“During the worst energy crisis in generations, this government is on the side of the British people.” Chancellor Kwarteng’s words might be encouraging, but the sentiment doesn’t sit well with the numbers.
Please note: following on from the government's U-turn, an update to this article can be found here.
In today’s mini-budget, the Chancellor laid out plans to bolster growth and aid economic recovery during a time when we may already be in an unofficial recession. This morning’s announcement heralds a grand total of £45 billion in tax cuts - in fact, it’s the biggest series of tax cuts since the 'Barber Boom' Budget in 1972, which ended unequivocally in disaster, with inflation sky-high and dire economic repercussions. Despite the grand promises of fiscal security, the support for taxpayers and businesses is somewhat stunted.
Is it an ambitious plan for growth or, as the Shadow Chancellor put it, the equivalent of “two desperate gamblers in a casino chasing a winning run”? The next few months will certainly be telling.
While there are some definite boosts to SMEs on the back of today’s mini-budget, it’s not “the beginning of a new era” as Kwasi laid out. In fact, it’s quite the quasi-fiscal renaissance when viewed as a whole.
One win is the confirmed reversal of National Insurance contributions, as is the planned increase in Corporation Tax being scrapped and duty rates for beer, cider, wine and spirits being axed - but the overall onus is on borrowing. And lots of it.
With no windfall taxes being imposed on energy giants revelling in record profits and current and future taxpayers left to foot a mounting bill which prioritises savings for the very highest earners, it’s an announcement that has clear and palpable echoes of Thatcherism - however, Lady Thatcher wasn’t contending with a 9.8% rate of inflation at the time of her famous tax cuts in 1981.
Good news for taxpayers and employers, with income tax being cut by 1p a full year earlier than planned, taking effect from April 2023. This closely follows the announced reversal of the 1.25% National Insurance rise to fund the health and social care levy from 6 November - making it surely one of the shortest-lived tax changes in history - given that it only took effect this April. Interestingly, these income tax changes do not apply to Scottish residents, as the Scottish Government sets rates of income tax. By contrast, they will apply to Welsh Residents as the Welsh Government sets rates on top of England and Northern Ireland rates. I’m quite sure that Scotland will have to do something if their high earners are not to move south of the border. There is a certain piquancy about these tax changes and the incompatibility of the outlooks of England and Scotland Governments. We might have fireworks before 5 November this year!
Importantly, these changes to National Insurance will affect the self-employed too, along with Company Directors and certain other employees who are subject to NIC on an annual basis. They and the self-employed will be subject to a 'blended rate of national insurance'. The self-employed will pay theirs through self-assessment as normal.
The associated rise in dividend tax of 1.25% increase from April 2022 will also be reversed, but not until April 2023. It’s likely that the government deems it too much trouble to deal with a mid-year tax change on dividends, given that all are taxed through self-assessment, so it would be especially onerous for HMRC to check dividend timings during 2022-23.
On top of this, the top income tax rate will be abolished entirely from 6 April 2023 - meaning that those earning over £150,000 will pay the same tax as someone earning significantly less. While this is good news for larger business owners, it does reinforce the new PM’s eager adoption of the much-maligned ‘trickle-down economics’.
All businesses can breathe a collective sigh of relief over one thing, as the planned rise to Corporation Tax has been officially set on the scrap heap.
The Chancellor also announced that the cap on bankers’ bonuses will be scrapped - a point that was met by a bevy of boos from the chamber. “A strong UK economy has always depended on a strong banking sector,” he urged - but this means that bankers are now set to enjoy bonuses that exceed their annual salary, which is certain to infuriate a nation struggling to keep the heating on as the cost of living continues to bite.
On that note, the Chancellor also announced that energy bills WILL be subsidised by the government, capping them at £2500 a year, which is expected to cost the Treasury £60 billion over just 6 months. The logic is that slashing bills will stimulate growth and spur consumer spending.
This follows the news that the government will implement an Energy Bill Relief Scheme to help businesses manage the spiralling costs of energy, with all the support so far being aimed strictly at personal households. The new scheme will ensure that businesses’ bills are fixed at £211 per MWh for electricity and £75 per MWh for gas, which is less than half the wholesale prices that are expected this winter. These changes will come into effect in October.
Another way the government hopes to coax out economic growth is with a radical shake-up of stamp duty, with the threshold buyers can spend on their new homes without paying the tax now being £250,000 - and £425,000 for first-time buyers.
Interestingly, the Chancellor also announced that the government will establish up to 38 low-tax investment zones, slashing tax for businesses in these areas for a full decade to create localised areas of heavy investment. It promises to offer 100% tax relief on qualifying investments in plants and machinery, on purchases of land and buildings for commercial or new residential developments. He said:
“There’ll be no stamp duty to pay whatsoever on newly occupied business premises. There’ll be no business rates to pay whatsoever and if a business hires a new employee in the tax site, then on the first £50,000 pounds they earn, the employer will pay no national insurance whatsoever.”
Of the 38 special zones, four are in our region, with Leicestershire County Council, North East Lincolnshire, North Lincolnshire, Nottinghamshire County Council each having a zone. It will be particularly interesting to see what opportunities and tax reliefs might become available to our clients in the designated areas as the scheme finds its feet - which we’ll announce as we learn more. On this, there are understandable concerns that instead of incentivising new business investment, these zones might instead encourage existing businesses to simply relocate from elsewhere in the country.
One of the biggest questions most people will be asking is ‘will this raft of measures be enough to support households and businesses across the nation struggling with the rising cost of living, surging energy costs and record low confidence’?
MoneySavingExpert’s Martin Lewis has called the announcement “staggering”, fearing that excessive borrowing could spell big problems further down the line, but business leaders will no doubt find much to celebrate.
The proof of the pudding may be in the eating, and we’ll have to wait and see whether this is enough to pick up the economy and encourage spending. Either way, at least businesses and households have some sense of certainty of what their bills will be in the coming weeks and months.
The outlook may be unclear but, as Shadow Chancellor Rachel Reeves comments, “never has a government borrowed so much and explained so little”.