On 23 September, Chancellor Kwasi Kwarteng released the UK autumn budget outlining several tax cuts – he has since been replaced by Jeremy Hunt who has reversed almost every change put forward by his predecessor.
Among the measures that have now been reversed are the plans to reduce the basic income tax rate by a penny, the proposed freezing of the 19% corporation tax, and the freeze on alcohol duty.
Mr. Hunt said, “confidence and stability” were required for economic growth, adding that the UK “will always pay its way”. However, is the scrapping of most of the tax cuts announced in September enough to reverse the negative impact on the UK economy, and what other changes can we expect, especially now the UK also has a new Prime Minister?
And his boss – Liz Truss – has also since been replaced by Rishi Sunak, who has retained Jeremy Hunt as Chancellor. They have now confirmed there will be a further financial statement on 17 November which it seems is likely to build on the changes Mr Hunt recently announced.
The scrapping of the 45% additional tax rate
One of the more controversial decisions announced in Mr Kwarteng’s September budget was the scrapping of the 45 pence additional income tax rate applied to earnings that exceed £150,000 per year. It is estimated that the removal of this tax would have cost the UK treasury £2 billion in receipts – constituting around 4% of the total tax cuts initially proposed.
After a somewhat tumultuous 10 days following the release of his new budget, however, Mr Kwarteng reinstated the 45% tax rate, announcing at his Conservative Party conference speech that the scrapping of the top-band tax rate had become “a huge distraction” to the overall economic growth plan.
This would only be the first U-turn taken by the UK government, with many more being announced after Mr Kwarteng was replaced as Chancellor of the Exchequer.
Income tax, corporation tax, and dividend tax
Income tax is the highest tax revenue generator for the UK treasury, bringing in around £192 billion for the 2020/21 tax year. In his September budget, Kwasi Kwarteng had announced that the basic rate of income tax would be reduced from 20% to 19%, to take effect in April 2023. However, Jeremy Hunt has now reversed this decision, so the basic rate of income tax will remain at 20% next year.
Another U-turn taken by the newly appointed Chancellor was to scrap the plans to keep corporation tax at the 19% rate. This tax will now be increased to 25% for the April 2023 tax year.
The September budget had also announced a 1.25% reduction in dividend tax, but this decision has also been reversed. As such, dividend tax will remain at 8.75% for basic rate taxpayers and 33.75% at the higher rate.
National Insurance Contributions and health and social care levy
The 1.25% reduction in National Insurance Contributions (NIC) had already passed through parliament and will therefore be one of the few tax cuts to survive from Mr Kwarteng’s autumn ‘mini’ budget. This reduction effectively reverses the increases that were introduced in April 2022 to help with the post-pandemic economic recovery and later to be reallocated to a health and social care levy. The 1.25% social care levy that was to take effect in April 2023 has also been cancelled.
The levy was expected to raise around £13 billion per year to help fund health and social care, but former Chancellor Kwasi Kwarteng confirmed in September that these services will be maintained at the same level as if the levy was in place, with additional funding used to replace the revenue coming from general taxation.
Stamp Duty Land Tax
There will be 100% Stamp Duty Land Tax relief for land and buildings bought for the use or development of commercial purposes as well as the purchase of land or building for new residential projects.
A permanent stamp duty cut has been confirmed, with no tax to be payable on properties up to the value of £250,000, and also an increase to the threshold for first-time buyers to £425,000.
What about your pension?
While in office, Mr. Kwarteng had confirmed plans to ‘accelerate’ reforms to the pensions regulatory charge cap, to unlock pension investments into UK assets and high-growth businesses.
This means the government plans to remove well-designed performance fees from the occupational defined contribution pension charge cap, potentially giving higher investment returns for savers.
However, the deputy governor for financial stability at the Bank of England, Sir Jon Cunliffe, said the bank had launched an emergency £65 billion bail-out-gilt-buying program to prevent a ‘self-reinforcing spiral’ days after the budget had been published.
He said the speed and scale of the cost in government borrowing was ‘unprecedented’ and had put pressure on pensions funds.
Sir Jon Cunliffe added, ‘The Bank was informed by a number of liability-driven investment (LDI) fund managers that, at the prevailing yields, multiple LDI funds were likely to fall into negative net asset value. As a result, it was likely that these funds would have to begin the process of winding up the following morning.’
The Bank of England has now confirmed that it has ended bond-buying operations, replacing them with a lending facility. In a statement, it said that the emergency actions taken had “enabled a significant increase in the resilience of the sector”, but also noted that the central bank was not there to “provide a permanent backstop” to the pensions industry.
The Work and Pensions Committee (WPC) has now launched an inquiry into defined benefit pensions with LDI to explore the lessons learned from recent experiences, focussing on the volatility in gilt markets.
A new Prime Minister, a new plan for growth?
The former Chancellor who oversaw the UK financial plan throughout the Covid pandemic was announced as the next Prime Minister on Monday 24 October 2022. Rishi Sunak will not only be the first UK Prime Minister of Asian descent, but at the age of 42, the youngest PM in well over a century.
Mr. Sunak also holds the record as being the fastest from being the first elected MP to becoming Prime Minister, in just seven short years. The question on the minds of many UK citizens is, will having a former Chancellor lead the government help to stabilise the economy and rebuild the trust that has been lost over the last several weeks?
Blevins Franks has been helping British nationals living abroad for over 45 years, advising its valued clients through several periods of economic uncertainty. Our advisers are located throughout Europe and have the knowledge and expertise to provide you with financial peace of mind.
Contact us today.