Rishi Sunak has just delivered his Spring Statement to the House of Commons, detailing his economic plans for the UK. He heralded record “tax cuts” but are tax cuts really coming?
Amid the cost of living crisis, there was a lot of speculation about the this Statement. Many were hoping Chancellor Rishi Sunak would “pull a rabbit out of the hat” and offer meaningful support to those struggling.
The Conservatives are claiming to have done that. While the opposition Labour Party have been very critical.
So, will you actually benefit from tax cuts? Read on to find out…
In this post I’ll cover:
- Will there be tax cuts?
- Energy bills support
- Aligning National Insurance and income tax thresholds
- Income tax reduction
- The basic maths
Will there be tax cuts?
There will be some tax cuts. But, it is not as simple as that sadly.
The government is determined to be seen as a tax cutting party, probably because it’s an easy vote winner.
While the Spring Statement was full of promises to reduce most people’s tax burden, there are fears the majority will still be worse off.
Certain taxes will be cut, but some of these simply mitigate previous increase. This means a lot of people won’t notice a difference in their monthly take home pay.
Energy bills support
The government announced three measures to help with the energy and fuel bill crisis.
- Fuel duty will be cut by 5p per litre until March 2023.
This will reduce a low-income family’s petrol costs by around £2 a month. This relief is wroth around £5 billion, but the majority of people won’t see a huge difference and will still be paying far more for petrol than they were even a few months ago.
- Zero VAT on energy efficient improvements, like solar panels.
This tax cut will last for five years. For those hoping to make their homes more energy efficient, this will likely be a welcomed move. However, it is not going to make a difference for those struggling to pay their bills. Home improvements will certainly be out of budget for most people given the rise in bills!
This relief is also not yet available in Northern Ireland due to Brexit-related legislation. The Chancellor indicated the government is working on finding a solution to this.
- Household support fund for the most vulnerable doubled with an extra £500 million added to the pot.
Considering there was nothing else in the Budget that even acknowledged those on Universal Credit or State Pensions, this is a very meagre sum. Many of these individuals are already struggling significantly and will have been hoping for much more support.
Aligning National Insurance and income tax thresholds
This move is slightly strange.
In many ways, aligning the National Insurance Contributions (NICs) and income tax thresholds makes a lot of sense and helps simplify taxation.
However, the reasons for doing so are where the confusion comes in.
The government is sticking with its plan of raising NICs by 1.25 percentage points to help raise funds for health and social care. The £2,690 increase in the NIC threshold is designed to mitigate the impact of this hike for lower earners.
The breakeven point is around £35,000. So, those earning less than this will pay less NIC than before, while those earning above £35,000 will pay more each year.
Rishi Sunak hailed this as a £6 billion tax cut for “working people”, stressing around 70% of workers will have their tax cut by more than they would have paid under the new levy.
However, it’s worth noting in London the average salary is £39,700 – and the cost of living reflects that. Therefore, many in the Capital who are less well off than the average, will still be paying more national insurance.
Income tax reduction
By the end of the Parliament (2024), Rishi Sunak said he will reduce the basic rate of Income Tax from 20 percent to 19 percent.
This is clearly a tax cut but with no set implementation date, many will believe it when they see it. The economic outlook is very uncertain at the moment, so while the pledge may be well intentioned, many money experts remain sceptical.
The basic maths
So will you actually see tax cuts after the Spring Statement?
It will depend on how much you earn. As previously mentioned, if you earn less than £35,000 a year, you will see a reduction in the amount of NIC you pay from July. The exact reduction will depend on your salary.
Those earning over £35,000 will likely actually see their tax bill increase despite the tax cuts announced in this Statement. That is because the previously announced raises are larger for these earners than the cuts announced today.
Everyone (who drives!) can take advantage of the cut in fuel duty, which although won’t equate to a huge sum for most people, may help a bit.
If the reduction of the basic income tax rate does come to fruition, this will have a significant impact.
Someone earning £35,000 will pay £227.50 less in income tax a year – a reduction from £4,450 to £4,227.50.
According to the Office for Budget Responsibility (OBR), this Statement cut back about 1/6 of all tax increases.
This will have an impact, but – especially with inflation forecast to average 7.8% this year – most people will still feel much worse off than they did a few months ago.
Shadow Chancellor Rachel Reeves’ words seem apt. “Perhaps the Chancellor’s reality is just different to yours.”
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