The Spring Statement is intended to be nothing more than a trading update on the UK’s finances.
It was certainly never intended to be a Budget, with changes to taxation and spending.
But recent economic events have derailed such tidy plans.
A few months ago, Chancellor of the Exchequer Rishi Sunak was hoping that he’d be able to announce that things were looking better than expected as we emerge from the Covid crisis, lay the groundwork for good news on tax in the Autumn Budget and celebrate a big rebound in employment.
But we have entered stormy waters. In the wake of Covid has come inflation, as the world struggles to get back to work, and competes for scarce resources. Consumer costs peaked at a 30 year high of 6.2% in the 12 months to February and the Bank of England has already raised interest rates three times in an attempt to stop them from spiralling out of control.
The Chancellor’s Spring Statement confirmed that prices are heading up fast – and set to head up faster still. Official forecasts, from the Office for Budget Responsibility said inflation would average 7.4% this year, peaking at around 9% at the end of the year.
Surging energy prices mean that it could hit 8% next month, the Bank of England has warned. Household finances, already under pressure may be harder pressed as war in Ukraine means problems for the global food markets and increased costs for staples such as wheat. People are having to choose between eating, filling the car or heating their homes. The Office for Budget Responsibility says inflation and higher taxes from April mean households will be facing the biggest fall in living standards since records began.
Both companies and consumers suffer from inflation. Businesses that have to pay higher costs for fuel and raw materials have to pass on the costs to customers. Profits and sales shrink, leading to reduced activity across the entire economy. Consumer spending weakens and a downward spiral can result.
It means that the Chancellor was under immense pressure to announce measures to ease the cost of living crisis in his Spring Statement on Wednesday.
It was not the only challenge he was facing. Demands for increased spending on defence in light of the war in the Ukraine, a need to provide extra support for the NHS and even to reduce the national debt were all likely to be on his mind. The government is forecast to spend £83bn on debt interest in the next financial year, the highest on record.
“We should be prepared for the economy and public finances to worsen, potentially significantly as a result of Ukraine and the cost of borrowing continues to go up”, he warned.
So what did the March 2022 Spring Statement actually contain?
The National Insurance threshold will be raised by £3,000. This means people can earn £12,570 per year before paying income tax or NI.
This was a surprising – and welcome – change of direction for the Chancellor. MPs had piled pressure on the Chancellor to ease the impact of the National Insurance rise that comes into effect from 1 April.
He seems to have listened. The threshold change means people earning up to about £34,000 a year will be better off. But once you start paying National Insurance, the rate will be higher than last year (13.25% instead of 12%).
So, you’ll pay less National Insurance this year if you earn less than £34,000. Someone earning £20,000 will pay about £180 less National Insurance this year than last year, while someone earning £50,000 will be paying about £200 more.
Fuel duty will be cut by 5p a litre until March 2023. The average price of petrol has risen by more than 40p per litre since last year’s Spring Statement and the Chancellor’s announcement will not make a huge impact – although the RAC said that move would knock £3.30 off the cost of filling a typical 55 litre tank in a family car.
VAT scrapped on home energy-saving . Mr Sunak also scrapped 5% VAT on installing energy saving systems, such as solar panels, heat pumps, or insulation, in homes.
He noted the levy was due to an EU law and “thanks to Brexit” the Government is now able to ditch it. This means that a family having a solar panel installed could see tax savings worth over £1,000 and savings on their energy bill of over £300 per year. Of course, energy prices are still set to soar, and very few of the hardest hit households will be in a position to take advantage of this cut.
Retail hospitality and leisure sectors will have a 50% discount in business rates. The sector is still in serious trouble in the aftermath of Covid, and a rates reduction will mean a lifeline for many struggling businesses.
The Household Support Fund will be doubled to £1bn from April. This allows local councils to help the most vulnerable in their local communities with payments and grants such as vouchers to help pay their bills.
The Chancellor also announced support for small businesses and increased the employment allowance to £5,000 for small businesses from April.
A cut in income tax
But perhaps most significant of all the points in the statement was Mr Sunak’s pledge to cut the basic rate of income tax from 20 pence in the pound to 19 before the end of the current Parliament, in 2024.
It will be the first time in 16 years the basic rate has been cut, and could provide extra cash for workers, pensioners and savers. The Chancellor did not flesh out the details and failed to give any timings for the tax change but hinted that it would be worth in the region of £5 billion.
Someone earning £30,000 a year would be around £175 better off.
Is the news good or bad?
The Chancellor may have done what he could, but despite his tax concessions, the reality of inflation still means misery for many households. What’s more, even with the proposed reduction in income tax, the UK taxpayer will be shouldering the biggest burden since the 1940s when the nation had the cost of a world war and the creation of the welfare state to pay for.
The costs of covid and the huge amounts spent on pandemic support packages mean similar pressures on the public purse to be covered now.
If you are on a pension or a fixed income, inflation in general and energy bills in particular are still going to come as bad news.
Getting some expert support
Even with the Chancellor’s efforts in the Spring Statement, money is going to be a challenge for many people over the next months and years. If you are looking at ways to make your pension work harder, want to make sure your investments are performing or simply need to be certain that you are not paying any more tax than you need to, expert help from the Continuum team could be vital.
For a free initial discussion about how we could help you make the most of your money contact us today.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to an investment or retirement strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.