Make work pay, to deliver more opportunity and more prosperity!
The Chancellor entered today’s Budget Statement not in the position he wanted to be in, the mood music having changed from his November Statement.
Many had hoped that this Spring Statement would be generous in tax breaks, boosting the Conservative Party’s election hopes. The date for the Spring Statement was announced very early (and missed by many) on Wednesday 27 December, for today’s date, an early date in March (normally being the middle to end of March). Many believed that the decision for the early announcement and date was election driven, based on forecasts provided for the Autumn Statement by the Office for Budget Responsibility (“OBR”), the Government fiscal watchdog, forecasting the Government to have as much as £30bn to spend in this Statement, due to in the main lower Government borrowing costs. As a result, starting over the Christmas break and in early January, stories were circulating regarding a cut to basic rate income tax, abolishing inheritance tax, reducing property stamp duty etc.
However, the mood music changed a couple of weeks ago, a combination of a rise in the cost of borrowing, weakening economic outlook and lower tax receipts because of falling inflation, resulted in the fiscal headroom being revised down to only about £13bn, £6bn of which it appears to be held in reserve by the Government, resulting in not much to give away!
In addition, The IMF (together with other fiscal/economist groups) had recently warned against cutting taxes.
There were some tax cuts, most of which were announced/leaked in advance of the Statement, together with a couple of surprises. However, there were some tax increases, including reliefs abolished to help fund the tax costs and a couple of ideas being taken from the Labour Party.
Although there were some tax cuts, the reality is that millions of taxpayers are paying more tax due to allowances and thresholds being frozen until 2028, following the decision in March 2021 to freeze thresholds from April 2022. This was originally meant to last until 2026, but a year later extended to 2028. The result of this freeze is that as salaries rise, more people move within the taxable income brackets, what is known as fiscal drag. This has resulted in bringing more people who were previously paying no tax (as total income below the personal allowance) paying basic rate tax and there being more higher rate taxpayers. In addition, the additional income tax rate threshold, the level you pay the highest rate of income tax (45p) was reduced from £150,000, to £125,140.
The main tax cut announcement was the reduction in National Insurance Contributions (“NIC”) by 2p, adding to the cut announced in November, (more details can be found in our main summary). Adding the two NIC announcements across the two speeches, an average worker will save £900 per year. A saving for the employed and the self-employed, but also less costly for Government, as the NIC cut costs £4.5bn, as opposed to an income tax cut of 2p, which would cost £13.7bn.
Leaving income tax rates and thresholds unchanged results in many taxpayers not benefiting from today’s statement, as only those of working age pay NIC (the Chancellor making work pay). Also, higher earners pay a reduced rate of 2% over the 40p tax threshold of £50,271, limiting The Treasury’s cost of providing compared with a blanket income tax cut
What would have generated tax savings for individuals, is increasing personal allowance and tax band thresholds, even if realigned to inflation.
In respect of business, in particular small to medium sized enterprises, the core Harbour Key client, there was very little if anything in the Statement. The only real point of interest being the increase in the VAT threshold from £85,000 to £90,000. The VAT threshold hampers business growth, acting as a cliff edge for some small businesses, preventing them from expanding as they actively restrict turnover to remain beneath the compulsory registration threshold. However, £90,000 is not a significant increase, as it has not been changed for seven years.
The one big surprise announced that was not leaked pre-Statement is a reduction in the main rate of Capital Gains Tax on residential property disposals. From 6April 2024 the main rate will be reduced from 28% to 24%. The abolishment of the Furnished Holiday Letting rules announced today, which will result in this type of rental being treated for tax as a normal buy-to let and mean the loss of many tax advantages (see our summary), may mean that holiday homes will now be sold. If you are in the process of selling a property, hold off exchanging contracts (the tax point) until after 6 April 2024.
Of course we are likely to have change of Government, so have to see how much is implemented before an election, or is changed post election!
More detail on the tax changes announced in the Statement can be found HERE.
