Speaking purely objectively, UK economic growth has lagged behind it’s peers since 2019, however the data is presented. 2 main contributing factors are identified – a withering workforce and stifled business investment.
It was called a ‘budget for growth’. But high inflation, high interest rates, and high tax is not a traditional recipe for growth. So it was more a budget for continuity and laying the foundations for future growth, with very specific targeted measures.
One of the most important components of these foundations, is a robust labour market, and you could say that we as UK Plc are a touch short-staffed at the moment.
Whilst unemployment (1) is at a record low of 3.7m, levels of economic inactivity (2) is at a record high of 8.9m post pandemic. Around a 3rd of these individuals state long term sickness as the cause. Covid changed many people’s perspective on what’s important in their lives and in particular work/life balance.
There were several measures announced to incentivise a return to work including help with childcare, pension allowance reforms and a ‘midlife MOT’ to assess readiness for work.
To address business investment, greater incentives were offered to encourage spending on capital items such as plant and machinery, to offset the rise in corporation tax. In other words, the more you invest, the less you pay in tax.
What does this mean for you? Well for those in market sensitive businesses and roles, you might see a continuing reluctance amongst your counterparties for now. For those in pay disputes, expect negotiations to continue rather than there be a quick fix. For those who enjoy our hospitality, expect your pub roast to be a little slower on a Sunday for now.
However, having restored our reputation for fiscal discipline, and once we’ve brought down inflation, got through the cost of living squeeze and stabilised interest rates, then maybe some more generous stimulus will be served up come the autumn (3).
Some of the biggest decisions that could impact your finances have already been made. I won’t rehash them here but the fun and games from Autumn 2022 can be summarised as follows, along with links to my original notes:
Quasi Kwarteng’s Mini budget (Sep-22) – Deregulation and lower tax burden (https://www.kingstonandco.org/post/mini-budget-sep-2022)
Jeremy Hunt’s Emergency Statement (Oct-22) – Reversal of the mini budget (https://www.kingstonandco.org/post/emergency-statement-oct-22)
Jeremy Hunt’s Autumn Statement(Nov-22) - Higher tax burden
Office of Budget Responsibility (OBR) Forecast
The OBR is an independent body tasked with providing economic forecasts off the back of any major fiscal event.
The OBR forecast inflation to fall from 10.7% to 2.9% by end of 2023, exceeding government targets of a 50% reduction.
In terms of growth, a 1.4% contraction in 2023, including a recession, was forecast during the Autumn of 2022. The OBR now forecast the UK will avoid recession with a 0.2 contraction with growth, albeit downgraded, forecast to return from 2024. An improved picture, albeit a fairly modest achievement.
A striking figure was the projected 5.7% reduction in household disposable income by the end of the 23-24 year. This puts household income at around the same level as 10 years ago.
Some mixed news there.
Support for childcare
The extra investment in childcare support is aimed at getting more parents of young children back into work.
30 hours of free childcare, currently offered to parents with 3 and 4 year olds, will be extended to parents with all pre school children over 9 months old. There will be a delayed roll-out though to ensure supply can meet demand.
Universal credit claimants will have their childcare costs settled directly rather having to be fronted by the claimant.
Pensions
The pension annual tax free allowance will rise 50% from £40,000 to £60,000.
The pension lifetime tax free allowance has been abolished all together, previously just over £1,000,000.
Now many of us admittedly would do well do threaten these types of figures.
It is primarily aimed at senior public sector workers, such as doctors, enjoying the benefits of very favourable pension conditions from years gone by, who are leaving work early to avoid tax penalties upon retirement.
What will be criticised is the fact that the reforms weren’t made available only for Doctors, like the existing scheme for Judges, rather than rolled out universally. It can appear like a generous tax cut for the wealthy.
Business Growth
Corporation tax reforms will go ahead. The rate remains at 19% for businesses with profits under £50,000. Tax will be charged at 25% for businesses with profits over £50,000, with marginal relief applied on profits up to £250,000.
To offset this tax rise, the government has introduced full 1st year tax relief, known as capital allowances, on all IT equipment, plant and machinery expenditure for the next 3 years, pending the assessment of a permanent policy.
It is expected to increase business investment by 3% per year.
But there is still a huge amount of uncertainty about. As a business owner, can you depend on the consistency of these measures over the medium term, to have faith that your investment is protected.
Changes to tax rates and thresholds
To summarise, as was announced in November, the majority of Income tax and NI thresholds will be frozen. The higher rate of tax threshold has also been reduced from £150,000 to £125,140, as has the dividend tax free allowance from £2,000 to £1,000. This means that collectively a greater portion of our income will be taxed at higher rates, as wages increase.
The National Minimum Wage has gone up from £9.50 to £10.42, as has Child Benefit from £21.80 to £24.00 per week for the eldest/only child and from £14.45 to £15.90 for each additional child.
A comprehensive list of benefits, taxes, and thresholds will be sent out to you in the coming days.
For company directors, my recommendations for salary withdrawals will also follow in the coming days, along with tax projections for total withdrawals.
Other highlights
Energy – the government has extended the Energy Price Guarantee for a further 3 months, invested in low-carbon energy projects and energy efficiency for leisure centres and equalised charges for prepayment meters.
Returning to work – further incentives to get the economic inactive back to into work such as fitness-to-work tests, skills boot camps and a relaxation of some immigration rules for the construction sector amongst others
Investment zones – aimed at emulating Canary Wharf and the Liverpool Docklands, 12 investment zones across the UK have been created, with £80m offered to each site over the next 5 years.
Defence – spending increased by £11b over 5 years to address increased global threats.
If you have any questions or would like to discuss how this budget impacts you, please let me know.
Footnotes
Unemployment is defined as those people looking for work who are out of work
Economically inactive is defined as working age adults not looking for work
i.e. closer to the election…
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