Ahead of today’s statement, the chancellor had warned “it’s not going to be easy”, saying: “I wish government could solve absolutely every problem, that I could fully protect people against all the challenges that lie ahead. I can’t do that.”
With inflation and interest rates rising, the chancellor said that the rising cost of servicing Britain’s debt made it essential that he stuck to his fiscal rules of balancing day-to-day spending within three years with room to spare, while the economic fallout of war in Ukraine is yet to be known.
UK inflation accelerates to 40-year high
Expected to be an update of forecasts with no real substantive changes, there were some sobering numbers. According to the Office for National Statistics (ONS) – the rise in inflation to a 40-year high this year is expected to reduce real household disposable incomes on a per-person basis by 2.2 per cent in 2022-23 the biggest fall in living standards in any single financial year since ONS records began in 1956-57.
Although disposable income is facing a strong headwind in the short term, unemployment in the UK is still expected to fall in every year of the OBR’s forecast, indicating a degree of underlying strength in the economy.
National insurance threshold change
Back in September 2021, the Government unveiled plans to overhaul the UK’s social care system and help tackle the NHS backlog. This is to be funded by a temporary increase of 1.25% in national insurance from April 2022; before introducing a separate levy of 1.25% from April 2023. Many MPs had been pushing for this tax rise to be cancelled or delayed.
Instead, the Chancellor announced an increase of £3,000 in the national insurance threshold to £12,570 from July. This means that those earning £12,570 will not pay any income tax or national insurance from the summer. This will take some of the lowest earners out of paying these taxes altogether. However, they will feel the full impact of the tax rise for the next three months.
From April, self-employed individuals will not pay Class 2 national insurance on profits between the small profits’ threshold and lower profits limit, meaning lower-earning self-employed can keep more of their earnings whilst continuing to build up national insurance credits.
Dividend tax increase
As announced last September, dividend tax rates will increase by 1.25% from April 2022. Rates will rise to 8.75%, 33.75% and 39.35% for basic, higher and additional rates. The dividend trust rate will also increase to 39.35%. The tax-free dividend allowance of £2,000 will remain.
5p fuel duty cut
For only the second time in 20 years, fuel duty will be cut by 5p per litre, the largest reduction in history. This will last for 12 months and take effect from 6pm tonight.
The RAC calculates that this will reduce the cost of filling a typical family car by £3.30.
Homeowners green boost with VAT cut
With rising energy costs, it is now more important for homeowners to make sure their homes are as energy efficient as possible.
For the next five years, homeowners will pay 0% VAT on energy saving materials, such as solar panels or heat pumps to help improve energy efficiency and reduce heating bills.
R&D tax relief
Pledging to nurture a culture of innovation in the UK, the chancellor will reform tax credits on research and development to reward companies. Costs associated with R&D, such as cloud computing, will qualify for relief.
Living wage increase
The National Living Wage is rising to £9.50/hour as announced in the Autumn Budget. This is an increase of over £1,000 to the annual earnings of a full-time worker.
No help for those dependent on benefits
What was missing was anything for people on Universal Credit or the state pension, which is only going up by 3.1% this month when inflation is forecast to be around 8%.
ISA and pensions savings
The annual subscription limits for ISAs and pensions will be maintained at £20,000 and £40,000 respectively for 2022-23. It remains important to make full use of available allowances.
A further £10bn is set to be raised by the UK from green gilts in in 2022-23, with transactions scheduled quarterly. Last year, the government launched the UK’s Green Financing Programme, having now raised £16.1bn through the sale of green gilts so far.
Rabbit in the hat
Chancellors often like to keep at least one big surprise up their sleeves. The chancellor said the UK’s basic rate of income tax would be cut from 20 per cent to 19 per cent — although not until 2024.
Although a positive, it’s precisely zero help to families struggling with the cost-of-living crisis now. Personal allowance and tax bands are also frozen up to April 2026, resulting in a steady increase in tax by ‘stealth’.
Keeping something in reserve
Measures announced by the chancellor today should help to alleviate some of the financial strain households and small businesses across the UK are currently facing. But the cost of living crisis is likely to get worse in the months to come.
The chancellor has banked a £50bn windfall in the public finances, there’s a very good chance he will need to use some of that in the Autumn Budget to help households further.