Chancellor Kwasi Kwarteng’s “growth plan” contained multiple tax initiatives, including proposals to reverse recent increases, cancel planned rises, plus some big surprises.
The result was a package of tax cuts for both households and businesses. Kwarteng’s biggest surprise was the abolition of the additional rate of income tax — the 45 per cent band payable by people earning more than £150,000. All earnings above £50,270 will now be taxed at 40 per cent.
Kwarteng said the reform would “reward enterprise and work . . . incentivise growth” and “benefit the whole economy and whole country”.
The Treasury estimated that scrapping the additional rate of income tax would cost about £2bn per year by 2026-27, the end of the government’s forecast period.
Abolition of the rate, paid by 629,000 individuals, is likely to attract a lot of political controversy. Rachel Reeves, shadow chancellor, attacked Kwarteng’s growth plan as “a return to the trickle down [economics] of the past, not a brave new future”.
The chancellor said the basic rate of income tax would be cut from 20 per cent to 19 per cent next April.
This cut, related to earnings between £12,570 and £50,270, had been pencilled in for 2024 by his predecessor Rishi Sunak. Bringing it forward will cost £5.2bn next year.
The government is also cutting the main rates for national insurance paid by employers and employees by 1.25 percentage points from November — reversing a rise introduced by Sunak. This increase was meant to be the prelude to a new tax funding the NHS and social care — now also cancelled. These cuts will cost £18.1bn by 2026-27.
The Resolution Foundation, a think-tank, estimated that almost two-thirds of the cost of Kwarteng’s personal tax cuts would accrue to the richest fifth of households.
The chancellor confirmed that corporation tax would not rise to 25 per cent, as had been planned by Sunak. The main rate will remain at 19 per cent. Dropping this proposed rise will mean the Treasury will forgo £18.7bn a year by 2026-27.
The chancellor’s growth plan included several smaller measures. The annual investment allowance, which had been temporarily increased from £200,000 to £1mn for 2022, will now stay at that level.
The allowance is intended to encourage investment by allowing businesses to claim full tax relief on qualifying investment in plant and machinery.
The government has also expanded the seed enterprise investment scheme, a relief for investors in early-stage companies, and the company share option plan.
Kwarteng’s growth plan was welcomed by business groups. Tony Danker, director-general of the CBI, said: “Today is day one of a new UK growth approach. We must now use this opportunity to make it count and bring growth to every corner of the UK. Fifteen years of anaemic growth cannot be repeated.”
The Treasury is also repealing past reforms of the so-called IR35 rules, which relate to workers who supply their services via an intermediary, such as a personal service company. These rules are intended to make sure that contractors pay broadly the same income tax and national insurance contributions as directly employed staff.
The changes being repealed made employers bear the responsibility for compliance with the IR35 rules, and Kwarteng said they “added unnecessary complexity and cost for many businesses”. The Treasury will forgo £2bn a year by 2026-27.
Martin McTague, chair of the Federation of Small Businesses, said the Truss government was “off to a flying start” and welcomed the demise of the “poorly thought-out, unnecessary and burdensome IR35 rules”.
The government will also raise the threshold at which stamp duty is payable on residential property purchases — a tax cut costing about £1.7bn by 2026-27.
Source: Financial Times