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.

Challenging times

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.

In summary

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.

Related articles

Investing

This communication is general in nature and provided for information/educational purposes only. It does not take into account any specific investment objectives, the financial situation or particular needs of any particular person. It not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful for them to access.

This communication has been prepared by Barclays Private Bank (Barclays) and references to Barclays includes any entity within the Barclays group of companies.

This communication:

(i) is not research nor a product of the Barclays Research department. Any views expressed in these materials may differ from those of the Barclays Research department. All opinions and estimates are given as of the date of the materials and are subject to change. Barclays is not obliged to inform recipients of these materials of any change to such opinions or estimates;

(ii) is not an offer, an invitation or a recommendation to enter into any product or service and does not constitute a solicitation to buy or sell securities, investment advice or a personal recommendation;

(iii) is confidential and no part may be reproduced, distributed or transmitted without the prior written permission of Barclays; and

(iv) has not been reviewed or approved by any regulatory authority.

Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.

Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.

Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.