Sunak goes on a Spring Statement tax cut spreeby
Against the backdrop of a growing cost of living crisis and economic pressures exacerbated by the war in Ukraine, Rishi Sunak used today’s Spring Statement to slash fuel tax, change the national insurance threshold and unveil a surprise cut in income tax to 19% in 2024.
The Spring Statement is usually intended only to be an economic update, but with inflation hitting a 30-year high of 6.2% in February, the Chancellor has been under pressure to deliver something akin to a mini-Budget.
While there weren’t enough announcements to fill a medium-sized red book, Sunak responded to the cost of living squeeze in the House of Commons this lunchtime by:
- Cutting fuel tax by 5p per litre until March next year
- Raising the national insurance threshold by £3,000
- Announcing a 1% cut in income tax in 2024
- Abolishing VAT on energy saving insulation.
Sunak also announced the publishing of a “tax plan” that will ensure the government takes a “principled approach to cutting taxes” and will help them achieve their “overarching ambition to reduce tax. Publishing a tax plan. Take a principled approach to cutting taxes.”
While the big headline-grabbing measures respond to the rising living costs, he also highlighted the need to create “a new culture of enterprise” with the private sector training more, investing more, and innovating more.
Along with the roll out of the tax plan (which is already available on gov.uk), the Chancellor announced a few teases for the Autumn Budget including:
- An R&D tax relief form in the Autumn Budget
- A tax rate cut in the Autumn Budget
- Increasing employment allowance to £5,000
“This statement puts billions back into the pockets of people across the UK and delivers the biggest net cut to personal taxes in over a quarter of a century,” said Sunak.
He added, “Cutting taxes means people have immediate help with the rising cost of living, businesses have better conditions to invest and grow tomorrow, and people keep more of what they earn for years to come.”
In the shock rabbit-out-of-the hat announcement at the end of his speech, Sunak announced “for the first time in 16 years” a 1% cut in income tax before the end of the Parliament in 2024. Sunak said this would be a £5bn tax cut.
Not everyone was as positive as the Conservative Party about this cut. Paul Johnson, economist and director at the IFS, said: “What is the possible justification for cutting income tax rate while raising NI rate?
“Drives further wedge between taxation of unearned income and earned income. Yet again benefits pensioners and those living off rents at expense of workers.”
Elsewhere, Sunak said that being “no longer constrained by EU law” allowed him to scrap the 5% VAT rate on energy saving insulation and solar panels. He said this would “abolish all red tape imposed on us by EU”. This cut will not apply immediately to Northern Ireland.
“From 2019 the European Court of Justice required us to restrict its eligibility thanks to Brexit, so I can announce for the next five years, homeowners having materials like solar panels, heat pumps or insulation installed will no longer pay 5% VAT – they will pay zero,” said Sunak.
He also confirmed that the government will reverse the EU's decision to take wind and water turbines out of scope and zero rate them. “And we will abolish all the red tape imposed on us by the EU,” he said.
— HM Treasury (@hmtreasury) March 23, 2022
Steadfastly ignoring the growing discontent from the Tory party backbenchers, Sunak confirmed that the planned 1.25 percentage point increase in national insurance will go ahead in April to raise cash for health and social care.
However, the Chancellor tried taking the sting out of this roll of the new health and social care levy by increasing the NIC threshold by £3,000 instead of the planned £300. He said this would equalise the NIC and income tax thresholds in one go from July.
This takes the new NI threshold to £12,570. He quoted the IFS as saying this is the best way to help low and middle income workers.
Tim Walford-Fitzgerald, partner at accountancy firm HW Fisher, said, “The decision to raise the threshold people earn before they pay national insurance is a long overdue simplification and will make it easier for the Chancellor to take the next step in aligning income tax and NIC.”
As costs continue to spiral at the pumps, Sunak’s decision to slash fuel duty had been strongly expected in the days leading up to today’s speech.
The 5p per litre comes into effect at 6pm this evening and is worth £5bn. However, Richard Murphy pointed out on Twitter, “Fuel duty being cut by 5p per litre, which is less than the increase in VAT now being paid on each litre of fuel bought. In other words, this is costing him nothing.”
Fuel duty was previously frozen for 12 months at the Autumn Budget in October last year.
Sunak had set the foundations for the R&D tax relief overhaul during his Mais Lecture when he said, “clearly it is not working as well as it should” for small and medium-sized companies.
“Right now we know that the amount businesses spend on R&D as a percentage of GDP is less than half the OECD average. And that is despite us spending more on tax reliefs than almost every other country. Something is not working,” he said.
So Sunak confirmed that the government will reform R&D tax credits so that “they’re effective and better value for money. [This] will expand the generosity of the release to include data cloud computing and pure maths. And we’ll consider in the autumn whether to make the R&D expenditure credit more generous.”
Today’s news comes as the spending review committed to a £39.8bn R&D budget for 2022-2025.
Sunak also noted that the super deduction ends next year, which means “our overall tax treatment for capital investment will be far less generous than other advanced economies.” So they are committed to “fixing that” in the Autumn Budget.
With inflation surging above expectations to a 30-year high of 6.2% in February, up from 5.5% in January, Sunak was keen to set the sobering inflation figures and growth expectations against the backdrop of the Ukrainian conflict, explaining that “the actions we have taken against Putin are not cost free.”
He highlighted the need for “the security of more resilient public finances” and that “more borrowing is not risk or cost free.”
The Chancellor confirmed that public debt is expected to fall steadily and the cost of servicing debt interest is to rise to £88bn.
According to the Office for National Statistics, real household disposable incomes per person will fall by 2.2% in 2022–23, the largest fall in a single financial year since ONS records began in 1956–57.
Confronting rising costs
Today’s announcement follows weeks of speculation and discussion from the tax profession on ways the Chancellor can confront the rising costs at the pumps and energy suppliers.
No Chancellor will ever green light every tax reform floated before a fiscal speech, but Sunak had a lot of policy kites and lobbying to choose from as all comers tried to rectify the rising cost of living.
There had been calls from the opposition to scrap the 5% VAT on domestic fuel. Although critics of this plan said a cut like this wasn’t targeted enough for those that needed help the most.
As Shadow Chancellor Rachel Reeves argued when Sunak sat down, a policy missing from Sunak’s speech was a one-off windfall tax on oil and gas giants. The policy had again gathered support from the opposition benches.
Prompted by the end of the super deduction scheme in March 2023 the Chancellor had also faced calls from business for more investment and even an extension to the tax break. Sunak alluded to this and we can expect more of this in the Autumn Budget.
Spring Statement at a glance
- Expect largest fall in living standards on record
- Spring Statement 2022: R&D tax relief
- VAT 5% rate on energy saving materials cut to zero
- Sunak aligns NIC and income tax in Spring Statement
Pre-Spring Statement analysis
- Spring Statement blog: Countdown to 23 March
- Spring Statement: What could Sunak do? (Rebecca Cave’s pre-analysis)
- Sunak braces for critical Spring Statement
- When 'lower taxes' actually mean 'higher taxes'
- Tax reforms fill Sunak’s Spring Statement in-tray
Spring Statement coverage brought to you in association with Accounting Excellence.