Surprise income tax cut – but tax burden still rising

Sunak delivered his statement in the House of Commons on Wednesday (23 March). The complex interaction of income tax and NI threshold and rate changes led CIOT to comment that ‘the Spring Statement swings and roundabouts will leave taxpayers dizzy’. (More on the CIOT response here and on the ATT response here.)  

The statement was accompanied by a 50-page ‘blue book’ (Web PDF / Print PDF / HTML) and a much shorter ‘Tax Plan’ (NB. The Tax Plan section of the blue book has more detail than the separate tax plan).

Key announcements

The Chancellor grouped his tax (and some other) announcements under three headings –

Helping families with the cost of living

• Increase in the annual National Insurance Primary Threshold and Lower Profits Limit from £9,880 to £12,570, aligning it with the income tax personal allowance from July (delay to July to allow all payroll software developers and employers to update systems). These thresholds will remain aligned
• From April 2022 self-employed individuals with profits between the Small Profits Threshold and Lower Profits Limit will continue to build up National Insurance credits but will not pay any Class 2 NICs
• Increase Employment Allowance to £5,000 from April 2022
• 5p per litre cut in fuel duty that will be in place for 12 months
• Cut to VAT on the installation of energy saving materials

Cutting and reforming business taxes, to create the conditions for private sector-led growth

• Consult on business investment tax regime seeking ‘the most effective way to cut taxes on investment while ensuring value for the taxpayer’. The main Spring Statement document (pages 37-38) suggests a range of possible options.
• Encourage businesses to offer more high-quality employee training and explore whether the current tax system – including the operation of the Apprenticeship Levy – is doing enough to incentivise businesses to invest in the right kinds of training
• Improvements to R&D tax reliefs, setting out support for data and cloud computing costs, refocusing relief on R&D undertaken in the UK, and allowing businesses to claim relief on R&D supported by pure maths

Sharing the proceeds of higher growth fairly with working people, through further tax cuts

• Cut the basic rate of income tax from 20 per cent to 19 per cent from April 2024 (Scottish government will receive their share of funding, which they can use to cut taxes or raise spending)
• Make the tax system simpler, fairer and more efficient including reforming ‘costly and complex’ tax reliefs and allowances

Chancellor’s Statement

In his speech, Rishi Sunak claimed his Spring Statement builds a ‘stronger, more secure economy' for the UK. It is too early to know the full impact of the Ukraine war on the UK economy, but the OBR now forecasts growth of 3.8 per cent in 2022, 1.8 per cent in 2023, and 2.1 per cent, 1.8 per cent and 1.7 per cent in the following three years.

Unemployment is now forecast to be lower in every year of the forecast, he said. It is already at 3.9 per cent. He said the Ukraine war’s most significant impact domestically is on the cost of living. He said people should be reassured that the energy price cap will protect their energy bills between now and the autumn.

The Chancellor confirmed that the Health and Social Care Levy stays, but he argued that a long-term funding solution for the NHS and social care is not incompatible with reducing taxes on working families. He said increasing the NICs threshold to equalise it with income tax is the best way to help low and middle earners through the tax system. There will be tax cutting announcements on business investment in the autumn UK Budget, he said.

Opposition frontbench reaction

Responding to the statement, Rachel Reeves, Labour’s Shadow Chancellor, complained that pensions and social security will not keep up with inflation, and pensioners and those on social security will be getting a real-terms cut to their income. Reeves regretted that the SNP has joined the Tories in wanting to shield oil and gas producers from Labour’s windfall tax, which could raise £3 billion. She said a VAT cut on energy would have been a ‘real Brexit dividend’. She said the VAT cut on building material ‘is wholly inadequate’ for energy efficiency.

Despite the Spring Statement announcements, Reeves said Sunak is still taking money out of people’s purses and wallets with this year’s increase in NICs. She complained that someone with significant income from buying and selling stocks and shares will not be paying any more in tax, but workers will. She complained that a landlord with many properties will not pay a penny more in taxes, but their tenants will. Separately, she called on the National Crime Agency to investigate COVID-19 related fraud, including related political decisions.

Responding to Reeves, Rishi Sunak countered that a windfall tax will discourage investment in the North Sea, that small businesses in the retail, hospitality and leisure sector will get a 50 per cent discount on their business rates bill next week, and said that the increase in NI thresholds to equalise them fully is a ‘£6 billion tax cut for 30 million UK workers’.  

Alison Thewliss, the SNP’s lead Treasury spokesperson at Westminster, called the Tax Plan ‘lightweight and superficial’. This cost of living crisis has been a decade in the making because of austerity, Brexit, COVID-19 fraud and pandemic mismanagement, she said. She said the equalising of NICs and income tax thresholds was long overdue.

On Reeves comments about the SNP’s lack of support for a windfall tax, Thewliss said her party thinks a windfall tax should be widened to profits made by the likes of Amazon, Serco and Netflix during the pandemic.

Responding to Thewliss, Rishi Sunak replied that Scotland already has a considerable degree of fiscal autonomy and he looks forward to hearing from her that the Scottish Government will cut taxes for their taxpayers with the powers and funding that they will get. (Thewliss raised a point of order at the end of the debate in which she stated that there is already a 19 per cent rate of income tax for the lowest earners in Scotland.)

Lib Dem leader Sir Ed Davey tweeted that the Chancellor was “swindling the British people. Nothing to stop the cost of living crisis, nothing to stop eye-watering inflation and nothing to stop budget cuts to schools. A shocking Tory failure to rise to the crisis facing millions of people.”

Conservative backbench reaction and questions

Sir Peter Bottomley (Father of the Commons) remarked that pensioners do not just have the state pension, many have fixed pensions on top and getting inflation down as fast as possible is vital to them. They cannot go for a bigger pay increase if they are not at work, he said.

Sir Edward Leigh asked the Chancellor to help middle income pensioners with some sort of tax relief, if not on insurance, on the cost of health operations that are delayed for up to two years.

Robert Halfon wants reform of the apprenticeship levy, especially a focus on enabling more disadvantaged young people to take up apprenticeships, including degree apprenticeships.

Kevin Hollinrake welcomes the rise in the NICs threshold because it will not only help low earners but bring a welcome simplicity to the system. On the apprenticeship levy, he called on the Chancellor to look at the amount that can be transferred through the annual levy transfer.  It is currently capped for larger organisations, and that restricts the amount that they can give to smaller organisations. A reform would see much better use of the apprenticeship levy, which would help small and medium-sized enterprises, local authorities and others.

Chair of the Treasury Committee Mel Stride broadly welcomed the Spring Statement, including the cut to fuel duty, the VAT reduction relating to energy efficiency and solar and the hardship fund. But Stride wanted the NICs increases for next year to have been scrapped in their entirety.

Huw Merriman remarked that if the 5p reduction in fuel duty becomes permanent Sunak will not be able to reduce income tax.

Greg Clark, Chair of the Science & Technology Select Committee, congratulated the Chancellor on a tax-cutting, deficit-cutting, tax-simplifying statement very much in the tradition of Nigel Lawson. He asked if the Government is on track for its target for investment in R&D across the economy to reach 2.4 per cent of GDP by 2027, to which Sunak said we are on track for the ‘government bit of it’ but not on the private business bit of it.

Stephen Hammond wants the Super Deduction made permanent, believing it the most effective way of changing behaviour and securing greater R&D and capital expenditure.

Anthony Browne welcomes the publication of the Tax Plan. Too often, governments are tactical about their tax policies, leaving great uncertainty for businesses about what will happen next, he said.

Richard Drax is calling on the Chancellor to bring forward the tax cuts, particularly for the lower earners to help them meet the increasing bills. Sunak replied that the increase in the personal tax threshold in July was brought in far quicker than these things normally are.

Peter Aldous said the best way of targeting support for those who need it is through the benefits system.

Labour backbench reaction and questions

Chair of the Public Accounts Committee Dame Meg Hillier blamed the Government for the £4.7 billion that was lost to bounce-back loan fraud which could have mitigated measures such as the NICs increase.

Seema Malhotra said the NICs rise should have been scrapped because consumer confidence is declining, hitting small businesses hard and setting back their recovery from the pandemic.

Stephen Timms, Chair of the Work and Pensions Committee, was unconvinced that the household support fund is effective at delivering help to families in hardship. Timms suggested that uprating universal credit in line with current inflation would be more effective.

John McDonnell, a former Shadow Chancellor, pointed out that benefits and pensions are going to rise by 3.1 per cent while inflation is predicted to be between seven per cent and 10 per cent. McDonnell is calling for a doubling of the winter fuel allowance.

Fleur Anderson said in her Putney constituency 31 per cent of children live in poverty. The biggest measure that the Chancellor could bring in is scrapping the two-child benefit cap, which is cruel and leaves children in poverty, she said. The Chancellor said the best way to make sure that children do not grow up in poverty is to ensure that they do not grow up in a workless household.

Ellie Reeves remarked that the boss of BP’s salary has increased to almost £4.5 million, which is further evidence that it is time for a windfall tax on oil and gas, to tackle rising energy bills. Sunak told her to wait for the Prime Minister’s forthcoming energy security strategy.

Florence Eshalomi said one of the key ways that the Chancellor could help many businesses, not just those in London, is through VAT cuts for tourism, such as a permanent cut to 12.5 per cent to help those businesses get back on their feet. But Sunak countered that statistics show that the hospitality industry is recovering very well.

Alison McGovern said that unemployment is forecast to rise next year and then plateau.

Clive Betts said workers at Liberty Steel are protesting about the Prime Minister’s broken promise that if we left the EU, he would cut energy bills for steel companies.

Other backbench reaction and questions

Tommy Sheppard (SNP) remarked that the Chancellor is proposing to cut the value of state social security payments by at least four per cent and putting up tax rates for those on average and below-average incomes, yet Sunak refuses even to countenance asking those who have extreme wealth, or the corporations that are making obscene profits, to pay a little more.

The National Audit Office has found that, in a single year, HMRC ‘allowed’ more than £300 million of fraudulent claims for R&D tax relief, said Peter Grant (also SNP). Grant worries that the R&D announcement in the Spring Statement will end up another taxpayer-funded ‘get rich quick scheme’. Link.

Sarah Olney (Lib Dem) said an ‘emergency cut’ for one year to standard rate of VAT was possible because the OBR forecast that the Treasury will take an additional £13 billion in VAT thanks to inflation. But Sunak replied that it is wrong to suggest that there has been a VAT windfall.

Wera Hobhouse (Lib Dem) is surprised that the Chancellor has not agreed to a windfall tax on the ‘super profits’ of the oil and gas giants. Such a tax would hit shareholders, not workers and their jobs. It would not hamper business from operating successfully, she added.

Given the windfall in taxes that Sunak has experienced, more could have been done to help with fuel costs, energy bills and other cost of living increases, said Sammy Wilson (DUP). It is significant that the Chancellor could not apply all his tax cuts to Northern Ireland because of the Northern Ireland protocol, he said, which shows that the protocol needs to be dealt with.

Ian Paisley (DUP) complained that none of the Chancellor’s flagship programmes will apply to Northern Ireland until he goes ‘cap in hand’ to the European Community and seeks its permission to apply these VAT differentials there.

Caroline Lucas, Green Party, said there is a climate-shaped hole at the heart of this statement with the Chancellor not even mentioning the word ‘climate’, according to her.

Hansard is here.

Other reaction

Paul Johnson, Director of the Institute for Fiscal Studies (IFS), noted that the cuts to income tax and National Insurance “are effectively paid for by increasing revenues as a result of fiscal drag. The freezing of the income tax personal allowance and higher rate threshold turn out to be much bigger tax rises than first intended. As a result, almost all workers will be paying more tax on their earnings in 2025 than they would have been paying without this parliament’s reforms to income tax and NICs, despite the tax cutting measures announced [on Wednesday].”

Johnson said that if the Chancellor wants to be remembered as a tax reforming chancellor, so far he is headed in the wrong direction. “The combination of increased NI rates and a reduced income tax rate will make the tax system both less equitable and less efficient. It will increase the wedge between higher taxes on earnings and lower taxes on pensions and unearned incomes.” However the IFS said Sunak’s policies were “overall progressive and will take significantly more from those on the highest income”.

The Resolution Foundation said the 1p cut in the basic rate of income tax from April 2024 saves an average earner £243 a year. But the gains of this and the lasting impact of a higher NICs threshold are wiped out by previously announced tax rises. In 2024-25, when the income tax cut comes into effect, 27 million out of the 31 million people in work will pay more income tax and NICs because of personal tax changes announced by Sunak, it says.

The Centre for Policy Studies (CPS) warmly welcomed the Chancellor’s landmark decision to raise NICs thresholds to the same level as income tax, in response to the cost of living crisis, pointing out that it had argued for the change in a recent pamphlet.

Media reaction has been almost uniformly negative. Thursday editions of The Times, Telegraph and Independent all led on the “biggest hit to living standards since the age of rationing.” The Guardian accused Sunak of squeezing the poorest. The Star calls it the “up yours mini budget.” The FT warned of “dark economic times.”

Among the commentators, Iain Martin in The Times doubted Sunak’s claims to be a tax cutter. Chris Giles in the FT said that Sunak “offered minimal short-term help” for households suffering from the cost of living, and concludes he has prioritized a pre-election “war chest” of future political giveaways. Alex Brummer in the Mail said the NICs rise should have been reversed. Roger Bootle in the Telegraph also attacked the decision not to scrap the NICs rise. The Sun’s leader column likewise says he should have scrapped the NICs hike and adds that his pre-election income tax cut “won’t change much.

Analysis by POLITICO, after talking to Conservative MPs privately, says that many foresee trouble ahead for Sunak. “We didn’t need to have these tax increases and we are squeezing people’s incomes when we don’t need to, and cutting growth rates,” they quote an ex-minister as saying. Ministers and backbenchers reportedly agree that the Chancellor will have to stage “a much more considerable intervention” in his autumn budget, as energy bills surge again and inflation soars higher still.

By Hamant Verma, CIOT's Senior External Relations Officer