New Chancellor unwinds mini budget

Early on Monday 17 October, the Treasury issued a press release that nobody was expecting: the (latest) Chancellor, Jeremy Hunt, was effectively going to reveal most of the elements of the Medium-Term Fiscal Plan later in the day, rather than waiting two weeks for Halloween. Such a rushed release pointed to government concern that the sacking of Kwasi Kwarteng and dropping of corporation tax cuts would not be enough to soothe the markets when they opened on Monday morning. Looming in the background was last Friday’s removal of gilts market support from the Bank of England.

The Chancellor’s morning media statement, to be followed by an announcement in the House of Commons in the afternoon, reversed much of what was left of Kwasi Kwarteng’s ‘fiscal event’.  The headlines of his short statement were:

• The basic rate of income tax will remain at 20%. This was due to drop to 19% in April 2023, one year earlier than previously planned. The drop has been scrapped entirely until the economic conditions allow for any cuts.
• A review of the energy support scheme will commence, but the cap which was previously promised for 24 months will only be in place until April 2023. With the cap increasing on 1st October 2022 from the previous cap of around £1,600 a year for an average household, it is likely to bring increased uncertainty for those impacted. The Chancellor stated that “The objective of the review is to design a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need.” This implies a more targeted approach in the future of support in this area.
• Dividend tax will not be reducing back to the pre-April 2022 rates in April 2023, remaining at 8.75%, 33.75% and 39.35%. This again will be until it is deemed possible to review and reduce due to economic conditions.
• The IR35 rules remain, just as they did in the mini budget. However, the u-turn in this area means that again the responsibility for monitoring compliance with them will fall to the businesses and not revert back to the individuals. Significant work had been undertaken at the expense of industry to implement these changes and so not changing the focus of these now will mean money hasn’t been wasted.
• The freezing of alcohol duty from February 2023 for a year has also been scrapped which is worth approximately £600 million a year. However, other reforms in this area will remain as will the review in due course.
• The introduction of a new VAT-free shopping scheme for non-UK visitors to Great Britain will not be proceeding saving around £2 billion a year.
• The Health and Social Care levyreduction that has already progressed through parliament and so the reduction in National Insurance by 1.25% will still come into being in November, with the scrapping of the Health and Social Care Levy in April 2023.
• A confirmation of Liz Truss’s announcement of the reintroduction of the increase in Corporation tax from 19% to 25% for those companies with profits in excess of £250,000 and the slide scale for those with profits over £50,000.

Add today’s measures to the reversals on corporation tax and additional rate tax and £32bn of Kwasi Kwarteng’s £45bn extra borrowing in 2026/27 has now been removed (see table below). However, that is not the full story, given that the Treasury’s September numbers took no account of what has happened to the UK economy since the Office for Budget Responsibility (OBR) last published an Economic and Fiscal Outlook (EFO) in March.

The recent number crunching by the Institute for Fiscal Studies put the black hole in 2026/27 at £62bn.With today’s measures that comes down to about £32bn. That may be optimistic – weekend rumours pointed to the OBR’s starting figure being £10bn higher than that of the IFS projection.

COMMENT

The Chancellor has acted swiftly to calm markets, but how long the stability lasts remains to be seen –a fortnight remains until the OBR’s judgement arrives. There is also a question mark over whether the government can get all its measures through – the EPG reworking could be particularly difficult. And that is before the issue of benefit increases is considered.

The changes are unlikely to have any immediate impact to take home pay over the next few months because changes were not already in force. Nor should they impact heavily on financial plans in place. However, as with any changes it is good to review and understand any impact on financial plans both now and towards the end of the tax year.

Our planning software had included the additional 1.25% national insurance and dividend tax since it was announced and will now reverse the income tax change.