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Beyond the balance sheet

Is the Spring Statement 2022 the start of tax cuts?

Tom Biggs 24/3/2022 13 minute read

Tom Biggs ACA CTA, summarises Chancellor, Rishi Sunak's key announcements from the Spring Statement.

It was, in effect, a mini budget!

The Spring Statement is usually a review of the numbers, a case of what economic growth and tax revenue figures look like compared to the Office for Budget Responsibility's forecasts. However, since the Autumn Budget 2021 the political and economic goal posts have shifted considerably.

Back then The Bank of England, and the Chancellor, pronounced inflation as merely, transitory. Circumstances however, have ended up playing out very differently! Prolonged price rises have led to, what has been described as, a cost of living crisis!

Against a backdrop of inflation rising faster than average wage growth, war in Eastern Europe, and soaring energy bills, Rishi Sunak was compelled to make policy announcements to deal with the fallout from these issues. By doing this he has rowed back, to an extent, on an ever expanding state, and high taxation policies that have exemplified this government.

The question now is how far can the Chancellor go with his stated desire to cut taxes?

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In this post we cover some of the key policy announcements, and what they mean for you:

1. An Employment Allowance increase

There was a tax cut for small businesses with the Employment Allowance increasing to £5,000 from 6 April 2022. Previously the allowance was to £4,000. Sunak pronounced that this was a tax reduction that would impact half a million small businesses.

The Employment Allowance is designed to help smaller employers with their employment costs. It works by reducing the employer National Insurance bill, if the employer is eligible to claim it. This applies to your business, not individual employees, meaning you pay less employers' Class 1 National Insurance each time you run the payroll until you reach the £5,000 threshold, or the end of the tax year.

To qualify you have to be:

  • A limited company, sole trader, or partnership
  • Registered as an employer with employees on your payroll
  • Have Employer's Class 1 National Insurance liabilities of less than £100,000 in the prior tax year

 

2. National Insurance threshold rises

As of 6 July 2022, the threshold value at which workers make Class 1 and Class 4 National Insurance Contributions (NICs) will rise from £9,568 to £12,570. This now aligns NIC with the income tax personal allowance and is a small step towards simplifying the tax system; something that we have long been calling for on this blog. An important point to note is that this applies to the Class 1 primary threshold only and therefore the Class 1 secondary threshold remains unaffected.

The announcement will no doubt help many workers, 70% of whom will have their taxes cut according to the Chancellor. That said, it comes against a backdrop of the health and social care levy which was announced at the Autumn Budget and added 1.25% to Class 1 and 4 National Insurance rates, effective from 6 April 2022. The Chancellor announced this would still go ahead as planned.

According to Which magazine, this means those earning more than £42,000 will still pay more in taxation because of the levy, in spite of the raised threshold. The table below shows what the rates will be for the 2022/23 tax year compared to 2021/22 for Class 1 rates. Employers pay Class 1 rates on employees' earnings.

2021/22

2022/23

As of July 2022/23

Income Class 1 rate Income Class 1 rate Income Class 1 rate
< £9,568 0% < £9,880 0% > £12,570 0%
£9,568 - £50,270 12% £9,880 - £50,270 13.25% £12,570 - £50,270 13.25%
> £50,270 2% > £50,270 3.25% > £50,270 3.25%

If you're self-employed then your Class 2 and Class 4 rates will be as follows:

2021/22

2022/23

As of July 2022/23

Profits Class 2 & 4 rates Profits Class 2 & 4 rates Profits Class 2 & 4 rates
< £6,515 0% < £6,725 0% > £6,725 0%
£6,515 - £9,568 £3.05
Class 2 per week
£6,725 - £9,880 £3.15 Class 2 per week £6,725 - £12,570 £3.15 Class 2 per week
£9,568 - £50,270 9% + £3.05 per week £9,880 - £50,270 10.25% + £3.15 per week £12,570 - £50,270 10.25% + £3.15 per week
> £50,270 2% + £3.05 per week > £50,270 3.25% + £315 per week > £50,270 3.25% + £3.15 per week

3. A future cut to the Income Tax basic rate

The Chancellor stated the intention to cut the basic rate of Income Tax from 20% to 19% before the end of Parliament 2024. This would represent a £5bn tax cut for over 30 million people, estimated at around £175 per person.

4. A fuel duty reduction

Significant rises in petrol prices of late mean the Chancellor has cut fuel duty by 5p per litre from 6pm on 23 March 2022, and until March 2023.

This is just the second time the duty has been cut in 20 years, and Sunak claims it will save the average driver £100 over the course of the year. For van drivers, the saving could be even greater, at an estimated £200.

5. VAT cut on energy saving materials

If you're a homeowner investing in energy saving measures such as insulation, solar panels, or even heat pumps, there will be 0% VAT charged on these items from 1 April 2022 for the next 5 years. Previously VAT was applied at 5% on such purchases.

This is a timely announcement given rising energy bills and the need for greater energy efficiency because of a warming climate. The Chancellor claims a family installing a solar panel will obtain tax savings of £1,000 on energy bills over £300 a year.

It should be remembered through that purchasing and installing such energy saving materials is potentially very expensive, often costing several thousands of pounds. This means the change in VAT rate should not be the primary consideration for such a purchase.

6. The Household Support Fund doubles

The Household Support Fund will double to £1bn. This is designed to help families in need to get by through the expensive, energy intensive, winter months. It is distributed by Councils to those most in need and covers items such as food, utilities, and clothing. Criteria, eligibility, and the application process vary from one council to another. 

7. More tax cuts in the future?

On the surface this was a statement of intent to deliver a tax cutting agenda in the lead up to the next general election. However, this has to be viewed in the context of previous announcements and when they take effect. As mentioned earlier the health and social care levy comes into force from April 2022.

In the Spring Budget of 2021, the Chancellor announced a freeze to income tax thresholds for 5 years. Given inflation is rising so quickly this results in fiscal drag. This means as wages rise with inflation so more people are then dragged into higher bands resulting in greater tax exposure.

Given this won't be reviewed until 2026, and combined with the prior corporation tax increase, it calls into question any tax cutting aspirations. Furthermore, the NI threshold is also frozen for that time frame which all goes to outweigh any cuts from the statement. As the Spectator points out, the tax take is now at it's highest level in 77 years!

Moving forward, a new tax plan is set to be published, prior to the Autumn, focusing on:

  • Helping families with the cost of living
  • Creating the conditions for higher economic growth
  • Distributing the proceeds of growth fairly

Will Rishi Sunak obtain the growth he needs to pursue tax cuts? Higher than anticipated tax receipts combined with lower-than-expected borrowing provided the Chancellor with an additional, unexpected, £26 billion for this statement. But can he rely on being so fortunate in the future? 

Growth forecasts were revised down, inflation is set to continue with the CPI measure projected to potentially go as high as 10%, according to the Bank of England. The challenge this poses to the Chancellor is rising inflation increases the likelihood of higher interest rates, thereby pushing up the cost of the UK's debt.

UK debt is heavily linked to RPI and interest payments are set to reach £83bn this year, 4 times higher than the payment last year. These outside forces could limit Sunak's options moving forward, potentially increasing government outgoings significantly. He may have some limited leeway in that the budgets for Whitehall departments aren't set to rise in line with inflation.

Politically Sunak is committed to cutting taxes, by how much he can actually do this, remains to be seen.    

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The content of this post was created on 24/03/2022.

Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.

 

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