News & Insights | 24th March 2022
5 Min Read
The recent spell of warmer sunny weather has ensured that the Chancellor’s Spring Statement, at the very least, felt appropriately named. It also brought with it no small amount of anticipation. What action might Mr Sunak take to help alleviate the pressure of ever-rising costs of living, which have only intensified in recent weeks with the immediate economic impact of Russia’s invasion of Ukraine?
Against this backdrop, the Chancellor’s headline announcements felt somewhat underwhelming, despite the accompanying fanfare. The cut in road fuel duty by 5p per litre seems designed to generate more headlines than real savings. These are estimated to be around £50 per year to an average motorist, and at best only acts to offset the increased VAT revenue which has accompanied the recent increases in the underlying wholesale prices of fuel.
As expected, the government has opted to continue with the addition of 1.25% to National Insurance Contribution (NIC) rates from 6th April in the form of what will become the Health and Social Care Levy. In a twist worthy of filmmaker M. Night Shyamalan, the impact of this raise was countered by a surprise increase in the threshold at which NICs become payable to £12,570, matching the income tax personal allowance, to take effect from July 2022.
The government have been discussing their intent to align the income tax and NI thresholds for some time, and the acceleration of this has been broadly welcomed. Taken in tandem with a 1.25% increase, this change in the threshold should result in an overall reduction in NICs for those earning under £35,000 p.a. We also expect that this should make it more appealing for directors of limited companies to pay themselves a salary equivalent to the full income tax allowance, rather than restrict this to the (previously lower) NI threshold.
An important distinction is that these changes will only affect the ‘primary earnings threshold’ for National Insurance. The threshold to qualify for state benefits, including qualifying years for the state pension (the ‘lower earnings limit’ or LEL), will remain at its existing level, uplifted slightly to £6,396 p.a.
Remember that in the last Spring budget around a year ago, the Chancellor announced the ‘big freeze’, fixing the income tax allowance (for England at least) at £12,570 until at least April 2026. Will the newly increased NIC threshold be subject to the same fate? If shown to be the case, this will inevitably dilute the initial benefits of this policy over the coming years.
On a similar note, it was confirmed that there will be no corresponding increase to dividend thresholds to offset the equivalent 1.25% increase in dividend tax rates to 8.75%, 33.75% and 39.25% for basic, higher, and additional rate taxpayers respectively.
Even the most innocent of idealists will have raised a wry smile at the surprise announcement of a cut in the basic rate of income tax by 1% to 19%, deferred until the end of the current parliament in April 2024. This move has inevitably attracted derision from the government’s critics as a clunky and transparent attempt to drum up support on the eve of a future general election. None of us need reminding that a week is a long time in politics, never mind two years, and it will therefore be interesting to observe whether this promise will be honoured.
From a personal finance perspective, Wednesday’s statement was very much one of ‘business as usual’, with no changes to the existing rules governing pensions tax relief, and ISA allowances remaining static at £20,000 (£9,000 for Junior ISAs) for the new 2022/23 tax year. In line with previous announcements, the pension lifetime allowance (LTA) will also remain fixed at £1.073m until April 2026.
With more pressing matters seemingly at hand, it is reassuring to note that Capital Gains Tax (CGT) has once again benefitted from a stay of execution, with no mention of the long-touted reforms other than the annual exemption being maintained at the current level of £12,300 for another year.
With the country’s path to post-Covid recovery having been predicated on a stronger than expected economic growth forecast in the last Budget, we now see these being stalled by increasing inflation and rising fuel prices. As a seeming fan of twists, the Chancellor may feel some sympathy with James McAvoy’s character in M. Night Shyamalan’s 2017 film Split; a man struggling to control 23 distinct alternative personalities. Pulled in different directions by the growing pressure from the voting public to help alleviate their pressing and immediate financial hardship and the path the government has previously committed to, Mr Sunak might wish for a fiscal Sixth Sense to help guide him through the coming months.