The government didn’t want it described as a budget, or even a mini budget, and insisted that it was simply a fiscal event.
But whatever you call Friday’s announcement it contained some dramatic changes to the rules and regulations that affect the tax you pay.
It included some significant measures which may affect the direction of the economy as a whole, and could have a big impact on your finances now and for the future. At Continuum we are looking at the measures from new Chancellor Kwasi Kwarteng and new PM Liz Truss – and at how they could affect you.
Why is the government making changes?
The economy has been hit by double-digit inflation and is heading into recession while households are already in a cost-of-living crisis. The Bank of England has raised interest rates by 0.5 percentage points to 2.25%, the highest level since December 2008 in an attempt to get inflation under control. The Chancellor, on the other hand, needs to find ways to ease the pressure on households and boost growth – and £45 billion of tax cuts – the biggest tax cutting event since 1972 seem to be his solution.
The government’s plan for growth has set a target of reaching a 2.5% rate of economic growth as it tackles a tax burden predicted to reach its highest level since the 1940s.
What was announced?
The basic rate of income tax will be cut
The 20p basic rate of income tax, paid by anyone earning from £12,571 to £50,270 will be reduced to 19p in April 2023.
The cut had already been promised for the future, but the Chancellor has brought it forward by a year. It means a tax cut for over 31m people in just a few months’ time when the new tax year starts in April 2023.
The top rate of tax for higher earners abolished
The Chancellor is also abolishing the top rate of income tax.
This is currently 45% and paid by those earning over £150,000 – a major benefit for the highest earners in the country. From April 2023 it will mean a single higher rate of income tax of 40%. This will simplify the tax system, as well as reducing the tax paid by high earners.
Scrapping the additional rate of income tax will cost the Treasury about £2 billion a year, according to official Government figures. Around 600,000 people will benefit from scrapping the 45p rate and that the average tax saving will be about £10,000 each.
These changes do not apply to Wales and Scotland, however, where the additional rate remains and is currently 46%. Rates in Northern Ireland are aligned to those in England.
The threshold for stamp duty has been raised to £250,000
Stamp duty – the tax paid to the government when you buy a home – has been cut in England and Northern Ireland. Homebuyers will not pay stamp duty on the first £250,000 of the property’s value, instead of the current level of £125,000. First-time buyers will not pay stamp duty up to £425,000, up from £300,000. The maximum value of a property on which first-time buyers’ relief can be claimed has also increased from £500,000 to £625,000.
The Chancellor claimed that this would take more than 200,000 people out of paying stamp duty altogether and will reduce the tax obligation of those buying more expensive property. Unlike the Stamp Duty holiday of his predecessor, this is a permanent cut. It comes into force immediately.
Taking Contractors out of IR35
Contractors have been faced with changes to the tax system that saw them paying tax like an employee while enjoying none of the benefits enjoyed by employees such as holiday pay and security. IR35 legislation, introduced for public sector workers in 2017 and for private sector workers in April 2021, requires firms to assess whether contractors should be taxed as employees.
The Chancellor promised to reform these much disliked “IR35” tax rules which were introduced in 2017 and expanded last year, and stated that he will repeal these reforms from April 2023.
This is good news for anyone involved in the growing ‘gig economy’ and could substantially decrease the tax paid by tens of thousands of casual workers and contractors.
The cap on bankers’ bonuses has been lifted
On the controversial subject of bankers’ bonuses, Kwarteng defended his decision to end the cap on them. He stated that “A strong UK economy has always depended on a strong financial services sector. We need global banks to create jobs here, invest here, and pay taxes here in London, not Paris, not Frankfurt, not New York.”
He explained his view that the bonus cap simply pushed up the basic salaries of bankers, or drove activity outside Europe.
The planned rise in corporation tax has been scrapped
The UK’s corporate tax rate will not rise to 25 %- it will remain at 19%. Abandoning the rise is good news for business, and may help ensure investors who own shares will keep more of the profits made by the companies they invest in. The rise in tax rates on dividend income, which are linked to the rise in National Insurance rates, will also be reversed.
Investors will be given the chance to put money into more specialised funds by the removal of a cap on fees for certain schemes
The increase in National Insurance has been reversed
The chancellor reiterates that a recent rise in National Insurance – a tax people pay in their earnings – will be reversed from 6 November 2022.
Ex-Chancellor Rishi Sunak increased National Insurance by 1.25p in the pound in April – saying the money would fund health and social care.
Liz Truss’s government says that funding will now come from general taxation.
Low-tax investment zones will be set up across the UK
The Chancellor announced the creation of around 40 investment zones around the UK. These will benefit from lower taxes, easier planning application permission, increased funding, zero-rate NI employer contributions for certain employees, and stamp duty land tax relief.
Energy price capping
The Chancellor began his speech to the house with a plan to tackle rising energy bills. He said the Government’s new Energy Price Guarantee will freeze bills at about £2,500 for typical households – a far cry from the figures of £6,500 which were being forecast.
This seems to be very good news for anyone on a tight budget who has been dreading the coming of cold weather.
It seems that the Chancellor is determined to give the UK a low – or at least lower – tax burden, stimulating the economy by putting more cash into most people’s pockets. Reaction has been mixed, but some observers have applauded the potential stimulus it may offer business, while other are concerned about the scale of borrowing required to fund the cuts.
What should you do?
Liz Truss and Kwasi Kwarteng have insisted that their tax-cutting plans will drive economic growth, steering the UK out of recession and putting more cash back in most people’s pockets.
Some critics have complained that cutting tax will leave the country with long term debts. More sympathetic observers suggest that stimulating the economy now must be the priority.
But whatever the effect on the nation, the measures announced by the government will impact your own long term financial plans. Exactly how will depend on your current financial arrangements. But the good news is that it may be possible to reduce the tax you pay, and to take advantage of some changes that could make investment more rewarding.
The best solution may be to get some professional help from the Continuum team to make the most of tax savings and new potential investments.
The Financial Conduct Authority does not regulate taxation advice.
The information contained in this article is based on the opinion of Continuum and their understanding of the UK Government & HMRC taxation legislation. The levels, bases and reliefs from taxation are subject to individual circumstances and maybe subject to future change.
The information contained in this article is based on the opinion of Continuum and does not constitute financial or taxation advice or a recommendation to a specific financial planning strategy, you should seek independent financial advice in relation to your own circumstances before embarking on any course of action.