10 min read 24 Mar 22
In past times statements, traditionally in the Autumn, we would often see tax policy announcements as well as the economic forecast which was their primary purpose. Budgets were, and still are, the main source of tax changes. In recent times the government has moved away from announcing tax policy twice a year and focussed predominately on the budget for the announcement of tax changes.
This statement was intended as an economic outlook with some saying the figures showing the country actually doing better than was forecast back at the Autumn Budget.
The run up to this statement did however have a pre-budget feel to it. With the backdrop of the ongoing trouble in Ukraine, rising interests rates, soaring inflation and energy and fuel cost rises there were calls for the chancellor to do something to help those struggling under the current cost of living crisis.
There was speculation on what if anything he would add to his already announced “energy rebate” and council tax cut to help those in need. Fuel duty, energy prices and the National Insurance hike were all prime targets for action.
Fiscally, the economic backdrop has a significant impact on what the Chancellor feels able to do. The Office of Budget Responsibility (OBR) has predicted that inflation will hit 7.4% by the end of the year and, although uncertain due to the ongoing war in Ukraine, their current view is that the UK economy will grow by 3.8% this year, 1.8% in 2023, and then 2.1%, 1.8% and 1.7% in the following three years.
It was perhaps inconceivable that there would be no announcements made and as expected we got some announcements.
There were three things the Chancellor was looking to achieve:
There were the usual economic forecasts and measures helping businesses and the economy in general but I’m normally on the look out for tax matters and what might impact financial planning.
One measure which doesn’t really affect financial planning as such but impacts disposable incomes is the cut in fuel duty by 5p for 12 months. At just under 58p per litre, fuel duty is currently accounting for around a third of your fuel bill and VAT takes it up to over half the cost of filling up your tank. As a key expense for many it’s positive news that the government has acted in this area when many people are struggling. It’ll save around £2.3bn. I do think that may draw some criticism as it’s inconsistent with the strive for “net zero” and tackling the climate crisis.
I was fairly sure governments and other organisations will still have their eyes firmly on helping the planet. Soon after came along an announcement that there would be zero VAT on energy saving expenditure – the ying to the yang I guess.
The main thing for the planner was what was announced in the chancellor’s “Tax Plan ”. One thing imminent and one thing two years away (maybe).
The 1.25% increase in rate remains.
But softening the blow the governments ambition to align the income tax and NIC “tax free” thresholds has arrived and will be costing £6.25bn in 2022.
The Primary Threshold (PT) for Class 1 NICs and Lower Profits Limit (LPL) for Class 4 NICs will be aligned with the personal allowance from 6 July 2022, giving payroll providers and employers time to adjust, and the intention is they will stay that way aligning them with the personal allowance for income tax which is set at £12,570 per annum.
From April 2022, there will also be a reduction to Nil on Class 2 NICs for profits between the Small Profits Threshold (SPT) and LPL. These people will still to be able to continue to build up National Insurance credits. This one applies from April as it runs annually as opposed to by pay period and you will effectively have a threshold of £11,908 for the year (13 weeks at old rate and 39 at new rates as stated but the arithmetic is a little off if you ask me).
People on earnings to around the mid £30,000s will be better off than they would have been next year and those above will pay more but not as much as they would have without the increase. The benefit is around £330.
Whilst good news for all in planning terms maybe only a minimal impact with business owning SMEs remuneration strategies possibly getting a slight tweak to take advantage of the higher NIC threshold.
Channelling his inner Columbo, we got a last minute flourish from the chancellor with an announcement that for the first time in 16 years, and at an initial cost of over £5bn a year, the government will reduce the basic rate of income tax to 19% from April 2024. It should be noted and I quote from “the big blue book” that this is “…provided that the fiscal principles set out above are met in future...”. Namely, “…continued discipline on public spending, with no material additional spending beyond current plans. It will also depend on the broader economic outlook, taking into account uncertainty and the risk of future shocks…”
So it may or may not happen. The cynics amongst you may think hold on isn’t that just before a general election…
Remember this will not apply in Scotland as income tax is devolved to Holyrood.
Initial thoughts that spring to mind. Given the taxation within onshore life funds is linked to the basic rate of tax in England we will see a reduction in tax within that wrapper, making savings go further, but with presumably a corresponding reduction in the basic rate tax credit? Pension wise, lower tax means lower relief – your £1 of pension will get a little more expensive for basic rate taxpayers (but not by much). But also higher net incomes at exit.
At the end of the tax plan there was also an announcement that they would look to make the tax system simpler, fairer and more efficient. This will be achieved by looking to reform the over 100 relief and allowances that are in the tax system. That would be welcome – does investment income really need to have a personal savings allowance, starting rate for savings and dividend allowance to contend with? Pension tax relief reform? Will we start the rumour now?
There’s what I think is a really good fact sheet summarising these two changes .
To sum up – some minor things to think about but not an overly big deal. For now...
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