Quasi-Budget cuts tax bill by £40 billion plus a year

In a massive shake-up of the UK's finances, Kwarteng outlined tax cuts adding up to a total of £169 billion over the next four and a half years, or more than £40 billion a year by 2025-26. He proposes to abolish the Office of Tax Simplification, instead setting a mandate to HM Treasury and HMRC to focus on simplifying the tax code. Both the ATT and CIOT spoke of their disappointment at this decision.

The Chancellor told MPs: “The tax cuts and reforms I’ve announced today – the biggest package in generations – send a clear signal that growth is our priority. Cuts to stamp duty will get the housing market moving and support first-time buyers to put down roots. New Investment Zones will bring business investment and release land for new homes in communities across the country. We want businesses to invest in the UK, we want the brightest and the best to work here and we want better living standards for everyone.”

The announcement of the Growth Plan was not officially a fiscal event and no accompanying OBR forecast was published. This is expected in November. It is unclear whether there will be a full Budget this autumn. There have been some suggestions in the media it will not happen until March.

The ATT, CIOT and LITRG published press releases in response to these announcement.

Among the key tax announcements

Business tax

• Corporation tax rise cancelled, keeping it at 19 per cent (accompanying change to the rate of the Bank Corporation Tax Surcharge also cancelled).
• 2017 and 2021 reforms to the off payroll working rules (also known as IR35) will be repealed from 6 April 2023.
• The Annual Investment Allowance will remain at £1 million permanently.
• New Investment Zones will be set up around the country in which businesses will benefit from ‘time-limited’ tax incentives.
• Reforms to modernise alcohol duties will be taken forward
• Cancelling the increase in rate of Diverted Profits Tax.
• The Government will introduce a ‘modern, digital, VAT-free shopping scheme’.

Personal and employment tax

• Reversing the 1.25 percentage point rise in National Insurance contributions and the accompanying increase in dividend tax rates.
• A 1p cut to the basic rate of income tax one year earlier than planned( ie from April 2023)
• Abolish the 45p additional rate of tax, taking effect from April 2023.
• SDLT nil rate band will be doubled from £125,000 to £250,000. First time buyers will pay no stamp duty up to £425,000 and can claim relief on property up to a value of to £625,000.

Other

• Universal Credit claimants who earn less than the equivalent of 15 hours a week at National Living Wage will be required to meet regularly with their Work Coach and take active steps to increase their earnings or face having their benefits reduced.
• The Scottish Government is expected to receive more than £600 million extra funding over the 2021 Spending Review period because of the changes to income tax and SDLT and the Welsh Government will receive around £70 million over the same period because of the change to SDLT.

Reaction - political

Shadow Chancellor Rachel Reeves (Lab) criticized the failure to tax further the ‘eye-watering’ windfall profits of the energy giants. Reeves said that evidence shows that low rates of corporation tax are not the best way to boost investment and productivity. She said Britain has the lowest headline rate of corporation tax in the G7 but we also have the lowest rate of private investment.

On SDLT proposals, Reeves said the last time the Government made a cut, a third of the people who benefited were buying a second or third home, or a buy to let property. On investment zones, she said every time they were tried, all they achieved was moving growth around the country, not creating growth.

Lib Dem leader Sir Ed Davey said: “This was the billionaire's budget, showing the Conservatives are completely out of touch with families struggling to pay the bills.” The Lib Dems would scrap October’s energy price hike, freezing bills at their current level, and pay for this by extending and backdating the windfall tax on oil and gas companies’ ‘huge, unexpected profits’.

“Actively choosing to cut taxes permanently and spend eye-watering sums to patch up a failed energy market while inflation soars, interest rates are hiked and recession looms will not create growth, it will create economic chaos,” said Alison Thewliss, for the SNP. “Nothing the Chancellor has said today will provide any reassurance or give hope to ordinary people—folks who are struggling to get by in broke, broken Britain.”

Green Party co-leader Adrian Ramsay said: “People and the planet will pay a very high price for this economic and environmental vandalism. We need a tax on super profits, the dirty profits of the fossil fuel companies and the super-rich. And we need to cap higher wages to no more than 10 times the average wage.”

From the Conservative backbenches, Treasury Committee chair Mel Stride welcomed much in the statement, but warned there was “a vast void at the centre of the announcements that have been made this morning: the lack of an independent OBR forecast”.

Treasury Committee member Anthony Browne welcomed the “radical and generous package”, in particular the cut in “the most economically damaging of all taxes, stamp duty”. Noting that groups including the Institute for Fiscal Studies have called for its full abolition, he asked: “Will my right hon. Friend go even further, and consider more cuts in stamp duty to reduce the economic damage and the damage to households that it causes?”

The Chancellor replied that he was grateful to his colleague, “whose policy prescriptions are always interesting and valuable. I have only been in post for two and a half weeks, but I should be happy to discuss with him how we can simplify our tax system.”

Robert Halfon called for cuts in fuel duty. Craig Mackinlay said he was delighted to see lower and simpler taxes.

Reaction – think-tanks

This is the biggest tax-cutting event since 1972, said the Institute for Fiscal Studies, which is alarmed that the UK could be borrowing £120 billion in three years’ time to afford the measures. The IFS has crunched the numbers and found that the combined effect in 2025-26 of all reforms to income tax and NICs introduced over the course of the current parliament is still to leave the vast majority of income tax payers paying more tax. The biggest losers in cash terms will be those earning between £63,000 and £125,000. They will be paying £1,570 more in direct tax in 2025-26 than if no changes had been made. Only those with incomes over at least £155,000 will be net beneficiaries.

The Resolution Foundation warned that without significant cuts to public spending, debt will be on course to rise in each and every year. The think-tank said the cuts largely reverse those introduced by Rishi Sunak in recent years, but with a particular focus on higher income households driven by the reversal of the rise in National Insurance and scrapping of the 45p rate of income tax. Someone earning £200,000 will gain £5,220 a year, rising to £55,220 for someone earning £1 million. Someone earning £20,000 will gain just £157.

Similarly, analysis by the New Economics Foundation said the announcement amounts to a massive transfer of income to the very richest at the height of the cost-of-living scandal, ‘when millions on low and modest incomes are being hammered’.

The IPPR observes that 48 per cent of gains made from changes to income tax and national insurance contributions go to the richest decile and says levelling-up has been undermined as London and the South East gain much more than other regions, with Northern Ireland and the North East benefitting the least.

The Social Market Foundation said the evidence of previous cuts in corporation tax is that they don’t reliably lead to increases in business investment and the best way to increase the long-term productive capacity of the UK economy is to increase the number of highly skilled people working in it.

On the free market right, there was a much more positive response to the announcements, though thinkers and campaigners here hope it is just the start of a broader tax cutting agenda.

The Centre for Policy Studies welcomed the growth plan, and in particular the adoption of specific CPS proposals such as reversing the National Insurance increase, cancelling the rise in Corporation Tax, creating low-tax investment zones and introducing a permanent £1m Annual Investment Allowance. The think tank also noted that the additional 45p rate of tax, stamp duty and alcohol duties were all taxes it had singled out as being particularly inefficient, and urged action on. However, CPS warned that Friday’s plan ‘should only be the beginning’, citing the need in particular for a more competitive tax regime for investments that fall outside the AIA.

The Institute of Economic Affairs claims the additional rate of income tax (45p) was always ‘performative politics’ rather than sound economics. A simplified income tax system, with just two rates of tax, will mean higher earners spend less time tax planning and more time boosting their own productivity, they argue. The Government should consider raising income tax thresholds to help boost pay packets further, it says.

The TaxPayers' Alliance said the cut in the basic rate of income tax is something the think-tank has long campaigned for and claims it ‘will be welcomed by one and all’. ‘Now it’s been brought forward, the chancellor should look to double the cut at the next budget’, it adds

The Adam Smith Institute said making the £1 million Annual Investment Allowance permanent means businesses across the country have greater capacity and certainty to boost the economy ‘at a time we need it most’. The Institute welcomes the abolition of the higher rate of income tax, saying it ‘should never have existed in the first place’. The think-tank claims the ‘regulatory sandbox’ nature of investment zones will enable the Government to test and implement what works on the national level.