Income tax cut as Sunak looks to meet cost of living crisis
Rishi Sunak today announced the basic rate of income tax will fall to 19p in 2024 as he unveiled a raft of measures to support businesses and families in the face of growing economic pressure.
The chancellor told the Commons that the OBR expects inflation to rise further this year to hit the 7.4 per cent mark with the situation in Ukraine beginning to take its toll.
In his mini-Budget statement he revealed that for only the second time in 20 years fuel duty will be cut. The 5p a litre reduction will be in place for 12 months.
In another measure, he announced that the National Insurance threshold will also increase by £3,000. The chancellor described it as “a tax cut that rewards work.”
The new NI threshold will be £12,570. Mr Sunak said this would be £6bn “personal tax cut” for 30 million people.
However, he made no move to scrap the increase in National Insurance Contributions which will come into effect next month.
The chancellor did announce a new tax plan and in a move aimed at small businesses he said the Employment Allowance will increase to £5,000, describing it as a tax cut worth up to £1,000 for half a million SMEs. The new figure will come into place in two weeks’ time.
He said that the reduction in basic income tax was fully costed and fully paid for in the plans he was announcing.
The chancellor said his new tax plan would adopt a “principled approach to cutting taxes” and pledged to work with businesses over summer to explore options to help the private sector. He said: “We will reduce and reform taxes. We will build a stronger economy.”
He pledged that the government would reform the generosity of tax credits on the money private businesses spend on research and development.
And he revealed that the government also planned to cut tax rates on business investment, with details to be set out at the autumn Budget.
Employment training will also be reviewed as part of the new tax plan. This will include assessing whether the apprenticeship levy which pays for skills training - is “doing enough”.
Shadow chancellor Rachel Reeves said the planned 1.25 per cent rise in National Insurance Contributions which will come into effect in April should have been scrapped today.
She also criticised the chancellor for not putting a windfall tax on oil and gas companies - which Labour has been calling for - which she said would provide “real help to families”.
Tony Medcalf, tax partner at MHA Moore and Smalley: "The one per cent cut to the basic rate of income tax promised by the end of the parliament by 2024 will steal the headlines – an unexpected rabbit out of the hat the chancellor left to the end of his statement. Another significant intervention was the increase in the National Insurance threshold by around £3,000 effective from July 2022, bringing it in line with the income tax personal allowance. This was a longer-term target for the chancellor but has been significantly accelerated and, while it stopped short of the postponement in the 1.25 per cent rise in National Insurance Contributions many had called for, it will help lower earners keep more of their income.
"The five per cent cut to fuel duty should provide some welcome relief for motorists and the removal of VAT on energy efficiency measures will save money for households looking to reduce energy costs. For businesses, an increase in the employment allowance to £5,000 will help some small business owners reduce employment costs from April onwards.
"Despite the tax cuts, Mr Sunak made clear during his statement that the public finances would likely get worse and that additional public borrowing would be limited. This means we may see measures further down the line to increase the tax take."
Matthew Johnson, associate partner WNJ: "Little of what the chancellor announced today will immediately ease the pain being felt by SMEs squeezed by rising prices. In many ways it has added to the uncertainty. The fact that he did not scrap the 1.25 per cent hike in National Insurance contributions (NIC) scheduled for April 1, was particularly disappointing for SMEs facing the challenges caused by rising inflation, soaring energy bills and the impact of war in Ukraine.
"The chancellor has pledged to work with businesses over summer to explore options to help the private sector.
We need to see what the reform of tax credits on the money private businesses spend on research and development will look like. Also, the plans to cut tax rates on business investment, with details again to be set out at the autumn Budget.
"Employment training will also be reviewed as part of the new tax plan. This will include assessing whether the apprenticeship levy which pays for skills training - is “doing enough”. Once again, we will have to wait and see what that will look like and if it will benefit SMEs. In many ways, today’s announcement has raised more questions than answers."
Jane Parry, managing partner at PM+M: "The CBI has been lobbying the chancellor to turn his “super deduction” – which offers tax savings on business investment – into a permanent deduction to encourage firms to spend. That would help to offset the planned rise in corporation tax from 19 per cent to 25 per cent which is set to change from April 2023, but only consultations were announced today ahead of the main Autumn Budget. Reforms to R&D tax credits are hopefully a step in the right direction but more detail will be needed to truly understand what value they will deliver. I fear we may see the demise of the currently very generous SME scheme in favour of an enhanced scope of the RDEC scheme, which may be improved over its current levels but is still likely to be less generous to SMEs. What business needs is clarity and incentives, fast.
"I did think the government tried to downplay the importance of the Spring Statement, citing the £21bn worth of measures – as well as the rise in the minimum wage from £8.91 to £9.50 an hour from April - that have already been announced to help with living costs this year and next. But energy and food prices are only going one way so time will tell if his approach costs him politically as the massive squeeze on UK households and businesses continues to intensify."
Stephen Church, EY’s North Markets Leader: "The mention of Levelling Up was notably absent – a disappointment compared to the treasury’s Autumn statement, and the government’s recent Levelling Up white paper. In order to truly level up and reduce regional inequalities, the focus must be on substantial, long-term and fair funding across the whole country. In turn, building a strong Northern economy that can deliver prosperity for all.
“The question now will be whether the UK economy allows the Chancellor to stick to his course, or whether crises will continue to beset his plans. Either way what could be seen as a missed opportunity for the Levelling Up agenda in today’s statement, will only increase pressure for the government to deliver on commitments come the Autumn Budget.”
Victoria Vyvyan, deputy president of the Country Land & Business Association: "The failure to keep VAT at 12.5 per cent for hospitality businesses will have a sizable impact on profitability at an already testing time for many. This is a blow for rural businesses that are being asked to diversify, and the reduction in business rates will not plug this gap. If the government is serious about supporting the countryside, it must create the environment for rural businesses to thrive.”
Suren Thiru, head of economics at the British Chambers of Commerce: "The Office for Budget Responsibility’s latest forecasts paint a bleak picture of the UK’s economic prospects over the near-term as the drag effect of rising inflation, supply chain disruption and higher taxes weakens key drivers of UK output.
“The robust forecast for business investment looks too optimistic with rising cost pressures, higher taxes and a deteriorating economic outlook likely to dampen investment intentions by more than the OBR’s latest projections suggest.
“The OBR has also confirmed that the UK’s fiscal outlook has improved since the Autumn Budget, despite a sharp uptick in debt interest payments. This leaves the chancellor with more than enough fiscal headroom to better support households and businesses through this difficult period.”