New Chancellor Kwasi Kwarteng introduced a raft of tax cuts today in arguably the UK’s biggest fiscal event in decades.
By Rob Morgan, Spokesperson & Chief Analyst, Charles Stanley Kwasi Kwarteng, the new Chancellor of the Exchequer, announced a wide-ranging fiscal package today, chock-a-block with tax cuts in an effort to limit the impact of the spiralling cost of living and to “break the cycle of stagnation”. Plans to help households and businesses with the rising cost of living will be welcome in the short-term, but increased government borrowing could compromise the UK’s finances and long-term financial resilience.
Today’s sell-off in gilt markets and the fall in sterling suggests a high degree of concern. Tax cuts come on top of subsidisation of energy prices for consumers fixing the typical bill at £2,500 for two years, which will be funded by extra borrowing. In terms of the main factors affecting personal finances, the Chancellor announced the following.
National Insurance hike reverse
A 1.25% increase in National Insurance was implemented by the previous chancellor Rishi Sunak in April. A rewind of this was announced before today’s mini-Budget and will take place from November 6th.
The planned ‘health and social care levy’, an equivalent but separate tax which was expected to come into force in April 2023 has been shelved. The threshold at which workers begin to pay National Insurance, which was increased to £12,500 by Sunak, will remain the same.
Income tax
A penciled-in 1p cut to basic rate income tax has been brought forward by a year. Also, the additional rate of income tax of 45% for those earning over £150,000 is to be scrapped. The highest rate of income tax will be 40%. Different rates of tax apply in Scotland.
These measures won’t help equip the consumer for an expensive winter ahead as they don’t take effect until April 2023. Similar to the reduction in National Insurance, the package has a greater impact on higher earners than on those on low wages.
Stamp duty cut
An immediate stamp duty cut was unveiled in order to stimulate the property market at a time of rising mortgage rates.
Stamp duty is a tax you pay when you purchase a property. Previously, buyers paid nothing on the first £125,000, 2% on the next £125,000, 5% on the next £675,000, 10% on the next £575,000 and 12% on anything above that. First-time buyers paid stamp duty on the first £300,000 and 5% on anything from £301,000 to £500,000.
Going forward, there is no stamp duty on the first £250,000, a doubling of the zero band threshold, and for first-time buyers, there is no duty on the first £425,000. The maximum value of a property on which first-time buyers will get relief is also going up from £500,000 to £625,000.
Consumer confidence and spending are strongly linked to housing prices, so this will help maintain sentiment and activity in a property market that is starting to flag rising borrowing costs.
However, for first-time buyers, who tend to pay far less in stamp duty, there is less benefit at a time when rising interest rates are the bigger factor in making borrowing for a house more challenging.
Corporation tax freeze
The Prime Minister and Chancellor are aligned on a growth-focused agenda, believing tax cuts foster investment and growth. Kwarteng confirmed that plans to increase corporation tax from 19% to 25% in April will be shelved.
This should boost UK company profits and promote investment, an overall positive for UK shares. Yet considerable uncertainty elsewhere casts a shadow, including rising borrowing costs and unquantifiable energy bills after the recently announced six-month fix expires.
Dividend tax rise reverse
We will also see a reverse of the 1.25 percentage point increase in income tax on dividends introduced in April as part of the scrapping of the health and social care levy.
Investors will experience a year of higher rates on dividends (in excess of the £2,000 dividend allowance) before they drop back down to the previous levels – 7.5% for basic-rate payers and 32.5% for higher-rate payers.
This will save someone with £10,000 of dividend income £100 compared to the higher tax level.
Source: charles-stanley.co.uk