Our freshly minted Chancellor of the Exchequer, Kwasi Kwarteng, has unveiled in his mini-budget (or was it a fiscal event?) this morning a host of spending pledges and tax reforms intended to boost the UK economy and drive growth. Sources close to the Chancellor had been briefing that he would be pulling out more bunnies than a rabbit warren and the Chancellor will consider that he did not disappoint. The ‘Growth Plan 2022’ undoes many of the tax changes brought in or scheduled by the previous Conservative government and then goes even further in its pursuit of a low tax, high growth economy. The Chancellor will be hoping that the harvest from the magic money tree that our new Prime Minister appeared to find will be bounteous enough to fund his generous tax reforms in addition to the unprecedent provision to be made to households and businesses to help them meet the spiralling costs of energy.
The future tax increase is a marvellous political tool. One Chancellor announces a future increase in taxation and takes plaudits for promoting fiscal rectitude but without actually costing anyone any money. The next Chancellor arrives and announces that the proposed increase will not go ahead and gets to say they are cutting taxes, without actually cutting taxes. It is almost like they planned it that way. As such, the planned national insurance contribution (NICs) increases have been scrapped along with the planned Health and Social Care Levy.
Although cuts in the rates of income tax had been mooted, the complete abolition of the additional rate of tax (45% rate) was more dramatic than anticipated. So that some benefit is felt across the whole income spectrum and not just at the top end, the previously announced 1% cut in the basic rate of tax (20% rate) will also come in a year early (April 2023). This along with the changes to NICs will benefit all taxpayers, with the abolition of the 45% rate affecting some 629,000 people (but they probably didn’t all go to school with the Chancellor).
As expected, the cap on bankers’ bonuses will be scrapped. Despite the name, the existing cap does not restrict the pound value of bonuses but rather limits them to 100% of basic salary. It is the Treasury’s argument that this has done nothing to limit overall remuneration for bankers and has instead driven business elsewhere.
Whatever the actual economic effects of these changes, we do not doubt that the scrapping of the top rate of income tax and removal of the bankers’ bonus cap will attract certain people to the UK given the historic international mobility of people earning in those brackets.
A cut in the rates of stamp duty land tax (SDLT) is always a welcome fillip to the housing market, particularly for overseas buyers who have already seen an effective 20% price cut in UK property because of the fall in value of Sterling. The value on which the zero percent SDLT rate is charged will be raised from £125,000 to £250,000, with first time buyers enjoying the zero percent rate on the first £425,000 of a first property with a value not exceeding £625,000. However, these changes avoid the issue that SDLT is a highly inefficient tax for the property market and is well overdue for a root and branch reform. There are no changes to the higher rates of SDLT, which climb to 12% on values over £1.5m with the 3% additional property and 2% non-UK buyer surcharges remaining in place. The measures announced to simplify the planning process are likely to have a more beneficial long term effect on the housing market.
The proposed increase in corporation tax to 25% next April has been binned, meaning the general rate of corporation tax will remain at 19%, the lowest (remarked the Chancellor) among G20 nations. This will no doubt help promote the UK as a place to do a business.
As widely trailed beforehand, local ‘investment zones’ will be established where businesses will be able to benefit from lower rates of tax including the elimination of business rates, SDLT and reductions in employers’ national insurance contributions for new employees. It remains to be seen how many of these zones will be established and where in the country they will be. Whether this will actually increase investment or simply move it around the country remains to be seen.
VAT free shopping for tourists will return, which we expect will give a boost in particular to the high-end retail sector.
Other announcements will be welcome to investors, certain self-employed workers and companies: the limits on seed enterprise investment schemes and company share option plans will be increased and recent changes to the IR35 rules (the rules dealing with how ‘off-payroll’ workers are taxed) will be repealed.
The Office of Tax Simplification will be closed down and its onerous mandate of simplifying the tax code passed to the Treasury and HMRC.
This Chancellor hinted at the start of his mini-budget that this was just the beginning – so watch this space, as more tax reform is likely on its way should this government hang on long to see its plan through. The big question on everyone’s lips is whether or not Trussonomics will prove a success – judging from this first foray into tax policy it seems as if the government is not going to die wondering.