Two years ago, the UK entered its first lockdown. On Wednesday 23 March, our eyes were firmly fixed on the Chancellor of the Exchequer, Rishi Sunak, as he rose to deliver his Spring Statement.
Yet again, Mr Sunak found himself addressing MPs against a background of the crisis, with the residual impact of COVID, the invasion of Ukraine and the increased cost-of-living all affecting the economy in different ways.
The cost-of-living crisis must weigh especially heavily on the Chancellor’s mind. Hours earlier, the Office for National Statistics (ONS) confirmed that inflation had hit a 30-year high of 6.2 per cent. Meanwhile, petrol and diesel were averaging 166p and 178p a litre respectively, and anxiety is rising about the £693 increase to the energy price cap effective on 1 April.
Employers and employees need to prepare for a 1.25% increase in National Insurance Contributions (NICs) from 6 April.
For employers, a substantial rise in National Minimum Wage (NMW) and National Living Wage (NLW) is in place from 1 April.
We were anticipating the Chancellor announcing further measures to address the cost-of-living crisis.
However, the suggestion was that Government assistance with the cost-of-living crisis should be limited and dramatic intervention would not be on the cards.
Economic Forecasts
As expected, the OBR’s forecasts for the economy painted a less optimistic picture than they did at the Autumn Budget.
Growth is now expected at 3.8% in 2022, down from the previous forecast of 6%, 1.8% in 2023 and 2.1% in 2024.
Meanwhile, inflation is projected to reach 7.4% this year, peaking at 8.7% in Q4, 4%in 2023 and 1.5% in 2024.
The picture concerning unemployment is generally more positive, with a forecast of 4% in 2022, 4.2% in 2023 and 4.1% in 2024.
Cost of Living
The Chancellor dedicated a substantial proportion of his speech to the invasion of Ukraine. He particularly stressed the impact of the crisis on the global economy and the cost of living in the UK.
He began with one of the more eye-catching announcements of his speech – a 5p a litre cut in fuel duty applying from 6 pm on Wednesday 23 March 2022 until March 2023
The Chancellor scrapped VAT on home energy-saving measures, such as solar panels, heat pumps and installation for homeowners.
The Household Support Fund will be doubled to £1 billion from April, helping vulnerable households.
He also reiterated his February announcement of a £9 billion package to help with rising energy bills following the increase in the price cap.
Tax Plan
Shifting away from the immediate pressures on the cost of living, the Chancellor unveiled his Tax Plan. Setting out his intentions for the remainder of this Parliament, which is due to last until 2024, the Tax Plan comprises of three elements:
- Helping families with the cost of living
- Creating the conditions for private sector-led growth
- Letting people keep more of what they earn
As part of the first commitment, the Chancellor announced he is raising the National Insurance threshold by £3,000 to £12,750 from July 2022. For 30 million people, this is a tax cut worth over £330 a year, says Sunak.
70%of workers would see their National Insurance payments fall, even after the addition of the Health and Social Care Levy, which comes into effect on 6 April as planned.
From April 2022, the Employment Allowance will rise from £4,000 to £5,000, saving businesses up to an additional £1,000 on Class 1 National Insurance contributions.
Moving to create the conditions for private sector-led growth, the Chancellor will focus on “capital, people and ideas”.
He intends to cut and reform taxes on investing in businesses, building on the momentum of the super-deduction.
The Treasury will engage with businesses on ways to cut taxes on investment and confirm plans at the Budget later this year.
On people, the Chancellor will look at ways to offer more high-quality employee training.
Further reforms to Research and Development (R&D) Tax Reliefs are expected at the next Budget, with the Government planning a boost worth £5 billion.
Surprisingly, the Chancellor will cut the basic rate of income tax from 20% to 19% by the end of Parliament in 2024.
The Government will also look to reform tax reliefs and allowances before 2024.
Conclusions
The Spring Statement 2022 was a classic example of the Chancellor managing expectations downwards to exceed them.
Although anticipating a financial statement with little substantive change, the Spring Statement transpired with increases in NIC thresholds, cuts to fuel duty, and plans to cut basic rate income tax in two years.
While good news for the finances of many individuals, notwithstanding the forecast that inflation will reach a peak of 8.7 per cent in the autumn, employers and business owners might be hoping there will be more for them at the Autumn Budget 2022.
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