Key take-aways from the Spring Statement 2022
The pressure was on the Chancellor in advance of the Spring Statement. Concerns have been growing about the cost of living crisis and how the planned tax increases would impact household budgets. It was widely expected that measures would be announced to ease the strain on UK household finances.
So did the statement deliver on these expectations? Here is a summary of the main changes, with some highlights on how they could affect you:
- The Office for Budget Responsibility (OBR) predicted that the economy would grow by 3.8% this year. As the October 2021 Budget forecast 6%, this indicates that growth is slowing. This follows growth of 7.5% over 2021.
- From 2023 to 2026, the annual rate of growth is predicted to be between 1.7% and 2.1%.
- It was suggested in the statement that the Ukraine crisis, and the sanctions imposed on Russia had a part to play in these figures. However the slowing of the economy was already predicted before the Russian invasion.
- Government borrowing levels are currently 5.4% of Gross Domestic Product (GDP), and are forecast to drop to 3.9%.
- The budget deficit is £127.8 billion in the 2021-22 tax year, and predicted to reduce to £99.1 billion in 2022/2023.
- The net debt owed by the public sector is expected to be 95.6% of GDP for 2021/2022, estimated to gradually fall to 83.1% by 2026/2027.
- The cost of servicing public debt is rising to £83 billion in the next financial year, which is the highest level on record.
- Predictions indicate that the economy and public finances are likely to worsen.
- The expected rate of inflation for this year is 7.4%.
- This is driven mainly by rising energy costs, although prices across the board are also likely to rise.
- A household support fund of £1 billion has been promised to help lower income families,, which is double the amount previously pledged.
- To ease financial pressures, fuel duty will be cut by 5p per litre for 12 months. This is the second cut to fuel duty in 20 years. This is expected to save motorists around £5 billion.
- Despite growing opposition, the proposed 1.25% increase in National Insurance Contributions is still going ahead.
- However, the threshold at which this starts being paid will rise to £12,570, in line with the income tax personal allowance.
- This is expected to result in an effective tax cut for 30 million people, saving them a total of £6 billion.
- Income tax is due to be reduced from 20% to 19% at the basic rate from 2024. This is the first income tax cut in 16 years.
- It is hoped that by the time the tax cuts take effect, that the economy will be back in growth mode and inflation under control.
- With the planned reduction in income tax, this means that basic rate pension tax relief will be cut to 19%.
- This will affect basic rate and non-taxpayers as they will receive a lower uplift in their contributions.
- Higher and additional rate taxpayers will not be affected as they will be able to claim the difference via self-assessment.
- Research and development tax credits will be increased to encourage innovation and productivity.
- Tax rates on business investments are expected to be cut following the Autumn Budget.
- The employment allowance for small businesses is increasing to £5,000, which will reduce tax bills by £1,000 for around half a million small firms.
- To encourage homeowners to invest in energy-efficient homes, the VAT rate on solar panels, heat pumps, and insulation will reduce to 0%.
What Was Not Covered?
- While there were some measures included to help with the cost of living crisis, it was widely felt that these could have gone further.
- The self-employed will not benefit from the rise in the National Insurance threshold, but will still pay the additional 1.25% on their contributions. Company directors will also still face an additional 1.25% tax on their dividends, with no reliefs added to soften the blow.
- Benefits will increase by 3.1%, but this represents a cut in real terms. As rising prices are skewed towards basic necessities such as energy and food, lower income households could see their costs increase by as much as 10%.
- While motorists and homeowners may benefit from the reduction in fuel duty and VAT, renters and those reliant on public transport are unlikely to see any savings.
There is no denying that this could be a difficult year, and the Chancellor acknowledged this.
Clearly, a reduction in the price of fuel will be welcome across many sections of society. However, there was very little announced that will have a real impact on households during the coming months. The rise in the National Insurance threshold may offset the rate increase for employees earning under £35,000, but this is likely to be eclipsed by the spiralling cost of living.
Keen to avoid a doom and gloom statement, the Chancellor has announced tax cuts. However, it is unclear whether the future date of these plans is down to genuine optimism about the economy, or an effort to reassure the public that better news is around the corner.
For further information or advice please contact one of our Wealth Managers or call us on 01395 207350.