Despite the rumours of a reduction in income tax, you may have expected that the Chancellor would keep this in his back pocket for now. Possibly for the Budget later this year or the Spring Statement next year in preparation for the rumoured Autumn 2023 general election.
Not many would have anticipated that the Chancellor would announce such a giveaway – or, more accurately, would announce the promise of such a giveaway - today. We all know that Covid has to be paid for and that inflation and interest rates are rising. Yet many are suffering hugely as a result of recent price increases, especially energy prices, and the increase in NICs this April to cover health and social care costs will hit many hard. So the Chancellor has decided that we all need something to look forward to and of course any party needs to find a vote winner in the run up to an election. The tactic of “there is light at the end of the tunnel” is not new, but the tactic of starting to prepare the manifesto so soon may be.
The Chancellor has promised a reduction in the basic rate of income tax to 19% from April 2024. However, the promised cut comes with the proviso that it will be done in a “responsible and affordable way”. This may mean that personal allowances will remain frozen or that there will be a hike in the higher and additional rates of tax, or that world events or inflation rule it out. It may mean something else entirely, but the promise of a tax cut so far in advance is a bold move and that proviso may be the Chancellor’s Get Out of Jail Free card when the time comes.
The announcement today that the NICs thresholds for employees and the self-employed will increase in July to align with the personal allowance makes sense. It clearly targets lower earners and is a progressive change, although there is an element of give with one hand and take with the other for those higher earners who will still see their overall NICs payments increase as a result of the planned April rate rise.
Looking at the numbers, the anticipated savings are:
- those earning in excess of £12,570 will see a NICs saving of roughly £330 a year from July 2022 (although this does not take into account the April rate rise and only looks at the increase in the threshold); and
- those earning in excess of £50,270 will save £377 in income tax from April 2024, with those earning between £12,570 and £50,270 receiving a proportion of this saving.
That is a total possible combined income tax and NICs saving in excess of £700 a year from 2024, assuming no other tax rates change and ignoring the April NIC increase this year. Whether this will be felt in the pockets of taxpayers will depend of course on the effects of inflation and general price increases.
The Autumn Budget speech later this year could be a long one as the Chancellor has also announced plans to encourage business investment and training and to improve R&D tax credits (including allowing cloud computing costs associated with R&D to qualify). Investment is key to the Chancellor’s “Capital People Ideas” priorities and the outcome of these plans should make for an interesting end to 2022.
Finally, the 5p per litre reduction in fuel duty from tonight was possibly the most widely expected announcement. The Chancellor is under pressure to keep many sides happy and he probably had no choice but to reduce the duty. The real surprise is that the reduction will be in place for 12 months. The reduction in the rate of VAT to 0% on solar panels and heat pumps is also welcomed, although the benefit of this change will be felt by fewer.