Impacts of the Mini-Budget
I was going to start this article with a joke about the ‘trickle-down’ economy, but 99% of people wouldn’t get it……
Trickle down economics was known in the latter part of the nineteenth century as ‘horse and sparrow economics’. The theory being that if you fed the horse enough oats, some will pass through to the road for the sparrows. Kwasi Kwarteng is obviously quite hopeful that the ‘horses’ will be very productive for us, based on his optimistic economic growth projection of 2.5% per annum.
In fact, economists have long held that tax cuts will only lead to actual economic growth if their impact is mainly to reduce taxes for the majority of the population. This is the basis of ‘supply side economics’. In theory if people have more money to spend then they can feed the economy. However with this mini-budget the vast majority of the tax savings will fall to those earning over £150,000 and therefore the ‘supply side’ effect and the consequential economic growth that could otherwise be anticipated with tax cuts across the board, become less likely.
It should be noted that Scottish income tax and LBTT rates have not yet been updated in response to these changes and we will update you as soon as any changes are announced.
What are the actual measures being introduced:
1. There is to be a 1% tax cut from 6 April 2023 – bringing down the rate of tax in the UK on earnings and savings from 20% to 19% on income of £37,700. (Absolute value is therefore £377). Scottish taxpayers will only benefit in the reduced rate as it applies to savings income – but not on employment income, self employed income or rental income – rates in respect of this type of income will be determined by Holyrood.
2. The National Insurance rises which were to be called the ‘Health and Social care levy’ come April 2023 have been scrapped. This is a 1.25% decrease on what we have seen for the last few months only. It is due to come into effect from 6 November 2022. This particular measure has a disproportionate benefit for those people earning over £50,270. For those under £50,270 this represents a 9.4% decrease in the NI rates, whereas for those earning over this amount it represents a 38.4% decrease in their rates.
3. The 45% additional rate of income tax has been abolished in England from April 2023. It will be up to Holyrood to determine if there will be any similar measures made in Scotland. This will only benefit those earning over £150,000 but it is an absolute reduction of 5% for these taxpayers on an unlimited level of earnings, in comparison to the 1% relief on £37,700 that the majority of the country will benefit from.
4. Those earning over £150,000 will now benefit from the £500 savings allowance.
5. The planned increase in dividend tax rates has also been cancelled, and the rates will remain as 7.5% within the basic rate and 32.5% in the higher rate with the additional dividend rate of 38.1% being abolished.
6. Corporation tax rates which were due to increase from 19% up to a maximum of 25% in April 2023 for those companies with profits over £50,000, will instead now remain at 19%, making us the cheapest country in the G20 in which to operate a business.
7. The Annual Investment Allowance limit will remain at £1m indefinitely.
8. There are to be stamp duty cuts in England which double the tax free threshold for residential purchases and increases support for first time buyers in an attempt toboost the property market.
9. The cap on bankers bonuses is to be scrapped. This was previously limited to a bonus of 2 times their annual salary.
10. The Office of Tax Simplification is to be closed. This body has been operating for over 10 years and has made efforts to effect changes that will assist the general public in understanding and declaring liabilities themselves. The remit of this office was always to concentrate on existing legislation rather than assist in drafting better legislation and this restriction has had an impact on the effectiveness of the organisation. Several large ‘big picture’ recommendations have been made during its lifetime, though few acted on. One wonders whether it would have been a better idea to further empower this team, rather than abandon the idea of simplification.
11. IR35 legislation has been repealed, including all the changes made during 2017 and 2021. The onus now rests again with the contractor to determine the nature of the engagement with their end user. This will put many minds at ease and may have a positive effect on the economy.
12. Alcohol duty increases that were planned for February 2023 under the previous administration have been scrapped. This will benefit Scottish exports.
13. Investment Zones are going to be established throughout England in cooperation with local government to bolster growth across all geographic areas.
Impacts of the Budget
Even those unconcerned with the macroeconomic strategy may worry that the Great British Pound sank to a 37 year low in the minutes following Mr Kwartengs announcements. Similar concern was evidenced by the 2% decrease in the FTSE on Friday. But, what can we expect the impact to be on central government coffers?
Tax cuts will decrease tax revenue by £45bn and borrowing is increasing in this tax year by £72bn to accommodate for the deficit. Mr Kwarteng is anticipating a 2.5% growth in the economy annually as a result of the above measures, though there is little economic basis to support this optimism.
The increased borrowing comes at a time when interest payments on government debt are soaring. As an illustration, the interest paid on debt in June 21 was £9.1bn, whereas the interest paid on debt in June 22 was £19.4bn. This mainly results from the spiralling inflation, and the impact of RPI on the interest payable on index linked bonds.
Does Mr Kwarteng expect inflation to decrease by putting more money in people’s pockets? This would be at odds with economic theory. It seems particularly counterintuitive considering the current (and marked) interest rate increases by the Bank of England.
What are the impacts for Scotland
Firstly, the 46% rate will remain in Scotland, unless retracted by Holyrood.
Those Scottish taxpayers earning over £150,000 will not have the benefit of any savings allowance.
The same top earners will however see a decrease in tax on their savings income, if it was previously falling within the additional rate band.
We will benefit equally from the NI reduction – as Holyrood does not have power to alter this.
To compensate Scotland for the tax reductions that will be seen in England, Holyrood’s block grant will increase by £630m (£340m set to compensate for the 1% reduction in the basic rate band, £170m to compensate for the stamp duty land tax changes and £120m to compensate for the abolition of the additional rate band).
In respect of the ‘Investment Zones’, Scotland have the option of following suit, or missing out – there will be no compensation if Scotland decide not to pursue this policy.
If we assume that Holyrood do not follow Mr Kwartengs lead, the disparity between someone taxed in England and someone taxed in Scotland will only grow – and quite significantly, particularly for those on high incomes.
A taxpayer earning £40,000 of employment or self employed income and £10,000 of savings income, the disparity in take home pay between England and Scotland is 0.8%, whereas for someone earning £400,000 and £10,000 of savings income, the disparity rises to 4.51%, and continues to rise as income levels increase.
It will be an interesting week watching the political and economic reactions to this rather radical budget.
Brona MacDougall, Tax Partner
