Chancellor Kwasi Kwarteng unleashed a not-so-mini Budget today with a raft of policies designed to stimulate growth in the UK economy.
Below, Trustnet looks at the key measures, from scrapping the additional rate tax band to stamp duty changes and suspending the dividend tax rise.
Income tax
Perhaps the most widespread policy of all announced today was that the income tax reduction of 1% of the basic rate to 19% was being brought forward 12 months to April next year.
Will Stevens, head of financial planning at Killik & Co, said: “The basic rate of tax will fall from 20p to 19p will benefit all taxpayers, aiding with the cost-of-living crisis faced by many and should stimulate the economy further.”
Meanwhile the additional rate band of 45% on people earning more than £150,000 per year is to be scrapped, with higher earners capped at 40%.
“The removal of the additional rate represents one of the most significant income tax changes in recent times, which will deliver a substantial tax saving to the UK’s highest earners. They will also benefit from the abolition of the additional rate of dividend tax,” Stevens noted.
Stamp duty changes
The chancellor announced a cut to the stamp duty in England and Northern Ireland, raising the threshold of how much a property has to cost before stamp duty is paid to £250,000.
First-time buyers who currently pay no stamp duty on the first £300,000 will now not be charged on properties up to £425,000, while the value of said property on which they can claim relief will rise from £500,000 to £625,000.
Rachael Griffin, tax and financial planning expert at Quilter, said: “Every chancellor wants to have his moment as a magician and pull a rabbit out of a hat at a Budget. While today’s ‘fiscal statement’ is of course far from a Budget, the cut to stamp duty represents just one of Kwarteng’s crowd-pleasing tricks.”
While many will be happy with the announcement, she noted that those living in Wales and Scotland will need to wait and see if the cut is adopted by their governments too.
It is hoped the new measures will ease the burden on the housing market and encourage more people to sell, although it is by no means a guarantee.
“Getting rid of stamp duty epitomises Truss’ trickle down economic plan to try and kickstart the economy into growth through lower personal taxes. Like some of the other plans revealed at the mini-Budget today this represents a gamble for the government and one that may not pay off,” said Griffin.
Corporation tax
The chancellor also announced that the planned increase in the UK corporation tax rate from 19% to 25% that was due to take effect in April 2023 will not go ahead.
Laura Foll, UK equities portfolio manager at Janus Henderson, said: “The recently confirmed cancelling of the corporation tax rise that was due to come in next year will mean a boost to expected future earnings for many domestic UK businesses.
“This earnings benefit will come at a welcome time when given the uncertainty of the economic backdrop there are ‘question marks’ about earnings capability in 2023 and beyond.
“Therefore this boost to expected earnings could well provide a ‘cushion’ for companies at a difficult time when costs are in many cases continuing to rise and the demand outlook is uncertain.”
Dividend tax
The government is reversing the 1.25 percentage point increase in dividend tax rates that were due to take place on 6 April 2023 and upper rates of dividend tax will be reduced to 2021-22 levels of 7.5% and 32.5% respectively.
Due to the abolition of the additional rate of income tax, income that was previously charged at the additional rate, will now be charged at the upper rate of 32.5%.
Other measures
Alcohol duty reform was on the cards, with duty rates frozen until February 2023 due to the current high inflation rates (which the levy is linked to) being deemed too onerous for businesses.
Meanwhile, the cap on bankers’ bonuses has been scrapped. Tim Bennett, head of education at Killik & Co, said the cap did little to limit the amount most top bankers could earn.
“As such, this is a change aimed primarily at signalling the government’s commitment to free markets post-Brexit,” he said.
As expected, the cost-of-living crisis was on the agenda, with the expected abolishment of the 1.25 percentage point rise in national insurance.
Myron Jobson, senior personal finance analyst at interactive investor, said: “Most workers will receive a bumper pay packet in November following the reversal.
“Scrapping the rise in national insurance will go some way in easing the cost-of-living squeeze on many household budgets – to the tune of £218 per year for someone earning £30,000, rising to £468 per year for someone earning £50,000. Many lower earners won’t see a change in their wages.”
Government debt
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, questioned how the government would pay for these measures. While the Truss administration “wants to put a rocket under growth” there is a risk that costs soar.
“There are signs that buyers of UK government bonds are becoming even more nervous about the government’s ‘splash the cash’ policies, given the mounting debt pile,” she said.
“Reversing the national insurance rise, combined with scrapping the planned rise in corporation tax, scrapping the top level of tax and edging down the 20% threshold by 1p in the pound will mean that inflows into government coffers will be significantly reduced just at a time when they are being depleted to fund the energy price freeze.”
How have markets reacted?
Garry White, chief investment commentator at Charles Stanley, said global investors “failed to be impressed” by the new chancellor’s measures.
“UK shares fell, UK gilt yields surged to almost 4%, and the pound hit a 37-year low against the dollar. Chancellor Kwasi Kwarteng’s announced a series of tax cuts – the largest since 1972 – while also boosting spending, measures that will turbocharge the country’s national debt,” he said.
There is also concern that the diverging methods of tackling issues between the Bank of England and the new Conservative government may lead to additional volatility, with the former forced to raise rates more substantially if the government fans the flames of higher prices.