The new Chancellor of the Exchequer Kwasi Kwarteng announced his ‘mini-budget’ on 23 September 2022 and it was the most significant in recent times, setting out what he hopes will be a growth plan, encouraging a return to employment for those who fell out of the labour market over the course of the Covid-19 pandemic, and signalling that the UK will again lead as an attractive environment in which to do business.
With a backdrop of the cost of living crisis and the UK probably now in recession for the September 2022 quarter, it was a bold move by the Chancellor, one which may be a high risk, but potentially high reward strategy.
In terms of personal taxes, there were welcome reductions across the board in the overall tax burden. The basic rate of income tax is cut from 20% to 19%, and the higher rate of 45% abolished altogether with effect from April 2023*. More immediately, the 1.25% increase in the rate of national insurance for both employees and employers, which took effect in April 2022, is scrapped from November 2022.
One of the number of negative impacts that the Covid-19 pandemic and the government’s response to it has had, includes employees making the decision not to return to the workforce, or switching career, leading to deficits in many areas of the economy. There is a drive to get people back to work and to fill the many vacant posts, with additional support now offered to the over-50s to secure employment and the threat of reductions in Universal Credit for those who are not actively seeking work.
There is additional stimulus for the residential property market, with the Stamp Duty Land Tax threshold doubled from £125,000 to £250,000 with immediate effect, and for first time buyers increased from £300,000 to £425,000. To some extent, this might at least offer some counter to the inevitable interest rate rises.
The corporation tax hike that was announced in March 2021, from the current 19% rate to 25% with effect from April 2023, has been cancelled altogether. This should certainly be welcomed, because the rate increase could stifle start-up enterprises and discourage entrepreneurship, while the larger corporations tend to pass tax rises on as a cost to the consumer.
Certainty has now been applied to the Annual Investment Allowance (‘AIA’), which allows businesses to deduct 100% of their capital expenditure on plant and machinery from taxable profits. The AIA was increased to £1m per annum in January 2019 with the latest extension due to run out in March 2023, but the £1m allowance has now been made permanent.
In the immediate aftermath of the announcements, the value of sterling has fallen to new lows against the US dollar and created some turmoil in the markets, leading to further pressures to raise interest rates in the short term. With national debt now exceeding £2.7 trillion and the cost of government borrowing climbing, it is a big gamble by the Chancellor. The hope is that, in spite of the shorter term pressures, the new changes will provide the much needed stimulus for the UK economy.
If you have any questions about the mini-budget, or would like to discuss your specific circumstances, please contact Andrew Cardwell.
*Since the date of publishing our comment, the government has abolished its plan to scrap the 45% tax rate.