Updated: Aug 18, 2022
Reeves Independent analyses the Spring Budget 2022 to unearth any changes that may affect you.
Two years on from the first lockdown the Chancellor, Rishi Sunak, stood at the despatch box to deliver his Spring Statement. He did so against a background of a devastating war in the Ukraine, rising inflation, soaring energy and commodity prices and a report from the Office for National Statistics (ONS) that inflation as measured by the Consumer Price Index (CPI) was at 6.2% a 30 year high.
This was a sharp rise from the previous month at 5.5% and well above estimates for this month of 5.9%. The immediate outlook suggests that inflation has some way to go to an average of 7.4% this year.
Not surprisingly, the Chancellor’s room for manoeuvre was somewhat limited with the uncertainty of global events. However, like previous Chancellors he did manage to pull one rabbit out of the hat that no political or economic pundit had forecast, namely the change in National Insurance contributions being aligned with the basic rate of tax.
With this exception, we saw no major tax changes but promises for the future. It appeared to many that Rishi Sunak was ‘keeping his powder dry’ as given the continuing uncertainty stemming from the Ukrainian conflict, he might need the £30bn surplus to protect the economy later in the year. Others have taken a more cynical view that with a General Election due before January 2025 he might want to use any surplus to boost the chances of a Conservative Government being re-elected.
Whatever your view the Chancellor needed to be seen to be doing something to help households in the UK who are struggling to deal with rampant energy costs and rising food and clothing prices. The longer the conflict with Russia continues the economic reality threatens the standard of living of all in the UK.
National Insurance (NI)
The increase in the NI threshold by £3,000 was universally welcomed and brought the starting point for NI with that of the threshold for paying the basic rate tax, £12,570. For many on very low incomes this was welcome although the actual financial benefit will be minimised by the rising costs to household bills. The proposal to maintain the hike in NI will still go ahead which will penalise a number of households. Whilst the increase was to protect funding for the National Health Service (NHS) the amount being given back in the £3,000 increase in the NI threshold equates to most of the ring-fenced money for the NHS. It will be interesting to see how the Chancellor will be able to square this circle when he makes his Autumn review.
The statement that the basic rate of income tax is to be cut to 19 pence from 20 pence was welcomed but this will not be until 2024. This was a case of sounding aspirational without putting pressure on the current situation.
It is worth noting that the proposed income tax cut will not apply in Scotland. The Scottish Government will be free to decide how to allocate this additional resource – whether that be through tax cuts of its own, or higher spending on public services. The politics of this will be interesting.
The cut of 5p a litre in fuel duty has been widely welcomed by the motoring public as well as businesses. When VAT is added to the equation the actual reduction is 6 pence per litre the largest cut in fuel duty ever. Whilst the actual saving on a typical family 55 litre fuel tank vehicle will only amount to around £3.30 it is a step in the right direction given the inflationary environment we live in.
The real winners will be those who transport goods to our stores and supermarkets. Part of the inevitable rise in the cost of living is transporting goods to the supermarket. Although this cut will not solve the problem it will be another step in alleviating the cost of inflation.
Overall, the Spring statement was a bit like ‘the Curate’s egg”, good in parts. In many ways we see this as a forerunner to the Autumn budget when Rishi Sunak might have a clearer picture of the future. The big driver to what happens later in the year will be what happens in the Ukraine. The impact on global inflation cannot be underestimated and the longer this war continues the greater the issues facing us all.
As an example, the triple lock on pensions was abandoned this year simply because in the words of the Chancellor, we just cannot afford it. The Government has stated their commitment to reinstating this next year, but a treasury minister conceded that it will always be subject to review. The meaning is simple, an option of pushing the retirement age upwards combined with potentially lower national insurance receipts brings the ongoing affordability of maintaining the state pension triple lock beyond this Parliament in doubt.
It has been said that a week is a long time in politics, therefore with six months or more before the Autumn review we believe that the content of the Chancellors red box may be filled with a great deal more information to digest than it was this month.
This article is for information only and should not be seen as advice or a recommendation to take action. Investments can go down as well as up and you may not get back the original capital invested. Please note: The Financial Conduct Authority does not regulate advice on commercial mortgages, some buy to let mortgages and matters of taxation including inheritance tax planning.