After the UK had been crying out for help, on 23rd September 2022, the new chancellor Kwasi Kwarteng said that “help is indeed coming” in the mini-budget announced in the commons.
With the biggest tax cut since 1972, we take a deeper dive into the (not-so-mini) budget announcement and the key areas which may ease the strain caused by the rising cost of living.
Income tax
The planned cut to the basic income tax rate from 20% to 19% has been brought forward by a year. Effective from April 2023, this cut will benefit 31 million people, saving them on average £170 a year.
But even more surprising, the chancellor pledged to abolish the 45% additional rate for those earning over £150,000. Instead, from April 2023, the top tax rate will return to 40% for earnings over £50,270.
Dividend tax rates will also be cut by 1.25% to 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
However, these changes won’t apply in Scotland, where the income tax bands differ.
Savings allowance
Because of the abolition of additional rate tax, savers will also see the benefit, as everyone will now qualify for the annual tax-free allowance on savings interest (Personal Savings Allowance). Previously, basic-rate taxpayers would receive £1,000 tax-free, higher-rate taxpayers £500 and additional-rate taxpayers £0. However, all those earning over £50,270 will receive £500 of savings interest tax-free when the changes come into place.
Corporation tax
Corporation tax was set to rise to 25% next year. However, it will remain at 19%, which will be music to many business owners’ ears. This is the lowest corporation tax rate in the G20, and the Kwasi Kwarteng claims it will “plough almost £19bn a year back into the economy”.
Stamp duty
Previously, the government used stamp duty holidays to encourage activity in the housing market. However, in this mini-budget, the chancellor immediately called for a permanent stamp duty cut.
In England, with immediate effect, the price at which stamp duty is paid was doubled from £125,000 to £250,000, and the rates are now as follows:
- 0% – £0 – £250,000
- 5% – £250,000 – £925,000
- 10% – £925,000 – £1,500,000
- 12% £1,500,000 +
For first-time buyers, the rate at which stamp duty begins to be charged has also been raised from £300,000 to £425,000.
You can use the government’s Stamp Duty Land Tax calculator to work out how much tax you will now pay on a property purchase.
Please note in Scotland and Wales, the tax rates on property purchases differ. You can find more information on Scottish rates here and Welsh rates here.
National Insurance
As announced yesterday, the government has done a complete U-turn on the increase in National Insurance. The 1.25% uplift to National Insurance will be reversed from 6th November, and the government have axed the health and social care levy.
First introduced in April by Rishi Sunak, the change pledged by Liz Truss in the leadership race will save 28 million people an average of £330 per year. Those earning over £12,570 per year will see the benefit of the reversal, and the more you earn, the more you will save. Let’s look at a couple of examples:
- Someone earning £20,000 will save £93 per year
- Someone earning £100,000 will save £1,093 per year
Energy prices
Nothing new was announced in the mini-budget. However, the chancellor blamed Vladimir Putin for the soaring energy prices household face.
The chancellor confirmed three key steps to combat the energy crisis: the energy price guarantee, the same price cap for businesses, and The Bank of England’s delivery of an energy markets financing scheme.
The Energy Price Guarantee caps the unit price for gas and electricity, limiting a typical household to an average of £2,500 a year on their energy bill, for the next two years. The government also reaffirmed their commitment to the £400 energy bill support scheme starting in October.
The Energy Markets Financing Scheme will provide loans to energy suppliers to help combat the effect of discounting business energy bills.
The chancellor stated that these planned actions would cost the government an estimated £60bn over the next 6 months. However, they “expect the cost to come down as new, long-term energy contracts are negotiated”.
What impact will the mini-budget have on the economy?
With the announcements today, the chancellor hopes to turn a “vicious cycle of stagnation into a virtuous cycle of growth”, targeting 2.5% per year.
Although the government refuses to call this a budget, today’s announcements intend to boost the economy and encourage activity.
What impact will the mini-budget have on investments?
In response to the budget, the FTSE 100 has seen a drop. However, the chancellor has said “the markets will do what they will”.
Krupesh Kotecha, Investment Director, and Financial Planner at Balance: Wealth Planning, provides his thoughts: “Today’s budget has seen the Pound drop to a 37-year low as the unfunded tax cuts have shaken the market. The FTSE 100 dropped to a two-month low as the measures in the budget did not reduce the risk of a potential recession.
The one bright spot saw the property sector stocks rising 1% due to the stamp duty cut. However, this sector has been one of the worst performing this year as rising rates caused worries about affordability and a slowdown in house sales.
Bonds continue to be particularly vulnerable to a rising interest rate environment. In recent decades bonds have protected against periods of stock market turmoil; however, inflation has a detrimental impact on both sectors
However, with a well diversified portfolio and a robust financial plan in place, most investors should be able to weather these storms even if there are further trials ahead. Moreover, we remain confident that the market will continue to reward investors who remain patient and disciplined.”
Want to know more?
Download our guide on the 2022 mini-budget.
Your financial plan following the mini-budget
The not-so-mini budget will have a significant impact on people financially. If you have any questions about the difference the above changes will make to your financial plan or situation, our expert team is on hand to help, so please get in touch with us.
