Mini-budget 2022: what does it mean for your money? | Mini-budget 2022
The chancellor, Kwasi Kwarteng, has announced a sweeping package of measures in his mini-budget, including a number of tax cuts that will have a huge impact on millions of people’s finances. Here we look at what the main announcements mean for household finances.
So what’s happening with income tax?
The basic rate of income tax is being cut by 1p in the pound from next April – a year earlier than planned – taking it down to 19%.
The Treasury said the £5bn-plus move would “mean 31 million people will be better off by an average of £170 per year” in 2023-24. However, the move benefits those on higher incomes more. On average, basic-rate taxpayers will be £130 better off in 2023-24, while for higher-rate taxpayers the gain is £360, the Treasury said.
The government said this was the first cut to the basic rate of income tax in 15 years (the last time it happened was in 2008-09), and added that 19% was the lowest the basic rate had ever been in the modern income tax system.
Aside from employees, Kwarteng’s announcements will be “a shot in the arm” for pensioners, said Hargreaves Lansdown, given that both annuities and drawdown are subject to income tax. The 1% cut may sound small but it can add up to serious savings, with someone on a £25,000 income paying over £125 less a year, it added.
The income tax changes apply in England, Wales and Northern Ireland.
I hear the mini-budget was also good news for the rich?
Kwarteng also announced that the top rate of income tax – the 45% “additional rate” for people earning more than £150,000 – is being abolished altogether with effect from April 2023 and replaced by a single higher rate of income tax of 40%.
The current threshold for the higher rate of tax is £50,270 – from April everyone earning more than this amount will be taxed at 40% rather than 20%. Scrapping the additional rate will cut tax for about 660,000 individuals.
One extra perk for those who would have otherwise been additional rate taxpayers is that from April 2023 they will benefit from a personal savings allowance of £500, in line with higher-rate taxpayers. They were previously excluded from this.
Anything else I should know about?
There was no change to previous plans to hold the personal tax-free allowance at £12,570 for the next four years. In the 2021 spring budget, the then chancellor, Rishi Sunak, froze personal tax thresholds, dragging more low-income households into paying the basic rate and those with earnings nearing £50,000 into paying the higher 40% rate. The freezes – branded a stealth tax by some – are forecast to last five years and raise billions for the Treasury by 2026.
Freezing the thresholds at a time of wage inflation has pushed many thousands of workers into higher tax brackets. In other words, more workers are paying income tax on a greater proportion of their earnings.
Steven Cameron, a pensions director at the insurer Aegon, said: “Income tax thresholds are currently frozen until 2026 and, over time, wage increases mean people are paying tax on more of their income, and in some cases are being dragged into paying higher-rate tax. This is a particular issue in the current climate as soaring inflation has accelerated wage increases.”
Remind me: what’s happening with national insurance?
The government confirmed on Thursday it was reversing the 1.25 percentage point rise in national insurance contributions (NICs) that was only implemented by Sunak in April this year.
The new move, which takes effect from 6 November, will put a little back in the pockets of millions – about £14 a month on average for a basic-rate taxpayer, according to the government – but will not provide any extra assistance for those on the lowest incomes.
The government announced the 1.25 percentage points rise in NICs in September last year, calling it a health and social care levy to fund improvements to the NHS and social care. Ministers pushed up the main rate of NICs for employees from 12% to 13.25%, while employers were told to pay 15.05%, taking effect from 6 April.
The government said reversing this means almost 28 million people will keep more of what they earn. Most employees will receive the cut in their November pay via their employer’s payroll, though for some workers it could be December or January.
The change will bring a saving of £93 a year for someone earning £20,000, £343 for someone on £40,000, £593 for earnings of £60,000, and £1,093 for £100,000, said analysts.
Sunak also announced earlier this year that the level at which NICs start to be charged would rise from £9,880. From July this year, workers do not make contributions until they earn £12,570 a year – the same level that income tax starts to be charged.
The government confirmed on Thursday that it was “committed to retaining the level of these thresholds to support families”. It said that, taken together, the levy reversal and higher thresholds mean that almost 30 million people will be better off by an average of more than £500 in 2023-24.
What’s happening with stamp duty?
As reports had predicted, Kwarteng cut stamp duty, raising the point up to which none is paid from £125,000 to £250,000, while for first-time buyers that threshold went from £300,000 to £425,000. The maximum value of a property on which first-time buyers’ relief can be claimed will also increase from £500,000 to £625,000.
The government says these measures will take more than 200,000 buyers out of paying for stamp duty altogether. The chancellor said the cuts were permanent, and effective from 23 September.
Stamp duty applies in England and Northern Ireland.
What are experts saying about the changes?
Many analysts are pointing out that for millions of people, much of this help will effectively be swallowed up many times over by higher energy bills, the higher mortgage and borrowing costs that many have been saddled with after seven interest rate rises in a row, and the many other soaring costs that are putting household budgets under unprecedented pressure.
Becky O’Connor, the head of pensions and savings at the website Interactive Investor, said: “Many working households will see an immediate uplift from the measures announced today – lower taxes mean we keep more of our own money.
“But in reality, any money saved from lower taxes will come in the front door and straight out the back door in the form of higher energy bills and rising mortgage payments.”
Some analysts said the income tax and national insurance moves would provide a huge boost to the pay of some of the country’s wealthiest.
The scrapping of the 45% rate means someone earning £175,000 will take home an additional £1,250 a year, which increases to £3,280 if you include the NICs rise reversal, said wealth management business Quilter.
It added that those earning £500,000 a year would gain a “whopping £17,500” from the abolition of the 45% rate – rising to £23,500 when the NIC reversal is included.