Tax cuts for growth – the order of the day for the emergency Budget?
Chris Sanger, EY’s Head of Tax Policy, provides his thoughts and predictions on what direction the new Chancellor might take at this emergency fiscal statement:
“The Prime Minister is still in her opening weeks in office following a leadership campaign that promised no new taxes and has led to targets of 2.5% growth next year. We can expect this fiscal event to be far shorter than a traditional Autumn Budget and targeted at delivering stimulus over the next 18 months. With consultation on the draft Finance Bill only closing a couple of weeks ago, measures needing imminent legislation may be few and far between. Instead, we should expect a statement of intent for policy, rather than detailed announcement of change.
“It’s likely that we’ll see a number of tax cuts and threshold manoeuvrings, aimed at both easing the burden on taxpayers and inviting investment and growth from business. This would be a marked step change in approach for the Treasury, which in recent years has targeted growth through more targeted measures. Whereas the Treasury under Rishi Sunak opted for higher tax rates that incentivised business with tailored relief and interventions, we may now be entering an era where it is hoped companies respond to lower rates. We should expect to hear the ‘Britain is open for business’ message repeatedly and emphasised globally.”
A ‘Cost Of Living’ raft of cuts to relieve stretched households
Tom Evennett, EY’s Head of Private Client Services, comments:
“The Chancellor will feel the need to deliver on promises made by the Prime Minister during her leadership race, which included reversing the 1.25 percentage point rise in National Insurance contributions and abolishing the introduction of the Health and Social Care Levy, which was intended to come into force in April. Making these changes would mark savings for both employees and employers, but it remains to be seen how quickly government can act here.
“The 1.25 percentage point National Insurance increase is already in effect and it would take time for employers and payroll providers to implement change, which means we may see a promise to reverse the rise from the first of January rather than immediately. Self-employed and freelance professionals hoping to benefit early will probably be disappointed, as governments tend to prefer a standardised approach in these matters and will likely provide a set date from when the cut will apply to everyone.
“The Health and Social Care Levy is legislated to come into effect in April and to replace the National Insurance increase and so would require a change in law to reverse. It’s also a broader policy than National Insurance, as retirees who still earn are subject to it. The government may announce its intention to abolish the introduction of the levy this week, with legislation coming in the New Year. This would also provide the time to explore measures to fund health and social care changes from general taxation rather than a ring-fenced levy.
“The Chancellor may also look to end the four-year freeze on income tax thresholds introduced to pay for debts accrued from pandemic measures. We may see a combination of both lifting the higher rate threshold and the tax-free Personal Allowance from £12,570, which would offer instant relief for households and wouldn’t require immediate legislation, as it could be included in the upcoming Finance Bill.
“It’s likely to be too soon into the new Chancellor’s time in office to expect amendments to policies such as Child Benefit or pension tax, but that’s not to say we shouldn’t expect change in the future. Inflation and energy bills will continue to bite and in the coming months we may see measures introduced to offer further help. This could include adjustments to Child Benefit eligibility, which is currently withheld from household with one parent earning a salary higher than £50,000 but given to a two-parent household where both parents earn £40,000 each.”
An invitation to business
Chris Sanger, EY’s Head of Tax Policy, comments:
“If the country is to meet the ambitious target of 2.5% growth next year, the Chancellor will probably need to use this mini-Budget to set out the UK’s stall for investment and incentivise business.
“The Prime Minister has already rejected the idea of a windfall tax on oil and gas producers as the government looks to enhance UK’s energy self-sufficiency by attracting fresh North Sea investment.
“We can expect to hear plans to reverse the six percentage point hike to Corporation Tax, due to come into force in April, and maintain a 19% rate. The hike has already been legislated and so any reversal will require a change in law, so it’s probable the Chancellor will use this as an opportunity to announce his intent to seek this change. This is a Budget of intent, signalling the new government’s aim to spur business growth and attract inward investment.”
Is this temporary policy – or a permanent shift?
“During the leadership race, the Prime Minister promised no new taxes and this event is likely to live up to that. Whether they’ll be retained long term remains to be seen and the marker of success will be how the market responds. If these cuts do spur a significant level of investment, it will be difficult for any government of any political persuasion to justify a reversal.
“Can the Prime Minister retain her promise of no new cuts for the foreseeable future? If there is a ‘full’ Budget later this year or in Spring, we may see some tightening of corporate loopholes that the PM mentioned before her selection and a response to the Online Sales Tax consultation, which closed earlier this year. However, these will likely be framed as enhancing existing tax frameworks, rather than the introduction of new policy.”