UK ‘mini’ budget: Brave new world?
Article co-authored by George Hill and Nicholas Bearne, from Barclays Private Bank
Please note: The article does not constitute advice or any form of recommendation. Barclays Private Bank does not offer tax advice, and professional advice should always be sought.
Arriving hot-on-the-heels of the Bank of England’s decision to raise interest raises to their highest level since 2008, the new UK government unveiled its much-anticipated mini Autumn budget.
As Chancellor Kwasi Kwarteng laid out his short-term plans, it became clear that the new occupants of Number 10 and 11 bring with them significantly different attitudes towards taxation and spending, compared with their predecessors.
Indeed, Prime Minister Liz Truss has previously spoken of her desire to break the Treasury’s “orthodoxy1”, and to prioritise growth above all else. It puts her at odds with President Biden who earlier this week had tweeted that he was unconvinced by so-called “trickle-down economics2”.
While the latest budget was always expected to usher in various tax cuts, the headline figure of £45 billion is more than many anticipated. It represents the biggest set of UK tax cuts for half a century.
In many ways Mr Kwarteng faces an unenviable task, confronted with an unpleasant macroeconomic backdrop, as well as the need to shield the UK public from the fallout of the Ukraine war – specifically, soaring energy prices.
He also appears to have a different approach to the politically-neutral Bank of England, which is aiming to cool the economy at a time when the government wants to turbo-charge it.
Here are some of the biggest takeaways from the 2022 Autumn budget. As always with these things, the devil is in the detail and much deeper analysis is needed. This informal summary offers an immediate view of the headline decisions.
1. Income tax, National Insurance and energy bills:
Overall, this budget is an explicit attempt to put more money back into people’s pockets.
Arguably the biggest rabbit to come out of the hat was the decision to scrap the additional rate of income tax (45%). This will benefit higher earners, specifically those people with annual earnings of £150,000 or more. The government argues that it makes the tax system simpler and the UK more competitive in the international fight for workforce talent. Critics say it benefits the wealthiest most, and jars with the current cost-of-living crisis, as in their opinion does the decision to scrap Banker bonuses. However, the 8% surcharge on banks remains.
Less surprising was the decision to trim income tax from 20p in the pound to 19p, which has been brought forward to April 2023, from April 2024.
The biggest U-turn of the day – albeit one that was widely expected – was the news that the recently-planned 1.25% increase to National Insurance and Dividends is now cancelled. Tied in with that, is the decision to ditch the 1.25% Health and Social Care Levy (from 6 November 2022).
Finally, with winter fast approaching and the war in Ukraine raging on, the government confirmed its intention to freeze household energy bills for two years, at a projected cost of £60 billion. It also dangled a carrot in front of overseas shoppers, with the move to scrap VAT on their purchases.
2. Stamp Duty Land Tax
In an attempt to support the housing market and boost homeownership, the chancellor also announced the decision to cut Stamp Duty Land Tax (SDLT) with immediate effect for first time buyers.
For those not subject to overseas or second home surcharges, it will mean that no SDLT is due on the first £250,000 of a property’s purchase price, removing the 2% levy that was previously applied between £125,001 and £250,000 of a purchase price.
3. Corporation tax, workforce and EIS
In the lead-up to this budget, the government had been vocal about wanting to make the UK more business-friendly, more productive and more competitive.
As part of that approach, it announced another U-turn: the planned Corporation Tax rise (to 25%) will be cancelled and Corporation Tax will instead remain at 19%. This is the lowest rate in the G20.
The government also declared its desire to see more people return to work, and believes a reduction in Universal Credit to be an appropriate incentive.
In a similar spirit of incentivisation, Mr Kwarteng confirmed that the sunset clause for the Enterprise Investment Scheme (EIS) will be removed, in parallel with the decision to increase the Seed EIS limits. Both things are intended to encourage private investment into smaller UK growth companies.
Global economic headwinds are likely to blow hard this winter, leaving politicians and policy makers treading a fine line between needing to cool inflation without stalling economic growth.
The Autumn budget was a bold statement of intent from the UK government and it now remains to be seen whether it’s as big a catalyst for growth as they hope. And as the adage goes, ‘there’s no such thing as a free lunch’. With increased borrowing needed to fund all the tax cuts, the UK’s finances are now entering unchartered territory, with a bullish chancellor at the helm.
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