Hunt sounds death knell for Trussonomics as vast majority of tax cut plans axed

by | Oct 17, 2022

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Laura Suter, head of personal finance at AJ Bell
  • Cut to basic rate of income tax ditched, costing taxpayers up to £377
  • Changes take us ‘back to square one’ on pension tax relief
  • Energy Price Guarantee put under review, with support from April expected to be more targeted
  • Dividend tax cut plans reversed 

Laura Suter (pictured), head of personal finance at AJ Bell, comments on income tax, energy bills and dividend taxation:

“That sound you can hear is the death knell for Trussonomics, with the vast majority of her tax cutting plans now consigned to the bin. People have had yogurt in their fridge that’s lasted longer than some of the Government’s planned tax cuts, and it’s clear that Liz Truss has opted to have one last attempt at saving her skin by ditching her economic principles rather than try to cling on to her policy plans.

“But many Tory party members who voted for her will wonder what the point of Truss is without Trussonomics, particularly as she now has the unwelcome moniker of the most unpopular Prime Minister in recent history. There will now be big questions around the stability of Liz Truss’ position.

“In one statement Jeremy Hunt has reversed all the mini-budget moves apart from the National Insurance and stamp duty cuts. He went further than many expected and what’s probably most worrying for people is the signal that more ‘difficult decisions’ will be taken. The Chancellor signalled that government departments will need to find more cost savings, which feels like austerity in all but name.”

Energy bills

“Scrapping all but six months of the Energy Price Guarantee will send shockwaves through households in the UK, who are once again going to be exposed to soaring energy prices and the prospect of a struggle to pay their bills. The indication from Mr Hunt is that help will be targeted at those who need it the most from April onwards, rather than universal support regardless of income. However, there’s no guarantee that the support will be meaningful after April.”

Income tax

“The reversal of the basic-rate tax break was signalled ahead of Jeremy Hunt’s statement, but it has now been cut indefinitely, rather than just delayed until 2024. The move will cost taxpayers up to £377 a year in additional tax compared to Truss’ previous plans. It means that when April arrives people will no longer get that extra boost to their pay packets. The move will save the Government £5.3bn for next year, adding to their coffers and helping to calm the markets. But that clearly has a cost to the public – it means someone earning £25,000 will pay an extra £124 a year while someone on £50,000 will pay £374 more in tax a year.”

Table: How much the reversal of basic-rate tax will cost taxpayers

Income band Tax due at 20% Tax due at 19% Difference
£15,000 £486 £462 -£24
£20,000 £1,486 £1,412 -£74
£25,000 £2,486 £2,362 -£124
£30,000 £3,486 £3,312 -£174
£35,000 £4,486 £4,262 -£224
£40,000 £5,486 £5,212 -£274
£45,000 £6,486 £6,162 -£324
£50,000 £7,486 £7,112 -£374
£55,000 £9,432 £9,055 -£377
Source: AJ Bell.

 

Dividends

“In the space of a few weeks we’ve gone from a dividend tax system where there are just two rates, back to the three-tier system and with higher rates. The move to reverse the cut to dividend rates but not change the National Insurance cuts means we now have a more uneven playing field between those who earn money via dividends vs those who earn via a salary. It has the biggest hit for those additional-rate taxpayers, who have seen their tax rate go from 32.5% back up to 39.35%. These are likely to be company directors paid via dividends, rather than many investors.”

Dividend rate changes
Income tax level Tax rate from mini-Budget Tax rate now
Basic-rate 7.5% 8.75%
Higher-rate 32.5% 33.75%
Additional-rate 32.5% 39.35%

 

AJ Bell head of retirement policy, Tom Selby, comments on the impact for pension saving:

“Liz Truss’ disastrous mini-Budget has been almost entirely unwound by Chancellor Jeremy Hunt today, with knock-on implications for incentives to save for retirement. Pension tax relief is paid at your marginal rate of income tax, meaning when income tax is higher, so is the bonus for sticking money in your pension.

“Under the current system, basic-rate taxpayers get 20% tax relief on their contributions, higher-rate taxpayers 40% and additional-rate taxpayers 45%. This means a £100 pension contribution ‘costs’ a basic rate taxpayer £80, equating to a 25% savings bonus. For a higher-rate taxpayer the savings bonus is 66%, while for an additional-rate taxpayer it’s 82% (see table at the end of press release for details).

“If the full mini-Budget package of income tax cuts had been brought forward, a basic-rate taxpayer would have needed to contribute £1 more in order to get £100 in their pension, reducing their retirement saving bonus from 25% to 23%. Higher-rate taxpayers would still have received the same 66% bonus, although members of relief-at-source schemes would still have needed to reclaim an extra 21% of tax relief – 1% more than before – from the taxman.

“Additional-rate taxpayers, meanwhile, would have seen their retirement saving bonus dip from 82% to 66% as a result of the now-abandoned proposal to abolish the 45p income tax rate altogether.

“Today’s announcement takes us back to square one via an unbelievably traumatic route. Brits will pay more income tax than under the mini-Budget plans announced last month and therefore will get more pension tax relief than they would have if those plans had been taken forward.”

How the current pension tax relief system works – and how it will continue to work after today’s announcement*

  • Basic-rate taxpayer – pays in £80, gets £100 in their pension (20% tax relief, 25% bonus)
  • Higher-rate taxpayer – pays in £80, gets £100 in their pension, claims back £20 (40% relief, 66% bonus)
  • Additional-rate taxpayer – pays in £80, gets £100 in their pension, claims back £25 (45% relief, 82% bonus)

Under tax rates originally proposed at the mini-Budget – before any U-turns

  • Basic-rate taxpayer – pays in £81, gets £100 in their pension (19% tax relief, 23% bonus)
  • Higher-rate taxpayer – pays in £81, gets £100 in their pension, claims back £21 (40% relief, 66% bonus)
  • Additional-rate taxpayer – pays in £81, gets £100 in their pension, claims back £21 (40% relief, 66% bonus)

Under revised tax rates – if the 20p rate had been reduced to 19p (move scrapped indefinitely by Hunt today)

  • Basic-rate taxpayer – pays in £81, gets £100 in their pension (19% tax relief, 23% bonus)
  • Higher-rate taxpayer – pays in £81, gets £100 in their pension, claims back £21 (40% relief, 66% bonus)
  • Additional-rate taxpayer – pays in £81, gets £100 in their pension, claims back £26 (45% relief, 82% bonus)

*All numbers assume member is in a relief at source scheme. Members in net pay schemes will have the full amount of tax relief paid automatically unless they are a very low earner.

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