Against the backdrop of the continuing war in Ukraine, the chancellor delivered his spring statement at the end of March.
The war has contributed to nervousness in the global economy, with the Office for Budget Responsibility (OBR) saying that, “given the unfolding situation in Ukraine, there is unusually high uncertainty around the outlook”.
Disruptions in global supply chains and the Ukraine war have led the OBR to revise downwards their forecast for growth over the next five years. The OBR now forecasts GDP to rise by 3.8% in 2022, down from its 6% growth forecast in last October’s economic and fiscal outlook.
The OBR then forecasts growth of 1.8% in 2023, 2.1% in 2024, 1.8% in 2025, and 1.7% in 2026.
Another current factor underpinning Rishi Sunak’s speech is rising inflation. According to the Office for National Statistics (ONS), inflation in March reached a 30-year high of 7%.
As the economic consequences of the Ukraine war continue to unfold, the OBR expects inflation to average 7.4% this year, with a further rise in energy costs in the autumn set to contribute further to the so-called “cost of living crisis”.
So, what does the spring statement mean for you and your clients? Here’s a summary.
Fuel duty to be cut by 5p a litre until March 2023
The chancellor announced that he would tackle spiralling petrol and diesel prices by cutting fuel duty. It’s only the second time the duty has been cut in 20 years.
Sunak reduced the tax burden by 5p a litre, calling it the “biggest cut to all fuel duty rates ever”. The reduction in duty came into effect on 23 March and will last until March 2023.
According to the Treasury, this cut represents a saving worth around £100 for the average car driver, £200 for the average van driver, and £1,500 for the average haulier, when compared with uprating fuel duty in 2022/23.
Cut in VAT on home energy installation
To further encourage households to invest in energy-efficient measures, and to keep energy costs down, Sunak announced an extension to the VAT relief available for the installation of energy-saving materials.
Taking advantage of Brexit freedoms, the chancellor announced that homeowners looking to install measures such as heat pumps or solar panels won’t pay any VAT (except for households in Northern Ireland).
The Treasury say that a typical family having rooftop solar panels installed will save more than £1,000 in total on installation, and then £300 a year on their energy bills.
A three-step tax plan for the rest of the parliament
Calling it “a principled approach to cutting taxes”, the chancellor outlined the “direction of travel” of how he intends to reduce the tax burden responsibly and sustainably over the remainder of this parliament.
Sunak outlined the three key steps of his plan.
1. Help families with the cost of living
As the NHS rebounds from the Covid-19 pandemic, and with the challenges facing the social care sector, Sunak argued that it was only right that the rise in National Insurance contributions (NICs) – which will become the new Health and Social Care Levy in 2023 – stays.
Read about what the NICs and Dividend Tax hike will mean for your clients.
However, to reduce the tax burden on working people, the chancellor raised the National Insurance Primary Threshold and Lower Profits Limit, for employees and the self-employed respectively, from £9,880 to £12,570. This equalises the NICs and Income Tax threshold from July 2022.
This means that individuals will be able to earn up to £12,570 a year without paying any Income Tax or NICs.
While the increase will benefit almost 30 million people, someone with an annual salary of £60,000 will pay an additional £232 in NICs, taking into account both the threshold and the rate rise. The table below shows what the two changes mean for different salaries.
Source: the Guardian
The reason given for delaying the cut until July is to enable businesses to update their payroll software to account for the change.
Sunak also announced that, from April, self-employed individuals with profits between the Small Profits Threshold and Lower Profits Limit will not pay Class 2 NICs. So, lower-earning self-employed people will be able to keep more of what they earn while continuing to build up NI credits.
2. Create conditions for higher growth
As the chancellor set out at the Mais Lecture in February, the government considers that a new culture of enterprise is essential to drive growth through higher productivity.
So, Sunak announced a range of measures that could affect your business-owner clients. These include:
- An extension of the temporary £1 million level of the Annual Investment Allowance until 31 March 2023.
- A freeze to the business rates multiplier in 2022/23.
- A new temporary 50% relief in Business Rates for eligible retail, hospitality, and leisure businesses. It means the average pub, with a rateable value of £21,000, will save £5,200. The average convenience store, with a rateable value of £28,500, will save £7,000.
- A business rates exemption for eligible plant and machinery used in onsite renewable energy generation and storage from April 2022 (brought forward from 2023).
- R&D relief on all cloud-computing costs associated with R&D, including storage, from April 2023.
- An increase in the Employment Allowance to £5,000. This means eligible employers will be able to reduce their employer NICs bills by up to £5,000 a year, and that businesses will be able to employ four full-time employees on the National Living Wage without paying employer NICs.
Sunak also announced he would be consulting on a range of measures to reform business taxes and reliefs ahead of the autumn Budget.
3. Proceeds of growth shared fairly
While arguing that it would be “irresponsible” to cut taxes in the current environment, Sunak reaffirmed his commitment to reducing the tax burden in the coming years.
He said that, by 2024, the OBR expects inflation to be back under control, debt to be falling sustainably, and for the economy to be growing.
Assuming that the government will have met its own fiscal principles, the chancellor committed to reducing the basic rate of Income Tax from 20% to 19% from April 2024.
This is a tax cut of more than £5 billion a year and represents the first cut in the basic rate of Income Tax in 16 years.
Interestingly, with more than 1,000 tax reliefs and allowances available, the government have also committed to considering tax reform “to better support a fair, efficient, simple, and sustainable tax system”.
Watch this space!
Get in touch
If you have any questions about how the spring statement will affect your clients, or if you have clients who would benefit from financial planning, please get in touch.
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Please note
All information is from HM Treasury Spring Statement 2022 document.
The content of this spring statement 2022 summary is intended for general information purposes only. The content should not be relied upon in its entirety and shall not be deemed to be or constitute advice.
While we believe this interpretation to be correct, it cannot be guaranteed, and Sovereign cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained within this summary. Please obtain professional advice before entering into or altering any new arrangement.
