The Chancellor’s Spring Statement was not trailed as a Budget but rather an opportunity to set the scene for future plans and to some extent it lived up to expectations. However, Rishi Sunak’s approach was unusual - setting a ‘Tax Plan’ for the rest of Parliament as well as some vote winning forward-looking announcements alongside some immediate measures to help with the cost-of-living crisis. The overall message is however still clear – anticipated stability for personal taxes for the remainder of this Parliament with the possible carrot of a 19 percent basic income tax rate if all goes to plan.
So the big personal tax announcement of the Spring Statement is the alignment of the National Insurance starting band threshold with that for income tax . This means that employees and the self-employed will need to earn above £12,570 before they will pay either income tax or National Insurance, a measure that the Treasury say will save a typical employee over £330 a year and will cost in excess of £6 billion to implement. Certainly not an insubstantial tax cut. There are some practical difficulties as employers and software companies need time to implement these changes so they will not actually come into effect until July 2022 – I suspect one of the downsides of having a Spring Statement less than 2 weeks before the start of the new tax year is that it does not give much time to implement any changes announced.
At the end of the speech, the ‘rabbit out of the hat’ was the announcement that the basic rate income tax rate will be reduced from 20 percent to 19 percent from April 2024. This will be the lowest basic rate since the early 1960’s in the UK and has been stated to cost over £5 billion per year. In the Chancellor’s statement he did put in some caveats to the circumstances when such a tax cut would be introduced quoting the OBR expecting inflation to be back under control, debt falling sustainably and the economy growing. It is a fairly bold decision to make such an announcement given our current geopolitical backdrop and one that I expect would be very embarrassing to reverse. The timing of the tax cut is unlikely to be a coincidence either. Having said this, you do have to remember that the 1.25 percent increase in NIC rates from April 2022 to fund Health & Social Care actually means that those with earned income at the basic rate will actually still be paying 0.25 percent more in 2024 than they are in the current tax year. So this is a tax cut for the pensioners and landlords really.
It will be welcomed by charities that the impact on gift aid will be mitigated until 2027 with 20 percent being retained until that time. At a time when charities are financially challenged, this is good news but for some 2027 will come around soon enough. I suspect that charities are going to need support as they work through what potentially losing 1 percent of their donations will mean for them.
I was excited at the thought of a ‘Tax Plan’ as a clear direction of travel in tax policy and stability is a great environment for individuals and families to make long term plans. The ‘Tax Plan’ itself did not contain much more detail than the announcements in the Chancellor’s speech although there is reference to reform of the tax system.
In particular, alongside tax cuts, the Government wants to make the tax system simpler, fairer and more efficient such as looking at the large number of tax reliefs and allowances that we have in our tax system. The Office of Tax Simplification started this review in 2010 and published their recommendations back in 2011 so this might be an opportunity to dust this off. One of the recommendations was a review of inheritance tax as the conclusion was that it was difficult to review the reliefs in isolation. The OTS completed their review of inheritance tax in 2019 and although the Chancellor previously decided not to take forward any recommendations, he may choose to consider again the recommended reforms to inheritance tax reliefs – perhaps one to keep on the radar.
The ‘Tax Plan’ is silent on capital taxes more generally so no comments on inheritance tax, capital gains tax or indeed a wealth tax. There is also not much detail on how the income tax cut is being funded although the Chancellor did say in his speech that it had been fully costed and paid for.
With the changes to the National Insurance threshold, the introduction of the Health & Social Care Levy and 1.25 percent increase in the dividend rate which are going ahead as planned as well as the cut to the basic rate of income tax, there continues to be a distortion between the taxation of earned and unearned income. Pensioners and landlords will benefit in full from the basic rate income tax cut whereas those with earned income will not although pensioners with an investment portfolio will see their dividend income impacted. This brings back the wider questions of whether the UK tax system should tax effort or ownership, work or wealth. The Chancellor’s vision of “people, capital and ideas” looks to be trying to adjust the balance of the taxation of effort, but the question remains on how he will tax ownership. It is difficult in a fairer tax system to ignore the taxation of wealth too.