With Liz Truss barely in the door as the new Prime Minister, the pressure was on to quickly deliver much needed support to families during the cost of living crisis.
Kwasi Kwarteng’s first budget statement in his new post as Chancellor had major ambitions. The intention was to provide the ‘biggest package in generations’ of tax cuts to support economic growth.
However, the resulting announcement has been highly controversial, with many of the provisions leaving journalists, critics, and even some fellow Tories, scratching their heads.
The key points are summarised below.
The Economy
Growth has stagnated and the Bank of England have already warned that the economy is probably already in recession.
The government intends to target growth of 2.5% per year by stimulating the economy through tax cuts.
The government commits to publish a full economic forecast to the Office for Budget Responsibility before the end of the year.
Energy Bills
It had already been announced that the price cap on energy bills would increase to ensure bills would be no more than £2,500 for the average household, instead of the £3,549 originally forecast.
This would come at a cost of £60 billion, to be funded by borrowing rather than by taxing the windfall profits of oil and gas companies.
It is thought that this will help to curb inflation, which is currently sitting at around 11%.
Personal Tax
The headline news item from the announcement was the proposed scrapping of the 45% tax rate for individuals earning over £150,000 per year.
The basic rate of tax will reduce from 20% to 19% from April 2023, ahead of schedule.
No changes will be made to the 40% tax band.
The changes will apply in England, Wales and Northern Ireland only, as Scotland has its own rates of income tax.
The increase of 1.25% to National Insurance contributions and dividend tax, which was introduced to help with spiralling social care costs, has now been scrapped.
Increases to duty rates on beer, wine, and cider have also been cancelled.
The Office of Tax Simplification will be disbanded.
Work and Benefits
The criteria for claiming Universal Credit have been tightened and benefits will be reduced if eligible claimants don’t fulfil job search requirements. Around 120,000 people will need to take additional steps to find work or increase their hours.
Jobseekers over 50 will be offered extra time with work coaches.
The rules for contractors, known as IR35, will be simplified.
Share options for employees will be doubled from £30,000 to £60,000.
Business
The rate of corporation tax on business profits was due to increase from 19% to 25% over the next few years. However, the rate will now remain at 19%.
The cap on bankers’ bonuses has also been scrapped, based on the view that it did nothing to cap total remuneration, and instead drove talent outside the UK.
Property
The rate of stamp duty will be cut for house buyers in England and Northern Ireland. Like income tax, stamp duty is a devolved matter, and Scotland and Wales have their own separate systems.
The threshold at which stamp duty starts to be paid will increase from £125,000 to £250,000.
The threshold for first time buyers will increase from £300,000 to £425,000, and will apply where the property is valued at under £625,000 (increased from £500,000).
Planning rules, including environmental assessments, will be cut, allowing more land to be used for building, and for this to be completed more quickly.
Conclusions
In the midst of a cost of living crisis, a budget which cuts the top rate of tax for the wealthiest earners, boosts bankers’ bonuses, and makes the process of claiming benefits more onerous, has decisively shown what the current government believes in and how they intend to run the country.
It is thought that the timing of the announcements, and the scale of the tax cuts seems a little tone-deaf to the concerns of most working people, many of whom are still struggling with rising bills.
The budget is based on the idea of ‘trickle-down’ economics, whereby boosting wealth and business growth eventually helps everyone. The best case scenario is that this could take several years. Critics would state that the more likely outcome is that wealthier people will save more rather than putting money back into the economy.
With climate change previously high on the agenda, the announcements to relax planning rules have also gone down badly from an environmental point of view.
Following the announcements, Sterling fell to a 37-year low and the stock market dipped. Not only are the measures risky from a political point of view, but they also rely heavily on borrowing, putting pressure on public finances.
Please don’t hesitate to contact a member of the team if you would like to find out more about the announcement.