It was no sooner announced than it was gone. Chancellor Kwasi Kwarteng’s decision to scrap the 45p rate of income tax for higher earners was withdrawn on Monday after Kwarteng said it had become "a massive distraction on what was a strong package".
But many of us are confused about what will now happen to our finances after the mini-Budget – what will stay and what will go.
Here’s a rundown of what to expect – barring any more U-turns.
What has happened?
The ‘mini-Budget’ or fiscal event on 23rd September brought in a number of financial changes for households across the UK.
These included:
- A cut in the basic rate of income tax from 20 per cent to 19 per cent, from April 2023
The abolition of the 45p in a pound additional rate for taxpayers earning over £150,000 – also from April 2023 - The abolition of the 1.25p in the pound increase in national insurance to pay for health and social care from 6th November
- The abolition of the 1.25p in the pound increase in dividend tax
- A doubling in the threshold for paying stamp duty from £125,000 to £250,000
However, the Government did not publish any data for how this would be paid for and there was criticism – including from within the Conservative Party – at the cost of the cuts and whether they would help the people who needed it most.
Former Tory minister Michael Gove called it “a display of the wrong values”.1
Following a fall in the value of the pound and the stock market, Kwarteng announced that the additional rate tax would remain.
What will happen now?
The other aspects of the package are likely to go ahead, with the forecasts on how much they will cost possibly being brought forward.2
How much will I gain?
Government calculations show that higher rate taxpayers will save more than lower earners.
- Reversing the national insurance rise will save £330 a year for the average taxpayer. High earners will benefit the most from this
- The income tax cut would save £167 for someone earning £20,000 a year, rising to £1,469 for those on £100,000 a year
However, research from thinktank the IFS (Institute for Fiscal Studies) suggests that plans to freeze the tax thresholds – the level you earn before the next rate of tax kicks in – mean we will be worse off even in a tax cutting budget.
Analysis from the thinktank shows that for every £1 consumers will gain in savings from new tax cutting measures, they will lose £2 from tax freezes and policy rollouts. Those in every earnings bracket will find the losses outweigh the gains.3
What about the economy?
Those of us with savings, investments and borrowings will also be affected by the strength, or otherwise, of the economy.
This will depend on a number of factors, including how quickly we return to economic growth and how large our debt is. If the pound is weaker, it costs us more to service government debt, which can affect growth.
Any rise in interest rates, as expected by the market as a mechanism to control inflation, will increase the value of savings but mean that borrowing is more expensive.
What can I do about this?
Times of economic volatility are difficult as an investor. The most important thing is to ensure that you do not panic and sell everything at a time when the stock market is down. Instead, there may be opportunities in the current volatility.
Frozen tax rates illustrate the importance of planning sensibly, using strategies such as salary sacrifice and investing into your pension to make the most of tax breaks and ensure that you don’t pay higher thresholds of income tax if it is not necessary.
Paying down borrowing becomes more sensible as rates rise, while fixing mortgage debt at lower rates can help shield you from rising payments. Many mortgage products were suddenly withdrawn during the turbulence surrounding the mini budget. Some are returning now but many are more expensive so act quickly if you need to remortgage.
Finally, with interest rates rising, there are better savings rates available than before. If you have a lot of money in savings, using structures such as ISAs is important as with rates high you could easily hit the £500 (for higher rate taxpayers) or £1000 figure that you can receive in savings interest before paying tax on savings outside of your ISA.
See Moneyfacts for the best-paying ISA accounts and speak to your adviser to find out more about what to do with investments and tax efficient saving.
12th October 2022
1 https://www.bbc.co.uk/news/uk-63114279
2 https://www.bbc.co.uk/news/uk-politics-63130854
3 https://ifs.org.uk/publications/reforms-roll-outs-and-freezes-tax-and-benefit-system