Chancellor Kwasi Kwarteng has delivered his mini-budget with wide ranging tax cuts. But their effects will be felt very differently by different people. Image: HM Tresury
Liz Truss’ new government has announced an emergency mini-budget to tackle the rising cost of living crisis.
Presented as part of new Chancellor Kwasi Kwarteng’s “The Growth Plan”, the duo are aiming to boost the economy by cutting taxes.
This is an ideological shift in how the government runs the country’s economy, one that Kwarteng was keen to highlight, from the spending of the Johnson years, towards a model of cutting taxes and boosting the rich that many have said is akin to the Thatcher and Reagan years of so-called trickle-down economics.
Shadow Chancellor Rachel Reeves was more direct: “The Conservatives cannot solve the cost of living crisis. The Conservatives are the cost of living crisis, and our country cannot afford them any more.”
Overall, the tax cuts have been criticised for giving the least help to those who need it the most, while boosting the incomes of those already earning the most.
These tax cuts are expected to come at a price of £30bn to the public purse, according to the BBC.
Here’s how they will affect your bank balance.
If you’re unemployed or claiming universal credit
Would you like the good news or the bad news first? The good news is that if you’re earning under £12,576 a year you will continue to be exempt from paying national insurance, according to the government website. The threshold at which low earners must pay the tax was increased in July, and Kwarteng has confirmed this measure will stay in place, meaning the 2.2 million who became exempt from paying will remain so.
The bad news, therefore, is that Kwarteng’s cut to national insurance will not affect you at all – your finances will not be improved by the measure.
The Joseph Rowntree Foundation believes the best way to get support to families according to their need would be to increase benefits as soon as possible to get people through the winter. There has been no response from the government to this call.
“Hard-pressed families can’t afford to wait to see if the benefits of tax cuts trickle down, they need help now” says the charity.
When it comes to heating your home this winter, Truss has already announced a cap on energy bills, meaning average household energy costs will stay at £2,500 a month from October until 2024 when the price was due to rise sharply.
However, the money (Kwarteng says it’ll cost £60bn over the next six months) stumped up by the government to subsidise payments to the energy companies will have to be paid back somehow, someday.
The previous government, under Boris Johnson, brought in cost of living payments of £650 for people on low income benefits and tax credits. Disabled people were also promised a one-off payment of £150 to tackle spiralling energy costs this autumn. Both of these initiatives still stand.
The reversal of the national insurance increase from November will see the poorest in society gain just 63p a month, according to analysis from the Institute for Fiscal Studies (IFS). So if your average income is the minimum amount to start paying NI, you’ll be roughly £7.60 better off over the year. Don’t spend it all at once.
If you’re earning a salary of £20,000, you will hold on to an extra £93 of your pay, and if it’s £30,000 you’re on you’ll be keeping £218, according to BBC analysis. If you’re on £50,000, it’s an extra £468 each year.
For everyone earning under £50,000 you’ll be paying one per cent less income tax from next April, which is a positive. It’s not quite the five per cent income tax cut which people over £150,000 have received, but it’s something.
The stamp duty tax cut is likely to be welcomed by people looking to buy a home as it would reduce the cost of moving, says Rightmove’s property expert Tim Bannister.
If you already own a property you may want to put it on the market to make the most of rising demand. The purpose is chiefly to increase demand in the housing market but the problem many people face when it comes to finding a place to live is the lack of affordable housing. A stamp duty holiday is a demand-side solution to a supply-side problem when it comes to the housing crisis.
Bannister added: “If the cuts benefit homes in higher price brackets it would help those trading up more than it would help first-time buyers. With rising interest rates and cost of living it could be welcome to those looking for a bit more buffer to find the home they want, but if prices rise further then that extra money could quickly be swallowed up.”
It’s likely the stamp duty holiday may elevate prices further at a time when they are currently already out of reach for many. Analysis from Neal Hudson, a housing expert for Built Place, found house prices were overvalued by 17 per cent in July based on Office for National Statistics and Bank of England figures.
Hudson believes the stamp duty holiday is likely to push homes away from first-time buyers and into the hands of the wealthy.
If you’re a business owner
Michelle Ovens CBE, founder, Small Business Britain said the cut to national insurance would “no doubt be received positively by business owners across the country (by) providing a boost that will go some way to help the many small firms out there struggling with cash flow.”
Next year’s planned increase in corporation tax – the tax companies have to pay on their income – has also been scrapped. The rate was due to rise from 19 per cent to 25 per cent, in April 2023. Again, Kwarteng says this tax cut will encourage investment in the British economy.
Newly established Investment Zones will offer “generous, targeted and time-limited tax cuts” to businesses owners. Under Kwarteng’s “The Growth Plan” this brand-new initiative hopes to encourage investment in new shopping centres, restaurants, apartments and offices. Though with less tax to pay, it is unclear what is stopping you transferring the savings into profit.
If you’re a high earner (£100,000 or £150,000 +)
If you’re earning above £100,000, we’ve got good news for you. You’ll benefit most from the national insurance reversal, says the IFS, keeping an extra £1,800 of your pay packet.
If you’re currently in the highest tax grouping, for people earning over £150,000 a year, even better. That tax band has been abolished entirely.
Where once people earning the most in society would be paying more back into it than the rest on top of their extraordinary earnings, that highest level begins at £50,000 from next April and has dropped from 45 per cent to 40 per cent.
Fantastic news to the bankers out there as we return to the days of unlimited bonuses. The government has confirmed that it is scrapping the cap to bankers’ bonus’, introduced in 2014 by the EU in response to the financial crash five years earlier which saw enormous payouts at a time when the government spent over £100billion to bail out the banking sector.
The rules meant that bankers couldn’t receive more than 100 per cent of their salary, or 200 per cent if shareholders agree, as a bonus. Bankers, rejoice! Those days of austerity are over.