On 23 September, Kwasi Kwarteng unveiled his mini-Budget. Coming off the back of Liz Truss’s announcement on the cost of living crisis and help with winter fuel bills, Kwarteng’s fiscal event was his first – and as it turned out, only – opportunity to outline his plans for growth while tackling soaring inflation.
What the then-chancellor announced was £45 billion of unfunded tax cuts that spooked global markets and saw the value of the pound against the US dollar drop to its lowest point in half a century.
It has since led to one major U-turn and Kwarteng’s sacking, before he was able release his “medium-term fiscal plan”, which would have set out the numbers behind the spending. This latest announcement had been due on 31 October.
In the meantime, keep reading for your rundown of the key tax takeaways from the former chancellor’s mini-Budget, and what those changes mean for you.
Kwasi Kwarteng set out tax cuts as part of the government’s Growth Plan 2022
Kwasi Kwarteng announced that his Growth Plan was based on three central priorities:
- Reforming the supply side of the economy through tax incentives and reform
- Maintaining a responsible approach to public finances with the Bank of England’s independence “sacrosanct”
- Cutting taxes to boost growth, reaching a medium-term trend rate of growth of 2.5%.
Kwarteng went on to announce £45 billion in tax cuts (although a U-turn just 10 days later left the figure at £43 billion).
Here’s what was announced and what the changes might mean for you.
1. Income Tax changes will lower your bill and the relief you receive on pension contributions
Kwarteng’s plan to scrap the 45% additional rate of tax for high earners came as a shock to many. While the prime minister initially stood by the plan, it was later deemed a “distraction” by the then-chancellor and a U-turn was announced at the Conservative Party conference.
While the cut would have come as good news for high earners, another Income Tax announcement remains in place.
Rishi Sunak had originally proposed a cut to the basic rate of Income Tax from 20% to 19%. He planned to introduce the decrease in 2024 but Kwasi Kwarteng has brought this change forward. It will now come into force in April 2023.
All UK workers and pensioners with a taxable level of income will see a drop in the Income Tax they pay, but there will be a knock-on for your pension too.
Unless you are in a “tax relief at source” scheme (for which the cut will come into force in 2024), you will receive less tax relief from April 2023.
A £100 increase in your pension pot would have cost you £80, with £20 paid by the government. From 2023, a £100 top-up will cost you £81 with £19 received in tax relief.
As a higher and additional-rate taxpayer, you will still be able to claim back extra relief through your self-assessment tax return.
2. Your National Insurance contributions will decrease as the Health and Social Care Levy is scrapped
In April 2022, Rishi Sunak introduced a 1.25 percentage point rise to National Insurance contributions (NICs).
The extra cash was intended to help the NHS in the aftermath of the pandemic and would have been rebranded as the Health and Social Care Levy from April 2023. At this point, it was hoped that the NHS would be back on its feet and the money could be channelled into the social care crisis.
Sunak’s changes had increased contributions from 12% on earnings up to £50,270 to 13.25%. The 2% payable on anything above that level rose to 3.25%.
Crucially, those above State Pension Age who were still working also paid NICs at 1.25%. It was the first time this group had been asked to contribute.
These increases are now to be reversed from 6 November 2022.
If you currently earn £20,000 a year, the BBC reports that you will save about £93 a year. Those with a salary of £100,000 will save £1,093.
The change will also affect your business, with 920,000 businesses saving close to £10,000 on average next year.
3. Short-lived good news for business owners but Dividend Tax rise is scrapped
Kwasi Kwarteng also used his “fiscal event” to announce that a planned rise in Corporation Tax would be shelved. The planned increase from 19% to 25% was due in April 2023.
Keeping the tax at 19% would’ve meant that the UK enjoyed the lowest rate of Corporation Tax in the G20.
In another government U-turn, however, this policy was itself scrapped, the confirmation coming in a Liz Truss press conference delivered shortly after Kwarteng was sacked.
For business owners who pay themselves dividends, some good news (currently) remains, in the form of a reversal of the recent Dividend Tax rise.
The 1.25% percentage point increase was brought in alongside the hike in NICs but will now be reduced. The ordinary and upper rates will be lowered to 7.5% and 32.5% respectively.
Get in touch
If you have any concerns about the impact of recent changes on your long-term financial plans get in touch.
Contact us now to find out how our Chartered financial planners could help you.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
