The Chancellor’s announcements on 23 September 2022 were termed a “Mini-Budget” but the measures were anything but small, including the biggest tax cuts seen in a generation, which will be funded by a sharp increase in borrowing.
In her campaign for the job of Prime Minister, Liz Truss promised tax cuts as part of a “bold plan to grow the economy” and today’s announcements signal a major change of direction for the government. It is certain that, had Rishi Sunak won the leadership contest, we would be seeing very different tax measures being announced.
The principles of so-called “Trussonomics” are rooted in spending more and taxing less, in order to increase growth. Accordingly, new Chancellor Kwasi Kwarteng has pledged to “turn the vicious cycle of stagnation into a virtuous cycle of growth”.
It has long been clear that the UK economy is in trouble, and just one day earlier the Bank of England announced that the UK may already be in recession, and raised interest rates from 1.75% to 2.25%, the highest level for 14 years. So something had to be done, it remains to be seen whether the new approach will work as planned.
We outline below the main measures announced today.
Income tax
The government will bring forward the 1% cut to the basic rate of income tax, from 20% to 19%, to April 2023, 12 months earlier than planned.
The additional rate of income tax of 45% will be abolished. From April 2023 there will be one single higher rate of income tax of 40%. Cutting the taxes of the wealthy when so many are struggling is indeed bold, and is likely to cause some uproar.
The government is also reversing the 1.25% increase in dividend tax rates from 6 April 2023, so the ordinary and upper rates of dividend tax will be reduced to 2021-22 levels of 7.5% and 32.5% respectively. Due to the abolition of the additional rate of income tax, dividend income that was previously charged at the additional rate will now be charged at the upper rate of 32.5%.
National Insurance
The 1.25% increase in National Insurance (NI) that was introduced on 6 April 2022 to help to pay for the NHS will be reversed from 6 November 2022, although the NHS will still be funded as previously planned, presumably from debt.
The rise in NI was to be replaced by a new Health and Social Care Levy from 6 April 2023, this new levy will not now be introduced.
Corporation tax
The planned rise in corporation tax from 19% to 25% in April 2023 has also been cancelled. Are you starting to see a pattern here? The Chancellor’s hope is that lowering corporation tax will stimulate economic growth.
Annual Investment Allowance
The temporary £1 million level of the Annual Investment Allowance will be made permanent, instead of falling as planned to £200,000 after 31 March 2023, in order to support business investment.
Stamp duty land tax
From 23 September 2022, the threshold above which Stamp Duty Land Tax (SDLT) must be paid on the purchase of residential properties will increase from £125,000 to £250,000.
From the same date, the threshold at which first time buyers begin to pay residential SDLT will increase from £300,000 to £425,000, and the maximum value of a property on which first time buyers relief can be claimed will also increase, from £500,000 to £625,000.
Other measures
Will it work?
Despite the far-reaching nature of these announcements, the plans have not been subjected to the usual Office for Budget Responsibility (OBR) analysis. This means that there is no independent assessment about whether the changes are consistent with the government’s Budget rules.
According to the Institute for Fiscal Studies, the government’s approach is a “gamble on growth that may not pay off”.
With the cost of cutting taxes estimated at around £30bn a year, the measures need to result in increased growth to balance the books.
What is certain is that this “Mini-budget”, which is certainly a bold move, will be the subject of great debate for some time to come.
