Sunak’s tight grip on tax cuts to tackle cost of living crisis
Responding to the latest inflation figures, the chancellor keeps attention on the long-term picture
The combined pressure on the UK’s economy from the coronavirus pandemic and the war in Ukraine took centre stage in the Chancellor’s 2022 Spring Statement, as he outlined his planned support for households and businesses.
Keeping a tight focus on the way ahead, outlining a long-term tax plan designed to create the conditions for higher growth and further tax cuts in future, his statement lasted less than 30 minutes. This breaks the record for the shortest budget statement, held by Benjamin Disraeli since 1867 with a speech lasting 45 minutes. It was just a tenth of the longest ever, delivered by Gladstone in 1853, lasting 4 hours 45 minutes.
With the Office for Budget Responsibility forecasting that inflation will average 7.4% this year, the chancellor outlined a series of measures designed to tackle the cost of living crisis and benefit pockets today, including a further £500 million for the Household Support Fund. This doubles the pot announced last autumn and will continue to be distributed by local authorities to those in most need with food, energy and water bills.
He announced a £3,000 rise in the threshold before national insurance contributions have to be paid by workers. The starting point is now in line with income tax, so from July neither income tax nor national insurance will be payable on the first £12,570 of income. However, the chancellor confirmed that the planned 1.25% rise in national insurance contributions will still go ahead, despite considerable lobbying, saying it was vital to provide for future health and social care.
The other big topic in the run-up to the Spring Statement was the soaring price of fuel at the pumps because of worldwide supply disruption surrounding Russia and the sanctions imposed following its invasion of Ukraine. The chancellor responded by announcing a 5p per litre reduction in fuel excise duty for the next 12 months, with effect the same day.
Also on the energy agenda, the government announced a cut in the VAT rate to zero for homeowners installing sustainable energy solutions, including solar panels, heat pumps, insulation and wind or water turbines.
But any further cuts to household taxes remain a promise for the future. The cost of servicing the national debt has risen for the third month in a row and predictions now are that service costs will rise as high as £83bn during the next fiscal year, the highest level on record. Borrowing as a percentage of GDP is expected to be 83.5% of GDP in the coming year.
Against this backdrop, Mr Sunak said it would not be responsible to make further tax cuts now, but he gave a flavour of his future-focused tax planning strategy, by promising that if the economy remained on track for predicted growth in future years, the basic rate of income tax would be cut from 20% to 19% in 2024.
However, the previously announced freezing of many allowances remains in place, including personal income and higher rate tax allowances from 2022-23 onwards, and exempt amounts for Capital Gains Tax, Pensions Lifetime Allowance and the threshold for Inheritance Tax all staying at their current rate up to and including 2025-26.
Turning to enterprise, the chancellor outlined his long-term strategy to drive up innovation and skills and to encourage investment towards a high productivity economy.
For small businesses, there will be an extension to the Employment Allowance, which provides relief from National Insurance payments to encourage employment. This will increase by £1,000 to £5,000 from April.
On the high street, retail, hospitality and leisure businesses will benefit from a 50% discount on business rates bill from April, up to £110,000.
Looking again at the longer term, Mr Sunak outlined the second part of his tax plan, towards a new culture of enterprise. He predicted further incentives in the Autumn Budget following consultation with business, looking at how best to boost investment in people, capital and ideas to boost UK productivity. This will include a review of technical skills development, including the apprenticeship levy, reform of research and development tax credits, and routes to increase private sector capital investment.
This was a short, sharp statement from the chancellor, focused, as expected, on the economic impact of the pandemic and the fall-out from Russian action in Ukraine.
Facing up to the current world order seems to have kept the chancellor away from some of the granular detail in tax planning that we have been expecting, including an overhaul of inheritance tax following the recent consultation. While the likely changes continue to wait in the wings, individuals and anyone planning to sell their business should keep a close eye on their tax planning.
Looking to property, the announcements around nil VAT on energy efficient measures will be welcome for landlords who need to comply with long term energy efficiency targets. There were no new incentives for the residential property market, as this has remained very busy even after the ending of a temporary reduction of stamp duty. While property demand remains strong and supply is short, sellers are in a strong position should they decide to move on.