Chancellor dumps almost all tax cuts announced in mini Budget
Jeremy Hunt – who only stepped into the position of Chancellor on Friday – has brought forward measures expected to be announced on 31 October as part of the medium-term fiscal plan.
In today’s Treasury’s update, Hunt confirmed that nearly all measures announced in September’s disastrous mini Budget – which ultimately cost Kwasi Kwarteng his job – have been reversed.
Only those that have been legislated for will remain. Here’s what’s changing…
Income tax cut
As part of Kwarteng’s mini Budget, he announced the basic rate of income tax would fall from 20% to 19% as of April 2023 – a 1p cut.
Reports over the weekend suggested Hunt was due to delay the income tax cut. The Treasury said: “While the government aims to proceed with the cut in due course, this will only take place when economic conditions allow for it and a change is affordable. The basic rate of income tax will therefore remain at 20% indefinitely.” This is worth around £6bn a year.
Dividends tax cut
The former Chancellor announced the government would reverse the 1.25 percentage point increase in dividend tax rates from April 2023 to benefit 2.6 million dividend taxpayers with an average saving of £345 in 2023/24. Additional rate taxpayers would further benefit from the abolition of the additional rate of dividend tax.
However, the government today confirmed the 1.25 percentage points increase, which took effect in April 2022, will now remain in place. This is valued at around £1bn a year.
IR35 off-payroll working rules
Under measures announced in the mini Budget, changes to off-payroll working rules, known as IR35, were due to be overturned from April next year in a bid to simplify the tax system. It would mean that IR35 workers would once again be responsible for determining their employment status and paying the appropriate amount of tax and National Insurance Contributions.
But Hunt confirmed the government would repeal these reforms. This will cut the cost of the government’s growth plan by around £2bn a year.
Alcohol duty freeze
The mini Budget revealed the planned increase to the duty charged on beer, wine and spirits was to be cancelled. As such, alcohol duty would be frozen from 1 February 2023 to provide additional support to the hospitality sector. The move was expected to save 7p on a pint of beer, 4p on a pint of cider, 38p on a bottle of wine and £1.35 on a bottle of spirits.
But the government confirmed it will now not proceed with the freeze, adding approximately £600m to its coffers. However, the alcohol duty review as announced in the mini Budget will continue as planned. The Treasury said: “The alcohol duty uprating decision and interactions with the wider reforms to alcohol duties under the alcohol duty review will be considered in due course.”
U-turns already announced
These reversals follow two U-turns already announced by the government in the wake of the mini-Budget which shook the market as it led to the pound slumping to a record low against the dollar, a spike in gilt yields and mortgage market mayhem.
These changes have been cancelled:
Abolition of the 45p rate of income tax
In a surprise move, Kwarteng announced the additional rate of tax – 45% on those earning £150,000 or more – would be abolished from April 2023.
It was expected to benefit just 1% of the population at a cost of £2bn to the Exchequer. But just 10 days later, he said abolishing the top rate “has become a distraction”, adding that the government “gets it” and “have listened” as he U-turned on scrapping the 45p rate of income tax.
On Friday, Prime Minister Liz Truss confirmed the government will abandon plans to scrap the corporation tax rise. Corporation Tax was due to rise from 19% to 25% in April 2023 before Kwarteng scrapped this move.
But Truss said she would keep the increase in corporation tax planned by the previous government which will raise £18bn a year, and “act as a down payment on its medium-term plan”. This means the tax will rise to 25% as expected.
Taken together, all of these changes are estimated to be worth around £32bn a year, the government confirmed.
The government added that the reversal of the National Insurance increase and the Health and Social Care Levy, and the cuts to Stamp Duty Land Tax, will remain benefitting millions of people and businesses.
The £1 million Annual Investment Allowance, the Seed Enterprise Investment Scheme and the Company Share Options Plan will also continue to further support business investment.
Energy bill review
One of the first things Truss announced as Prime Minister was the Energy Price Guarantee, which would curb average energy bills to £2,500 a year for the next two winters.
This is now in doubt as Hunt said the Energy Price Guarantee will be reviewed after 2023. “The objective of the review is to design a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need”.
While no details were given on how the guarantee will change, it’s expected that help may only be available for low-income households.
‘Enormous blow to millions of people’
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “Jeremy Hunt has stamped out of the last of the smouldering embers of the mini Budget, in an effort to restore confidence to the markets. These announcements will pour billions of pounds into the funding black hole, but they will come at a cost to our own pockets. The changes to support with energy bills and the postponement of the income tax cut together will be an enormous blow for millions of people. Meanwhile, the fact that dividend tax will not be cut alongside National Insurance will hit business owners and investors.”
Laura Suter, head of personal finance at AJ Bell said the announcements sound the death knell for Trussonomics, with the vast majority of her tax cutting plans now “consigned to the bin”.
Suter said: “People have had yogurt in their fridge that’s lasted longer than some of the government’s planned tax cuts, and it’s clear that Truss has opted to have one last attempt at saving her skin by ditching her economic principles rather than try to cling on to her policy plans.
“In one statement, Jeremy Hunt has reversed all the mini Budget moves apart from the National Insurance and stamp duty cuts. He went further than many expected and what’s probably most worrying for people is the signal that more ‘difficult decisions’ will be taken. The Chancellor signalled that government departments will need to find more cost savings, which feels like austerity in all but name.”