The headline of the Chancellor’s Autumn Statement in 2023 was the planned cut to National Insurance (NI) in 2024. Yet some analysts were quick to point out that income tax rates and thresholds remained unchanged. In effect, this amounts to a “stealth tax” as with average UK wages rising – more workers are likely to be dragged into higher income tax bands.
Indeed, the Office for Budget Responsibility (OBR) estimates that, on current projections, 2.1 million more taxpayers will start paying the 40% Higher Rate of income tax by 2027-28. This is a 47% increase on the current amount. Which raises the question – can the government actually cut taxes?
This is important for financial planning. Many UK households are still experiencing a high tax burden (the highest since World War 2 by some estimates) and the high cost of living, driven by higher inflation since late 2021, is also eroding many workers’ incomes. Below, our team at Vesta Wealth explores whether the government could, indeed, cut taxes beyond the Autumn Statement’s announcements. If so, what form might they take? How far might they go?
The below is all educated guessing. It is important not to base important financial decisions based on what might happen with policy and legislation. Seek financial advice if you want to discuss your own financial goals and situation in more detail.
We hope these insights are useful to you. Please contact us for more information or to speak with a financial adviser:
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Why has the government refrained from major tax cuts?
You may remember that the UK government had a brief “flirtation” with tax cuts in September 2022, when (then) Prime Minister Liz Truss and Chancellor Kwasi Kwarteng announced their short-lived “Mini Budget”. The proposal included bringing forward a tax cut for the Basic Rate of income tax from 20% to 19% and abolishing the 45% Additional Rate in England, Wales and Northern Ireland. The proposed Health and Social Care Levy was also cancelled.
The response, however, was anything but “mini”. Investors were unconvinced that the announced tax cuts could be afforded. To fund the plans, the government would have had to borrow £billions. With investors unconvinced these plans could be funded, this sent the yields on gilts (UK government bonds) spiraling and saw the pound plummet to its lowest-ever value against the dollar. To prevent a resulting crisis in the pensions market, the Bank of England (BoE) was forced to swiftly intervene by announcing a huge buy-up of gilts. Confidence in the government was rocked and Liz Truss resigned as Prime Minister after 49 days in office. A period of time many market commentators consider would have been even shorter but for the death of Her Majesty Queen Elizabeth II.
These events, naturally, have led to a high degree of caution by successors Rishi Sunak (Prime Minister) and Jeremy Hunt (Chancellor). Keen to avoid the perception of making the same mistakes again, policy has thus far been muted in comparison. But another development in the economy has added further barriers to major tax cuts – rising inflation.
Traditional logic from economists, when looking at basic supply and demand, states that cutting taxes during a time of rising overall prices adds “fuel to the fire”. This is because lower taxes can leave households with more disposable income which they might spend in the economy. More consumer demand, without a simultaneous shift in supply (from firms), tends to drive up prices.
What does the economy look like in 2024?
You may have heard that inflation has come down recently. Indeed, CPI inflation (Consumer Price Index) fell to 4.7% in the year to October 2023, down from 6.7% in the previous month. With the economy apparently “cooling down” with its price rises, Prime Minister Sunak announced that the country was now in a position to afford tax cuts.
Yet, interestingly, the 2023 Autumn Statement did not contain major tax cuts anything like the September 2022 Mini Budget. The only planned tax cut is a reduction in the main rate of Employee National Insurance from 12% to 10% in 2024, with an abolition of Class 2 NI contributions for self-employed people. Why is the government not going further?
One reason may be that the CPI inflation figure above is obscuring something deeper going on in the economy. “Core inflation” (excluding energy, food, alcohol and tobacco) rose by 5.7% in the 12 months to October 2023. So, whilst the UK’s services sector seems to be heading in a positive direction from an inflation perspective, this does not mean that price rises are necessarily slowing down for household bills. The rate of inflation may be falling, but this only means prices are rising at a slower rate. Household finances remain under pressure.
Implications for financial planning
There is speculation, following the 2023 Autumn Statement, that the Government may be planning an early general election by summer 2024 (a poll is due by January 2025 at the latest). Cutting National Insurance will be difficult for Labour to oppose and the move puts the next government in a tricky position of likely needing to raise taxes, cut public spending, or both. However, the opposition has a powerful overarching narrative about the last 13 years of government which will be difficult for Sunak to overcome when addressing voters.
Bringing this all closer to home, what does this mean for households and their financial planning? Unfortunately, although anything could happen, it seems unlikely that taxpayers can expect significant cuts to personal taxes anytime soon. As such, households should consider maximising their various allowances within the current system (e.g. ISAs and tax-free investment allowances) rather than holding out for major policy changes.
Here at Vesta Wealth, we can help you understand the key rules of the UK tax landscape and how to maximise your household’s financial position. Consider getting in touch today given the looming April 2024 deadline for the tax year end. Getting your affairs in order, early in the calendar year, gives you more time to optimise your income and assets – hopefully putting more hard-earned money back in your pocket.
Invitation
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.