line with his aspirational target of 2.5% a year. 

The other priority, fiscal responsibility, was covered in less depth. The response of the financial markets to the announcement of such substantial tax cuts was immediate: the value of the pound and the main stock market index both fell. 

In response, the Chancellor has now backtracked on one of the unexpected tax cuts – the abolition of the 45% top rate of income tax for those earning more than £150,000.

The Chancellor put off the publication of plans to reduce government debt over the medium term, and full economic and fiscal forecasts. It would be fair to say, the government is taking big but potentially risky steps to promote growth.

Significant points

• reversal of the April 2022 increase in National Insurance rates with effect from 6 November 2022 

• cancellation of the Health and Social Care Levy that was to be introduced in April 2023 

• cancellation of the 1.25% addition to dividend tax rates that was introduced in April 2022, with effect from April 2023 

• basic income tax rate cut to 19% a year early, from April 2023 

• cancellation of planned corporation tax increase to 25% in April 2023: the rate will remain 19% 

• increases in thresholds for Stamp Duty Land Tax with immediate effect 

• from April 2023, repeal of the ‘off-payroll working’ measures introduced in 2017 and 2021 

• confirmation of energy cost support packages

The sudden announcement of significant tax changes can make it hard to keep track of what is changing and when, and how it affects your finances. Below we cover the main areas that will be of extra interest. 

Energy costs

The Chancellor began his speech with what he described as the issue most worrying the British people – the cost of energy. He did not announce any new measures, but summarised the support that has already been announced: the Energy Bills Support Scheme, which will provide a £400 nonrepayable discount to eligible households to help Emergency Budget 23 September 2022 with their energy bills over the coming winter, and a new Energy Price Guarantee, which will reduce the unit cost of electricity and gas so that a typical household in Great Britain pays, on average, around £2,500 a year on their energy bill, for the next 2 years, from 1 October 2022. 

The Energy Price Guarantee limits the amount a customer can be charged per unit of gas or electricity, so the exact bill amount will continue to be influenced by how much energy the consumer uses.

There are further measures to support businesses, and different arrangements for people on different types of energy supply contracts. The Chancellor noted that the volatility of the energy market meant that it was not possible to be sure of the cost to the government of this support, but it is estimated to be £60 billion over the next six months.

Personal income tax

In March 2022, Rishi Sunak announced his intention to cut the basic rate of income tax from 20% to 19% from 6 April 2024. 

This was costed at over £5 billion a year and was said to be conditional on the government continuing to meet its ‘fiscal rules’ – borrowing going down and not being required for day-to-day spending. Kwasi Kwarteng has brought the cut forward by a year to 6 April 2023, with no conditions attached. For someone earning over the 40% threshold of £50,270, this will mean a reduction in income tax of £377 in 2023/24. 

National Insurance Contributions

From 6 April 2022, the rates of Class 1 NIC paid by employers and employees, and of Class 4 NIC paid by self-employed people, were increased by 1.25 percentage points. These increases were a temporary measure for the tax year 2022/23, pending the introduction of a separate Health and Social Care Levy (HSCL) to be paid by the same people on the same income from 6 April 2023.

The Chancellor has decided to cancel the HSCL altogether, and to cancel the increases in NIC from the earliest practicable date – 6 November 2022. It is recognised that some payroll software may not be able to deliver the reduction to the old rates in time for the November payroll, but affected employees should receive a rebate retrospectively with their December payments.

Stamp Duty Land Tax (SDLT) thresholds

With effect from 23 September 2022, the threshold above which SDLT must be paid on the purchase of residential properties in England and in Northern Ireland will be doubled from £125,000 to £250,000. 

At the same time, the thresholds for first-time buyers will increase from £300,000 to £425,000 and the maximum value of a property on which a first-time buyer can claim relief will increase from £500,000 to £625,000.

These changes may save first-time buyers up to £11,250, with savings of up to £2,500 for other purchasers.

Corporation Tax – rate of tax

As widely expected, the Chancellor confirmed that the planned increase in the main rate of corporation tax from 19% to 25% will not now take place on 1 April 2023, reducing government revenue by an estimated £67 billion over the next five years. 

The government states that ‘this will maintain a competitive business tax regime, which will support investment, innovation and economic growth in the UK’.

Annual Investment Allowance (AIA)

The 100% AIA, which is available to companies and unincorporated businesses, is available for qualifying expenditure on plant and machinery (P&M) up to £1 million. The limit was intended to drop to £200,000 for expenditure after 31 March 2023, but the higher limit has now been made ‘permanent’. This is described as intended to ‘support business investment, provide businesses with more stability, and make tax simpler for any business investing between £200,000 and £1 million in plant and machinery’.

Get in touch

We will be happy to help you adapt and reassess your plans in light of any legislative changes. Please get in touch on 01903 234904 or visit www.carpenterbox.com for more information.

Information correct as of 4 October 2022.