Budgets now come with a campaign slogan, and this autumn Rishi Sunak has presented the public with a Budget for a “new age”, one which he says will prepare the country for a post-Covid “age of optimism”.
Mr Sunak faced a reprimand from Speaker of the House Sir Lindsay Hoyle for briefing the press earlier this week on upcoming Budget announcements before presenting proposals to the House. Whilst this may have been a carefully orchestrated unveiling of plans to build a new post-Covid economy, it did little more than raise red flags that the devil would be in the detail of Sunak’s Budget plans.
The Chancellor delivered us what at first glance appeared to be some good news, a £150bn spending rise with extra money for schools, tax cuts for businesses and an economy set to hit pre-Covid levels by the end of the year. But it is important to take a step back to look at the broader picture.
Two significant tax decisions were made ahead of the Autumn Budget that will affect households across the UK in the coming years. If taken together, the March and October budgets mean that the Chancellor has raised taxes by more this year than in any single year since Norman Lamont and Ken Clarke’s two 1993 budgets in the aftermath of Black Wednesday, according to the Office for Budget Responsibility.
The OBR also predicts that real household disposable incomes (ie after inflation) will rise by just 1.1% this year, and by just 0.3% in 2022, after shrinking by 0.6% last year. On a per person basis, real household disposable incomes will only return to pre-pandemic levels in the latter half of 2023, with growth of 1.5% that year. While there is a recovery in nominal wages over the next few years, that is countered by above target inflation, taxes going up, and a net reduction in universal credit compared to what households had before.
“The budgets are set, the plans are in place, the task is clear, now we must deliver. This isn’t the government’s money, it’s taxpayers’ money,” said Sunak. But it is a budget which spends now, but we pay for it later. And it doesn’t tackle the rising cost of living.
We have summarised the key points from the Budget which may affect our financial planning clients. The full Budget report can be read by visiting the www.gov.uk website.
The Economy
- The economy is set to hit pre-Covid level by the end of the year. Annual growth is set to rebound by 6.5% this year, followed by 6% in 2022.
- The rate of inflation in September was 1% and is likely to rise to an average of 4% over next year. This means the cost of living is rising.
- The levels of unemployment is expected to peak at 5.2% next year, but this figure is lower than 11.9% previously predicted.
- Wages have grown by real terms by 3,4% since February 2020.
- Borrowing as a percentage of GDP is forecast to fall from 9% this year to 3.3% next year. Borrowing as a percentage of GDP will then fall in the following four years to 1.5%.
Tax
It is important to remember that two significant tax decisions were made ahead of the Autumn Budget that will affect households across the UK in the coming years.
In the Spring budget it was announced that the thresholds at which income tax is paid would be frozen at April 2021 levels for five years (Scotland has different levels). That means pay rises will push more people into higher tax bands.
In September, the government also announced employees, employers and the self-employed would all pay 1.25p more in the pound for National Insurance (NI) from April 2022 to fund social care.
- Universal Credit will be tapered down by 8%, bringing it down from 63% to 55% - allowing claimants to keep more of the payment. Earlier this month the government scrapped the £20- a-week uplift in universal credit, which was part of the government’s emergency Covid support package and received a significant backlash. The taper rate in universal credit will be adjusted so that the amount of benefit a worker will lose for every pound they earn above their worker allowance will be reduced to 55p in the pound from 63p currently. The change will come into effect no later than 1 December. Those on universal credit but who are not working will not benefit from the policy.
- Inheritance Tax, a tax usually paid on an estate after death, remained unchanged despite the nil-rate band not increasing since It sits at £325,000, with a 40% rate due on estates over that value, with additional allowances for married couples.
- No changes to capital gains tax.
- Dividend tax will rise by 25 percentage points from 6 April 2022, this will affect those who hold shares outside of an ISA or SIPP
- Confirmation business rates are to be retained and reformed.
- A 50% business rates discount announced for the retail, hospitality and leisure sectors in England in 2022-23, capped at £110,000.
- Whilst not an immediate change, consultation is set to begin on a new online sales In order to address the imbalance of online shopping and to protect the high street, the government is considering a UK-wide online sales tax for online retailers - the revenue from which would be used to reduce business rates for in-store retailers.
Government Spending
- Whitehall departments to receive rise in overall spending, totalling £150bn over the course of this Parliament.
- Funding will rise by an average of £4.6bn for Scottish Government, £2.5bn for Welsh Government, and £1.6bn for Northern Ireland Executive.
- A Levelling Up Fund promises £1.7bn to be invested in local areas across the
- Schools to get an extra £4.7bn by 2024-25.
- £6bn of funding to help tackle the NHS backlog.
- £7bn for transport projects in areas including Greater Manchester, the West Midlands and South Yorkshire.
Pensions
- The state pension will rise by 1% in the 2022-23 tax year, equating to an annual boost of £289 for some pensioners.
- Documents published alongside the Chancellor’s Budget today confirmed that, for this year only, the increase will not be determined by the usual triple lock guarantee, in order to avoid a ‘disproportionately inflated rise’.
- The Chancellor also announced a consultation of the current charge cap of 75% on defined contribution auto-enrolment pension schemes.
- Core pension tax-relief systems and rules for inheriting pensions have been left unchanged, despite considerable speculation that the government would make these arrangements less generous.
Wages
- Those on minimum wages will receive a significant pay rise in For those aged 23 and above, the rate - known as the National Living Wage - will go up by 6.6%, as the hourly rate increases from £8.91 to £9.50.
- Public sector staff will receive a pay rise in April when the freeze on wages in place during the pandemic is The amount will be decided at later date.
Property and Mortgages
- £24bn earmarked for housing: £11.5bn for up to 180,000 affordable new homes, with brownfield sites targeted for development.
- A 4% levy will be placed on property developers with profits over £25m rate to help create a £5bn fund to remove unsafe cladding. This could help many homeowners of high-rise flats who have faced crippling costs owing to the cladding crisis, following the Grenfell Tower tragedy.
Living Costs
Petrol: The planned rise in fuel duty is to be cancelled as the country faces the highest pump prices in eight years.
Air Travel: The cost of a domestic flight ticket could be cut, but very long-haul flights could become more expensive. This is because the changes to Air Passenger Duty, a levy paid by airlines, is ultimately funded by passengers through the cost of their tickets.
Alcohol and tobacco: Planned rise in the duty on spirits, wine, cider and beer cancelled. Higher- strength drinks going up in price, but lower duty on drinks ranging from sparkling wine to draught beer. The cost of smoking is rising again, with an above-inflation rise in duty on cigarettes and hand-rolling tobacco.
