“Nadhim Zahawi takes the dubious honour of being Boris Johnson’s third Chancellor in as many years and top of his to-do list is the monumental task of solving the country’s current cost of living crisis,” says Laura Suter, head of personal finance at AJ Bell.
“With inflation tipped to hit 11% later this year, average energy bills due to rise by a whopping £900 in October and petrol prices hovering near the £2 a litre mark the problems are mounting up for the British public – and in turn the new Chancellor.
“Rishi Sunak cited next week’s economic update as one source of friction with Prime Minister Boris Johnson, which means Mr Zahawi clearly has a challenge ahead if he wants to implement his own plans rather than just do Mr Johnson’s bidding.”
Here are some things the new Chancellor could implement to help the public’s finances:
- Tackling energy costs
“Estimates now put the average energy bill at almost £2,900 when the price cap next changes in October – a dramatic £900 rise on the current prices and more than double what it was at the start of the year.
“One suggestion from the opposition has been to slash the VAT due on energy bills to lower them. The current Government has been accused of nabbing Labour’s ideas and repackaging them with a new name, such as the windfall tax, so it could do the same here.
“As energy prices have risen, so too has the tax take for the Government. VAT is charged at 5% on energy bills, meaning that on an average energy bill of £2,900 cutting VAT to zero would equate to around £140 a year saving for households.
“However, the criticism of this plan is that it doesn’t target the help at those who need it the most, and provides a tax break for all, including the wealthiest who can easily afford energy price increases. That hasn’t stopped the Government with its current £400 energy rebate for all and the increase in the Winter Fuel Allowance, which goes to all pensioners regardless of income. But it may want the next round of support to be more targeted at those who will struggle the most this winter.
“The other option is to increase that £400 energy rebate scheme, with some predictions that the Government had left some money in the coffers to ramp up the scheme once the October energy price cap was set and we had a better idea of how bleak this winter was going to be.”
- Cutting basic rate income tax to 19% - unfreeze income tax bands
“Rishi Sunak already announced plans to cut income tax from 20% to 19%, but from 2024. One thing the incoming Chancellor could do is bring that cut forward, but it’s not the bumper tax-saving giveaway that many are hoping for.
“In fact, over five years the move is wiped out by the Government’s plans to freeze the income tax bands until 2026 – which represents a far bigger tax grab than many realise – so if Mr Zahawi really wants to help with the cost of living squeeze, he needs to revisit the freeze to income tax bands.
“As we can see from the figures below, the move to bring forward by a year the plans to cut basic-rate tax from 20% to 19% will only save someone on £25,000 a year £143, while someone on £50,000 a year will save £377 in tax – the maximum saving. While that will give people some breathing space, taxpayers will still be paying far more in tax than if the Conservatives had left the income tax rates the same but not frozen tax bands.
“Someone on £25,000 a year will still be paying £1,284 more in tax between 2022 and 2027 compared with a system with a 20% tax rate and unfrozen bands, while someone on £50,000 will pay £5,396 more over that five years and someone earning £80,000 will pay £7,997 more.
“The effect of freezing the income tax allowance has been turbo-charged by rising inflation, because if the income tax thresholds weren’t frozen, we’d be expecting them to rise with inflation – though in reality the Government might well have baulked at increasing thresholds by 9% or 10%.
“The frozen income tax allowances mean millions of people are going to get dragged into the higher tax bands. Based on OBR forecasts, we calculate that the personal allowance would reach £15,300 in 2026/27 if uprated in line with CPI, but will only sit at £12,800 if frozen until 2025/26. Likewise the higher rate threshold would reach £61,200 in 2026/27, but under the current system we can expect it to sit at just £51,200.
“The examples assume earnings rise in line with average earnings forecasts from the OBR, and that in Scenario A, income tax thresholds would have risen in line with the OBR CPI inflation forecast.”
|
Annual salary |
Tax saved by bringing cut to 19% basic-rate tax forward a year |
|
£25,000 |
£143 |
|
£50,000 |
£377 |
|
£80,000 |
£377 |
|
Income tax payable 2022 to 2027 |
||||
|
|
A. Pre-budget March 2021 |
B. Post Spring Statement |
C. Proposed plan now |
|
|
Annual salary |
Tax rate of 20% and inflation linked thresholds |
Tax rate falling to 19% in 2024 and frozen theesholds |
Tax rate falling to 19% in 2023 and frozen thresholds |
Additional tax due between pre-budget March 2021 vs Proposed plan now |
|
£25,000 |
£13,214 |
£14,642 |
£14,498 |
£1,284 |
|
£50,000 |
£40,949 |
£46,722 |
£46,345 |
£5,396 |
|
£80,000 |
£104,912 |
£113,286 |
£112,909 |
£7,997 |
Sources: AJ Bell, ONS, OBR
- Ditching Corporation Tax increases
“The new Chancellor has already set out his stall as a tax cutter, with a focus on making UK businesses more competitive on a global stage. He has highlighted corporation tax as one route to help ‘rebuild and grow the economy’, which means the planned increases to the tax could be ditched.
“Rishi Sunak had already announced that corporation tax is due to rise to 25% from next April, up from the current 19%. The new scheme would introduce variable rates of corporation tax, depending on the profits of the business, rising to a top rate of 25% for those who have profits of £250,000 or higher. On top of making the system more complicated for businesses to navigate, it was also expected to generate £11.9bn for the Government next tax year and £45bn over the three years from April 2023 to April 2026. That means ditching the planned increase would leave a hole in the new Chancellor’s budget.”
- Cutting VAT for businesses
“If the new Chancellor is going back to the pandemic playbook for ideas, he could re-introduce the cut to VAT for hospitality businesses. Restaurants, pubs and hotels have all been hit by rising energy and food bills, meaning many have to make the difficult decision to put up prices or make smaller profits – or do both.
“During the pandemic VAT for these businesses was cut from 20% to 5% for more than a year, before it was raised to 12.5% in September last year until the full 20% rate was reinstated at the end of March. The move was touted as helping to cut prices for individuals, but in reality many of the more than 100,000 businesses affected kept the VAT saving for themselves in order to boost their takings after the lockdown drought.
“That means any cut to VAT would likely benefit businesses more than consumers. However, if it stopped prices rising by so much it would protect consumers from some cost increases. In 2021/22, the cut to 5% for half of the tax year and 12.5% for the other half cost the treasury £4.7bn.
“Someone going out for a meal costing £60 now would see their costs reduce by £7.50 if VAT was cut to 5% if all that saving was passed on to customers. Likewise, a hotel booking costing £200 would be subject to £25 less VAT if the rate was cut.
- Cutting the Lifetime ISA exit charge
“The Government reduced the Lifetime ISA exit fee to 20% during the Covid pandemic, to reflect the fact that lots of people would have to withdraw their money due to losing their job or seeing their income fall. This sets a precedent and shows that it’s easy for the Government to implement a reduction.
“With the cost of living soaring and wages failing to keep up, it’s inevitable that some will have to dip into their Lifetime ISA savings just to pay their bills and meet the rising cost of food, petrol and energy bills. The latest figures show that a record 77,500 people were hit with more than £33 million worth of early withdrawal charges in 2021/2022, as many people were forced to dip into their savings to meet costs elsewhere.
“The new Chancellor could reduce the exit fee to 20%, so it only recovers the Government bonus. It will give people a bit of breathing room to dip into their savings and not face the punitive exit fee for doing so. Someone who withdrew £2,000 from their Lifetime ISA would save £100 if the exit penalty was cut from 25% to 20%, representing a much-needed boost to help pay the bills.”
