Today – 23rd March – Chancellor, Rishi Sunak, delivered his Spring Statement (and mini budget). With pressure on him to help ease the cost of living crisis, and the impact of the ongoing conflict in the Ukraine, we take a look at today’s announcements.
Inflation has hit a 30-year high, reaching 6.2%, and is expected to increase further. And with wages and pensions lagging behind, the real-world situation is that the majority of Taxpayers are going to struggle without solid action from the Government.
Record-breaking fuel prices worldwide have been further exacerbated by the invasion of Russia and the subsequent sanctions against Russia – including Russian oil.
Fuel prices are contributing to the cost of living crisis, and as such fuel duty will be cut by 5p per litre – this will be effective from 6pm Wednesday 23rd March, and will continue for one year. This is expected to save the average family £100 over the year.
However historically significant this is, it will not cover the unprecedented price increases we’ve seen at the pumps!
Energy Efficient Improvements – VAT-free
For the next 5 years, energy efficient home improvements will be VAT-free. So solar panels, heat source pumps, insulation, etc… will be more affordable and will effectively reduce evergy bills.
VAT-free improvements will be very welcome by some, but the majority of Taxpayers will not be able to afford these energy efficiency upgrades regardless of a VAT cut.
National Insurance Threshold
70% of Taxpayers will benefit from an overall tax cut, taking the energy price cap into account, via an increase to the National Insurance income threshold.
The increase was expected to be £300, however The Chancellor announced it would be increased by £3000, bringing it in-line with the Income Tax threshold – from £9,500 to £12,570 from July 2022.
This will essentially create a tax cut of around £330 per year for most taxpayers, which will help to cover the increase in energy prices.
While this all sounds great it is important to note that the National Insurance rate is going to be increased from 12% to 13.25%. So while 70% of the population will pay less NI, 30% will pay more than previously.
“There are some interesting measures that have been announced by the chancellor today. But the figure that courses through all of this is that very high inflation. It affects everything – how much borrowing there is, the debt interest payments too – and the prediction of it reaching 9% by the end of the year is pretty extraordinary. Rishi Sunak has kept the National Insurance rise to pay for the NHS and social care – starting next month.
But he announced today that in July, after three months, half of that gets given back mainly to lower earners in the form of a higher National Insurance threshold. Then the rest of it goes back via a tax cut, but only if the conditions are met in his tax plan in a couple of years time.
Overall, it means he hasn’t had to reverse the National Insurance rise he had already announced and he continues to go big on being a “tax cutting chancellor”. But if you look at the OBR’s documents, he has only cut back about one sixth of all the taxes that have been raised since he came into No 11. You still have corporation tax going up, you still have NI going up in people’s pay packets this April, and you still have council tax going up.”
Faisal Islam, BBC Economics Editor
Economist Paul Johnson, director of the Institute for Fiscal Studies think tanks has told the BBC the measures announced today by the chancellor will feel like a “small beer” for people on the lowest incomes.
“The thing that was completely missing from this was anything for people on universal credit or state pension, that’s only going up by 3.1% next month, when inflation will probably be around 8% – so that’s going to be a big cut in living standards for those on the very lowest incomes.
The rest of what he’s done, if you put together what he did in February with what he announced today, it really is quite a big package, but unfortunately for him and for our living standards that’s undone by the fact we’ve got this big National insurance rise coming in as well.
So you put all of that together and there’s still going to be a lot of households that are significantly worse off over the next year. But what he has done this time round is reduce that impact for low and middle-earners.”
The Chancellor also pledged to cut Basic Rate Income Tax before the end of this parliament from 20% to 19%.
The Employment Allowance gives a £4,000 relief against smaller business’ NI payments. From April it will increase to £5000 per year.
So, there it is. It was a much shorter Statement than we expected considering the current cost of living crisis. Will these changes have enough impact to reverse the crisis? Doubtful.