Save content
Have you found this content useful? Use the button above to save it to your profile.

Spring Statement: A clear direction of travel?


Following the Chancellor’s announcements, future plans for tax policy seem clearer.

24th Mar 2022
Save content
Have you found this content useful? Use the button above to save it to your profile.

Perhaps the least surprising line in the Spring Statement Blue Book was that “the uncertainty surrounding the Office for Budget Responsibility’s (OBR) spring economic fiscal forecast is higher than usual.”  Given the Covid-19 pandemic, spiralling energy costs, Brexit, the return of inflation, rising interest rates and the invasion of Ukraine, modelling the likely shape of the economy must be a daunting task.

But despite the economic and geopolitical currents trying to pull the Chancellor from his preferred course, some things – including the likely direction of tax policy – are clearer today.

Firstly, we shouldn’t forget some significant earlier announcements. The freezing of key allowances and thresholds means that fiscal drag alone will pull in significant amounts of tax over the remainder of this parliament; removing one element of the pensions triple-lock and the increase to corporation tax from April 2023 will pull in even more. Inflation however will increase the cost of borrowing for government with the interest bill for 2022/23 now forecast to be £83bn as against £23.6bn in 2020/21. As the Spring Statement Blue Book points out, this will be more than the budgets for day-to-day spending on schools, the Home Office and the Ministry of Justice combined.

Kick starting the plan

The clearest indication we have of the likely direction of tax policy is contained in the Tax Plan announced in the Chancellor’s speech. The plan contains three key priorities: helping families with the cost of living; creating a new culture of enterprise and the conditions for private-sector-led growth; and sharing the proceeds of higher growth fairly with working people through further tax cuts. The government also aspires to making the tax system simpler, fairer and more efficient.

We saw some immediate moves to kick start the plan. 

The fact that the personal allowance has risen over recent years to take low earners out of the income tax net while still leaving many within the scope of national insurance has felt illogical, but the cost of aligning the thresholds was always going to be expensive. Aligning the Class 1 and Class 4 thresholds from July will cost over £25bn between 2022/23 and 2026/27. The government estimates that the measure will take around 2.2m people out of the scope of NI and the Health and Social Care Levy. Reducing Class 2 NI on profits between the Small Profits Threshold and Lower Profits Limit will also help the smallest businesses, as will the cut in fuel duty (and the proposed cut in income tax in 2024).

Looking forward – and believing that investment is a key driver of productivity growth – the Tax Plan puts down a clear marker that the government intends to look at the capital allowances regime. The Blue Book cites some possible changes to the regime: an increase in the permanent level of the Annual Investment Allowance; Increasing Writing Down Allowances for main and special rate assets; introducing a First Year Allowance for main and special rate assets; introducing an Additional First Year Allowance to permit claims in excess of 100% of initial cost; introducing full expensing to allow write of costs of qualifying investment in one go. It is likely that we will learn more in the Autumn Budget this year.

The government also intends to look at ways to increase investment – and the effectiveness of investment – in training and at the effectiveness of R&D reliefs. 

Staying on course

The problem of course is the uncertainty that the OBR referred to. Inflation is already significantly worse than had been predicted at the time of the October Budget and the invasion of Ukraine has created an economic and political shockwave.

In addition to the economic effects of the events we have seen over the past two years (and who knows what others), the tax system will have to cope with changes to the way we work, the impact of new technology and fighting climate change. The mechanics of tax administration will change.  

For many businesses – especially the very smallest – the practical burden of compliance is just as great a concern (and as great a barrier to productivity and efficiency) as headline tax rates and changes to allowances. The ambition for the tax system to be “simple, efficient and fair” is therefore fundamental to its success in driving rather than inhibiting growth. People’s experience of the tax system must be factored into the Tax Plan. 

So, we can see the direction of travel and have some hints on what the Autumn Budget might contain. Let’s hope for calmer waters for the journey from here to there – and, indeed, beyond.

Replies (4)

Please login or register to join the discussion.

By johnjenkins
25th Mar 2022 11:16

"People’s experience of the tax system must be factored into the Tax Plan."
So, Paul, we can safely say that QU for the self-employed will now be kicked into touch?

Thanks (3)
By Charlie Carne
25th Mar 2022 13:28

I'd dearly like to hope that the alignment of the NI and tax thresholds is the first step in aligning the taxes more fully. This major update to the tax system removes the biggest hurdle to adopting the OTS recommendations from 2016, as below (with a few tweaks from me):

- separate er's NI from ee's NI by dissociating er's NI from individual employees and remove employees' own (secondary) thresholds and base the er's NI on the payroll as a whole
- make ee's NI cumulative, using the tax code as the in-year lower threshold for ee's NI so that P45's can be used to calculate cumulative NI in a new job, as well as tax (and no NI threshold in second job, just as is the case for tax with its BR code) - this may be slightly complex, as the tax code currently takes account of other income not subject to NI, so the P45, in the short term, may need to also disclose cumulative earnings and deductions to date for NI purposes
- once ee's NI is cumulative, this obviates the need for directors to have their own NI calculation (although they would not then get a full year's NI allowance in month 1, as at present, but build it up through the year, as for tax)
- simplify the employment allowance exception rules for companies that have a sole director as the only employee (which is easy to get around by employing someone part-time for one week each year at either the LEL or PT, depending upon whose interpretation of the legislation you believe) by only offsetting the EA against non-directors' er's NI (or the equivalent if er's NI is based on the whole payroll), even if there are other employees, as the purpose of the EA was to replace SSP and encourage employment, not give sole director companies a tax break
- remove whole swathes of legislation by calculating Class 1 ee's NI on the same base as PAYE income tax
- merging NI and tax is politically complicated, as the electorate won't like the idea that the basic rate of tax rises from 20% (2022/23) to 32.25% (2024/25 @ 19% plus 13.25%) even though the total PAYE deduction is exactly the same, but the legislation and calculations would still be dramatically simplified

I look forward to seeing further alignment along these lines announced in the Autumn budget.

Thanks (1)
Replying to charliecarne:
paddle steamer
28th Mar 2022 13:38

I certainly think those in retirement and BTL landlords etc, now paying this new unified rate on pensions etc, might withhold their vote from whoever introduced this higher tax that applied to them. And if not applied to these classes there would likely be a backlash from the younger generation (paying this and student loan deductions ) against the politicians when this fact was sprayed all over the media.

Seems a political no win to me.

Whilst yes, such taxes ought to be unified, in reality the political pain is likely too much- it would also not be helped by the new Health and Social Care Levy, people might view matters (possibly correctly) as effectively merely pumping up IT as they would likely never trust any government to later not just bump up the HSCL so as to replace NIEE.

Thanks (0)
By Rodcraft
12th Oct 2023 14:21

When seeking a clear direction of travel in the UK, Guildford is a splendid destination to consider. This picturesque town, surrounded by the stunning Surrey Hills, offers a delightful mix of history and modernity. Exploring Guildford can be made remarkably comfortable using local taxis, ensuring you can soak in the sights and experiences hassle-free. Recently, I had a wonderful experience traveling there by taxi to guildford, allowing me to fully appreciate the beautiful architecture, charming streets, and vibrant local culture. Guildford is indeed a prime example of the incredible destinations you can discover in the UK.

Thanks (0)