As expected, Liz Truss’s newly-formed government has slashed taxes for individuals, businesses and house buyers.
But who stands to benefit the most?
UPDATE: For information on the latest mini-buget u-turn announcement, please read here.
And for the latest Autumn statement, find out more here.
“We’re at the beginning of a new era,” proclaimed new Chancellor Kwasi Kwarteng during his emergency Budget speech on Friday 23 September, suggesting a change in tack for the Conservative Party. And after revealing his fiscal measures, that claim is hard to challenge.
As promised by new Prime Minister Liz Truss during her Tory leadership campaign, the new government views slashing taxes as the best way to tackle the UK’s growing economic problems.
Shortly after Kwarteng unveiled his raft of new policies, Director of the Institute for Fiscal Studies, Paul Johnson, tweeted:
“£45 billion of tax cuts. This is biggest tax cutting event since 1972.”
Kwarteng said the reason for such drastic measures is to stimulate economic growth, tackle inflation, support businesses, and help households with the rising cost of living.
And as other economic events last week underlined, the government needs to act fast.
On Thursday, the Bank of England announced another 0.50 percentage point rise to interest rates to address the UK’s worst bout of inflation in four decades.
The base rate is now 2.25% - the seventh time it’s gone up since December 2021 and its highest point since 2008. The UK’s Central Bank also suggested the country may already be in recession.
On the same day, the pound sunk to its lowest level against the dollar since 1985, with a one in four chance the currencies could reach parity; quite astonishing given that fifteen years ago a pound could be exchanged for two dollars.
So, what taxes has the government cut?
In short, few of the main taxes have escaped Kwarteng’s axe.
Notable omissions include capital gains tax and inheritance tax, but as both were recently reviewed by the Office of Tax Simplification, they could face reforms at some point in the future.
Meanwhile, income tax, national insurance (NI), stamp duty and corporation tax were all subject to radical changes. Let’s take examine how the changes might affect you, and your business.
Income tax
What’s changing?
Kwarteng’s changes to income tax have raised more than a few eyebrows.
The basic rate of income tax is being cut by from 20% to 19% from April 2023. This measure was originally unveiled by Kwarteng’s predecessor, Rishi Sunak, earlier this year, but was due to take affect in 2024.
In a further, more controversial step, the additional rate of income tax, currently 45%, is being scrapped. This is applied to annual earnings which exceed £150,000. But from April, the current higher rate of income tax of 40% will apply to all income above £50,270.
Meanwhile, on Thursday the government announced April's 1.25 percentage point increase to dividend tax is being reversed. This will take effect from April 2023.
Who will this affect?
If your annual income is higher than £12,570 a year, regardless of whether you’re working or retired, you will benefit from the 1% cut to the basic rate of income tax. The Treasury calculates the average person will be £170 a year better off.
While the decision to scrap the 45% tax rate will benefit fewer of you, the impact on a personal level could be sizeable. Further figures from the Treasury found that from April, 660,000 people will gain by an average of £10,000 a year.
The change to dividend tax is expected to result in an average saving of £345 for dividend taxpayers.
National insurance
What’s changing?
A few weeks ago, Truss promised to reverse April’s NI hike and to scrap the forthcoming Health and Social Care Levy. And this promise has been fulfilled.
From 6 November, both employers and employees will pay 1.25 percentage points less in NI, giving a minor boost to both profits and pay packets.
The changes mean employees will pay NI at 12% on earnings between £12,570 and £50,270, and 2% on anything above, while the employer rate will revert to 13.80%.
Who will this affect?
It’s estimated that around 28 million of you will see an average of £330 extra in your pay packets, while 920,000 businesses will save an average of £10,000 a year.
However, how much you’ll actually benefit depends on either your personal income or business affairs.
For example, if you earn £20,000 a year you’ll see a £8 boost to your monthly pay packet from November, while if your salary is £50,000, you’ll be £39 a month better off.
Stamp Duty
What’s changing?
With the speed of interest rate rises causing significant uncertainty in the housing market, Kwarteng has shaken up stamp duty rates to make it cheaper for you to buy a property.
The threshold where no stamp duty is payable is rising from £125,000 to £250,000, meaning buyers can save up to £2,500.
If you’re buying a home for the first time the savings are even greater.
The current threshold of £300,000 is being increased to £425,000. This means that any home bought for this figure or less will be free of stamp duty.
The new rates apply with immediate effect.
Who will this affect?
This will benefit anyone buying a home. The government estimates this will exempt 200,000 homebuyers every year from paying any stamp duty.
However, if first-time buyers wish to benefit from the favourable rates, the property must be bought for £625,000 or less.
Some have voiced concerns that this will act as a catalyst for further house price growth.
You may recall the stamp duty holiday introduced by former Chancellor Sunak from July 2020 to 31 June 2021, which propelled house prices upwards.
The difference this time around is that interest rates are rising, with experts predicting they could hit 5% next year. This is likely to have a greater impact on house prices than the new stamp duty rates.
Corporation Tax
What’s changing?
Another one of Truss’s leadership campaign promises, the new Chancellor confirmed that April’s scheduled rise to corporation tax is being abandoned.
The current rate of 19% was set to rise to 25% on business profits exceeding £250,000 from 1 April. For profits between £50,000 and £250,000 a sliding scale was to be applied.
However, the flat rate of 19% will remain and be applied to business profits of all sizes.
Who will this affect?
The winners here are private limited companies with profits exceeding £50,000. The amount they will save on future profits could be sizeable.
For example, a business with profits of £1.25m in the 2023/24 tax year will save £60,000 in corporation tax as a result of Kwarteng’s U-turn.
A further boost to businesses came in the shape of the annual investment allowance, which is set to remain at £1 million instead of dropping to £200,000 as previously planned. This allowance provides 100% tax relief on plant and machinery purchases.
If your business is structured as a sole trader or partnership you pay income tax on your profits, and so won’t benefit here. You will, however, gain from the changes to income tax and NI.
Need to make more sense of it?
Whatever your level of wealth, the new Budget is likely to have an impact on your finances. To make more sense of what they might mean for you, your family, and your business, seeking professional advice can help.
You might be a business owner needing help streamlining your commercial affairs, a budding homeowner seeking to get a foot on the property ladder, or an individual looking at ways of sheltering your income or assets from tax.
Click on the link below to find an expert you can trust.
