Mini-Budget 2022 – How it might affect your finances
‘Mini’ denotes a miniature version of something. This Mini-Budget however has had immediate seismic economic consequences for the UK, which will be touched on later.
The huge tax cutting package’s aim is to stimulate economic growth. This is in addition to the unprecedented support and borrowing to help households and businesses to reduce their energy bills over the next six months.
The unmistakeable backdrop to this statement is our cost-of-living crisis, with inflation having breached 10% recently, and the expectation of continued increases in interest rates by the Bank of England to try to contain it. The aim therefore was to give households and businesses more financial capacity to spend and invest, to help grow the economy.
The most controversial move was that the additional rate of income tax and dividend tax of 45% and 38.1% respectively, are set to be abolished from April 2023. Instead, these individuals will become 40% tax payers and pay 32.5% on dividend income. These rates of tax apply to income and dividends over £150,000. For those individuals with income of over £150,000, they will also now benefit from a Personal Savings Allowance (the amount of tax-free savings interest you can receive each year) of £500, which was previously not available to them. For those earning £200,000, the abolishment of the 45% tax rate equates to an income tax saving of around £2,900.
For those earning over £150,000, this tax year will be the last opportunity to capture 45% income tax relief on pension contributions. For example, for every £1,000 gross put into pensions, additional rate taxpayers receive £450 of tax relief, reducing the total cash cost of the contribution to £550. It is worth noting that this needs to be well thought out, including using any carry forward annual allowances but with an eye on any tapering of the annual allowance too to avoid unnecessary tax implications.
The basic rate of income tax will now be cut from 20% to 19% from April 2023, bringing this change forward a year so rather than from April 2024. This means that 31 million people will be better off by an average of £170 a year.
The notable exclusion is no immediate changes to income tax thresholds, such as the personal allowance of basic rate tax threshold, which would have benefited middle earners further. Those with earnings of between £100,000 and £125,140 will continue to pay a marginal rate of income tax of 60% as their personal allowance is tapered away. But, this still represents an opportunity to reclaim 60% income tax relief through purposeful pension contributions.
The recent National Insurance increase of 1.25% will be reversed in November. For employed individuals, this will happen through their payroll. For the self-employed, a blended rate of National Insurance will be applied when they submit their self-assessment. This means that employees earning £50,000 and £100,000 a year will be better off by £468 and £1,093 a year respectively. This reduction also applies to dividend tax from April 2023, which had also increased by 1.25% in April.
Stamp Duty Land Tax (SDLT) has been cut with immediate effect. The level at which people begin to pay SDLT has been increased from £125,000 to £250,000. For first-time buyers, this has been increased from £300,000 to £425,000. These will reduce SDLT bills for everyone by £2,500 and for first time buyers by up to £11,250.
In summary, this was a package that was designed to put more money in our pocket to spend. However, as we have seen, the pound quickly plunged to a 37-year low against the dollar, very likely leading to a further inflationary shock as the cost of imported dollar-priced goods increases.
There are also expectations that the Bank of England will have to act quickly with another increase in interest rates, which has led to mortgage providers pulling their fixed rate deals due to the uncertainty. Interest rates are now expected to peak at around 6% in April 2023, 2% higher than previous expectations, which is a huge worry for those having to renew their mortgages over the next 12 months. Broadly, a 1% increase in interest rates leads to £600 of additional interest paid per £100,000 of mortgage.
Therefore, the main worry is that the higher cost of goods and mortgage payments will effectively wipe out any tax savings gained.
You can read a full breakdown of all the announcements made at the Mini Budget here. However, if it in the meantime you’re concerned about how the announcements may affect your finances, why not get in touch and see if one of our financial advisers can help. We’re offering those with £100,000 or more in savings, investments and pensions a free financial review worth £500.
Please note: The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning, tax or trust advice.