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Whirlwind ‘mini’ Budget delivers surprise income tax cuts – AJ Bell

Following today’s statement by the Chancellor Kwasi Kwarteng, AJ Bell head of personal finance Laura Suter comments on some of the key tax announcements:

“There was nothing mini about this Budget, with the new Chancellor announcing more changes to the nation’s finances than many previous full-blown Budgets. Just 17 days into his new job, Kwasi Kwarteng has wasted no time in undoing his predecessor’s work and adding his own stamp onto economic plans for the UK.

“While many of the announcements were leaked to the papers beforehand, he still managed to produce a few surprises during his speech – with abolishing the highest rate of income tax being the biggest. The Chancellor was reminiscent of a gameshow host handing out prizes to everyone, from house buyers who get a stamp duty cut, to business seeing corporation tax slashed, to bankers getting a boost on their bonuses.

“Whether the much-debated trickle-down economics works and we get a boom in UK growth as a result of the policy announcements remains to be seen, but in the meantime many people will have more cash in their pockets going into this winter.

“But no magic money tree exists and the scale of public borrowing to fund the new Government’s plan will be eye-watering. We need vast growth in the economy to pay for the cheques that Mr Kwarteng is signing off today. Considering just yesterday the Bank of England said it thinks the nation is already in recession, that’s quite the turnaround story that the new Chancellor is banking on.

“Inflation is the other big monster the Chancellor had to tackle, and handing out tax cuts for all – not just those most in need – feels like a brave way to do it. While the Bank of England is raising rates to combat rising inflation, the Government is now putting more money in people’s back pockets to go out and spend – a move that will risks stoking inflation.”

Income tax:

“The big surprise announcement was the scrapping of the additional rate of income tax, meaning the highest earners in the UK will now face a maximum 40% tax rate on their earnings, rather than the current 45%. Mr Kwarteng also announced plans to bring forward the planned cut to basic rate income tax, meaning the current 20% rate will be cut to 19% from next April.

“The move will lower taxes for anyone earning over the current personal allowance of £12,570, with the Government estimating the average worker will save £170 a year. However, it’s a move that benefits higher earners more, with the average basic-rate taxpayer saving £130 a year, while the typical higher-rate taxpayer will save £360 a year.

“However, the previously-announced plans to freeze income tax bands during a time when we are seeing rampant inflation and decent wage growth means that many people will still ultimately be faced with paying more tax. It’s not quite the giveaway the Government is proclaiming for the average worker, as many people will still find themselves pushed into the higher rate tax brackets due to thresholds remaining frozen.

“The move to cut the 45% rate of income tax makes the anomaly of the personal allowance taper for those earning more than £100,000 even stranger. This tax rule means that those earning over £100,000 lose their tax-free allowance at a rate of £1 for every £2 earned over the threshold. It brings in an effective 60% tax rate for earnings between £100,000 and £125,140. If the Government has its eyes firmly set on tax simplification and a streamlined system, this must surely be on the table for reform in the future.”

Savings relief:

“Alongside the cuts to income tax rates comes a slashing of dividend tax rates. The Government had previously announced that the increased dividend rates we’ve seen this year were going to be cut back to their old levels, but the new Chancellor has also now abolished the highest rate of dividend tax too. It means that an additional rate taxpayer who paid 39.35% tax on their dividends this year will now see that drop to just 32.5% from next year.

“The changes to income tax rates have also handed more taxpayers a £500 tax break on their savings. Currently those earning over £150,000 a year are not eligible for any tax-free allowance on their savings income, under the Personal Savings Allowance. However, the move to abolish the additional rate band means that those individuals will now be entitled to get the first £500 of their savings income tax free. This will save additional rate taxpayers up to £225 a year.”

Stamp duty reform

“For any first-time buyer struggling to get on the housing ladder, today’s tax cut will be a bright spot of good news in their difficult quest to buy their first home. The Government says the move will save a first-time buyer up to £11,250 in tax – but this is in comparison to a non-first-time buyer under the current system. In reality the move has handed first-time buyers an additional £6,250 tax break when compared to the current system. This is money they can now put towards a deposit.

“The saving is more muted for the average buyer moving house, with the doubling of the tax-free stamp duty limit from £125,000 to £250,000 saving a buyer up to £2,500. It’s not as generous as the stamp duty cut rolled out by the new Chancellor’s predecessor, but it is a permanent change rather than a temporary measure. But the frustrating fact for many home-movers is that rising mortgage rates will end up costing many of them much more than this tax cut will save.” 

Office of Tax Simplification & pension tax simplification

Tom Selby, head of retirement policy adds: “If the Chancellor is serious about putting tax simplification at the heart of Government decisions following the abolition of the Office of Tax Simplification, there are few areas crying out for radical simplification more than pensions.

“The current pension tax system comprises no fewer than three versions of the annual allowance, a lifetime allowance and seven different forms of ‘protection’ created as a result of repeated cuts to the lifetime allowance since 2010.

“Non-earners are subject to another different annual limit, while the tax system simply doesn’t work properly with the pension freedoms introduced in 2015, with millions of people being overtaxed on their first withdrawal.

“Nobody in their right mind would create a pension tax system this complicated from scratch, and this complexity undoubtedly acts as a barrier to people engaging with their retirement pot and saving for the future. The Government must seize this opportunity to consider real simplification, with the central aim of encouraging more people to save for their future.

“There is merit in exploring moving to a framework where there is a single lifetime allowance for defined benefit pensions and a single annual allowance for defined contribution pensions.

“Clearly there would be issues to be ironed out as part of this – for example in relation to people who have both DB and DC pensions – but it has the potential to be infinitely simpler than what we have right now.

“Millions of people have now been introduced to pension saving by auto-enrolment, many for the first time. As their pots grow and initiatives like pensions dashboards aim to boost engagement, we need to ensure the rules they engage with can be understood.”

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