Chancellor Rishi Sunak unveiled his Spring Statement on Wednesday with promises to tackle the cost of living crisis, rising fuel prices, and a reduction in Income Tax.
Critics of the Chancellor believe his offerings do not go far enough to challenge the soaring energy bills and rapid inflation rates that are pinching the wallets of lower-income earners across the country.
However, supporters of the Statement point to the cut in fuel duty and Income Tax as well as the rise in the National Insurance contribution threshold as evidence that Mr Sunak is taking appropriate measures to help working families who are taking the biggest hit.
We are going to take a look at some of the details of the Statement and find out what it means for Income Tax.
One of the biggest announcements of the Statement was that the 20% rate of Income Tax will be cut to 19% by April 2024, although the Income Tax personal allowance is also due to remain at £12,570 until 2026. The National Insurance contribution threshold was also raised from £9,880 to £12,570, meaning that you start paying National Insurance when you start paying Income Tax.
As with any budget, there were supporters and detractors of Mr Sunak's announcements. However, there were an unusually large number of dissenting voices from his own wing, with many Conservatives praising the tax cut but unhappy with the near absence of support for people who simply cannot afford to pay their rising energy bills.
What is the Spring Statement?
The Spring Statement is also known as the 'mini budget' and is an annual budget announcement made by the UK's Chancellor of the Exchequer. It precedes the autumn budget, which is the more substantial of the two.
Both budgets lay out the government's spending for the next six months and are used to explain what the public's taxes are spent on.
How will the changes in Income Tax affect workers?
The Chancellor claimed that the 1% reduction on the lowest band of Income Tax from 20% to 19% is expected to amount to tax savings worth an average of £175 a year to 30 million people. The reduction was welcomed by the millions of people who pay the basic rate of income. However, as it is not being introduced until 2024, many questioned its current relevance to helping tackle the cost of living crisis.
Many people also pointed to the fact that the tax-free threshold is not due to rise until 2026, meaning people will gradually spend more of their real income on tax. So despite the reduction in the basic rate of Income Tax, the freezing of the personal tax-free allowance led the Institute of Fiscal Studies (IFS) to claim that almost all workers will be paying more tax on their income by 2025-2026.
What are the current rates of Income Tax in the UK?
The 20% tax rate is the UK's basic rate of Income Tax and is paid by all taxpayers earning £12,571 to £50,270. There is a £12,570 tax-free threshold, which means you only pay tax on earnings above that number.
Anyone earning £50,271 to £150,000 pays the higher rate of Income Tax at 40%. Those who earn over £150,000 pay an additional rate of 45%.
Let's look at some examples of how to work out your Income Tax expenditure each year.
Say you earn £40,000 per year, you are within the 20% basic rate bracket. To work out your Income Tax contributions you do:
- £40,000 - £12,570 (the tax-free threshold) = £27,430.
- 20% of £27,430 = £5,486 (total annual Income Tax contribution).
- £40,000 - £5,486 = £34,514 (total annual salary minus Income Tax deductions).
New basic rate
So let's now look at how much you will save if you earn £40,000 per year under the new 19% rate, which will be introduced in 2024.
- £40,000 - £12,570 (the same tax-free threshold) = £27,430.
- 19% of £27,430 = £5,211.70 (total annual Income Tax contribution).
- £40,000 - £5,211.70 = £34,788.30 (total annual salary minus Income Tax deductions).
- £34,788.30 - £34,514 = £274.30 (total annual savings due to Income Tax reduction).
If you earn £100,000 per year, you are within the 40% higher rate bracket. To work out your Income Tax contributions you do:
- £100,000 - £50,270 (the higher rate tax threshold) = £49,730 (the amount on which you will pay the higher rate of 40%).
- 40% of £49,730 = £19,892.
- £50,270 - £12,570 (the tax-free threshold) = £37,700 (the amount on which you will pay the basic rate of 20%).
- 20% of £37,700 = £7,540.
- £19,892 + £7,540 = £27,432 (total annual Income Tax contribution).
- £100,000 - £27,432 = £72,568 (total annual salary minus Income Tax deductions).
What else was announced in the Statement?
The Chancellor also announced changes in the National Insurance threshold and fuel duties. One major omission was the absence of any additional welfare spending to help the poorest in the country through the squeeze of higher rates of inflation and rapidly rising energy bills.
Sunak announced that the level at which National Insurance contributions start to be charged will rise from July. The current threshold of £9,880 will rise to be the same as the Income Tax threshold of £12,570.
According to financial analysts, this means that some earners will save as much as £330 per year thanks to this change.
The Chancellor also outlined a 5 pence cut in fuel duties charged on petrol and diesel to last until March 2023, which amounts to 6 pence once VAT is factored in.
This was introduced in order to combat rising petrol, oil, and gas prices that each adds to the cost of living crisis currently forecast for later this year. The average 55-litre car will save £3.30 for every tank filled.
In April 2022, benefits in the UK are set to rise in line with inflation figures from September 2021, which were around 3.1%. However, the post-lockdown world is currently experiencing rapid increases in inflation and UK inflation in February was at 6.2%.
This means that people who receive benefits from the state - be it a state pension, unemployment benefits, child benefits, etc. - are set to be much worse off than they were last year. For example, pensioners in receipt of a full state pension are projected to be about £290 a year worse off if inflation stays at the same rate. And inflation is expected to rise further.
The Chancellor did not announce any additional rise in benefits to be in line with inflation, leading many to fear for their financial security as the cost of living is set to soar.
What is the context of the Statement?
The Spring Statement was decried by many but the Chancellor was quick to remind his critics of the context in which the Statement was made.
As the world emerges from lockdowns and coronavirus, the UK has a labour shortage due to Brexit and the pandemic, and a supply problem, especially with gas. All of this has contributed to the highest inflation rates the UK has seen in 30 years.
Inflation is the amount goods and services go up in price. Real wages cannot keep in line with such high inflation rates, which means people are worse off overall.
Russia and Ukraine
Russia is increasingly isolated from the rest of the world due to its invasion of Ukraine. While the world seeks to cut off Russia in every way it can, this also means cutting off our own gas supplies as Russia are one of the biggest gas suppliers in the world. This then means that gas is far more expensive, which also adds to the cost of living.
As we have already seen, the pandemic has contributed to the rapidly rising inflation rates, but it informed the Statement in other ways as well. The Chancellor was keen to remind people how quick he had been to lay out the furlough system, raise universal credit and ensure that people were supported through the worst of the pandemic.
However, as the dust settles on the pandemic, Sunak is clear that it is time to tighten the belt, exercise budget responsibility, and begin to pay back the money borrowed during 2020/21.
The 2022 Spring Statement was a controversial one. Many argued that the Chancellor did little to assuage the pain caused by the cost of living crisis that has already set in and is only projected to get worse. However, others welcomed the reduction in the basic rate of Income Tax and a rise in the threshold for National Insurance contributions.
The still-popular Chancellor, Rishi Sunak, is undoubtedly already set to work on the autumn budget, where we can expect even bigger announcements as the country and the world continue to face instability in Eastern Europe, rising energy costs, and rapidly increasing inflation.