Mini Budget tax cuts – industry reaction

Chancellor Kwasi Kwarteng announced a series of tax cuts and financial support in the mini budget on Friday (23rd September).

The Chancellor announced changes to income tax and stamp duty, alongside plans to cut taxes for businesses in designated sites for ten years to support investment, jobs and growth, and cancelled the planned increase in corporation tax.

The announcement included a basic rate income tax cut from 20% to 19% has been brought forward to April 2023  (from April 2024). The additional rate of tax will be axed, so anyone earning over the higher rate threshold will pay 40%.

It comes alongside the National Insurance cut announced yesterday, which will save a person £93 a year if they are on £20,000 a year, £343 a year if they are earning £40,000, £593 a year if they are making £60,000 and someone on £100,000 will save £1,093.

Responding to the Chancellor’s growth plan, David Postings, Chief Executive of UK Finance, said “We welcome the clear direction and new approach from the chancellor and his strong backing of the financial services sector as being the catalyst for the UK economy. The measures announced today are the start of what is needed to unleash the sector’s full strength to deliver economic growth up and down the country. ”

“Further tax changes and ambitious regulatory reform are required to capitalise on this bold first move and we will be working closely with government to ensure the UK’s financial services leads the world.”

Stephen Haddrill, Director General of the FLA, said “The Government’s commitment to growth and investment is good news, in particular the decision to make permanent the Annual Investment Allowance at £1m which the FLA has been pressing for.”

“However, to maximise investment growth, the type of capital investment that qualifies for relief must take account of the prevailing economic conditions. In times of uncertainty when many firms want to hold onto cash reserves, leasing is the way to get new plant and equipment into the hands of understandably cautious business owners.”

“Government borrowing tends to put upward pressure on interest rates, so while the measures announced today will be welcomed in business circles, the future health of the economy will rely on keeping inflation, which is outstripping that of our international competitors such as the US, under control.”

Fiona Anderson, Managing Director of Cards at Vanquis said “We’ve seen considerable growth in demand for credit over the last year, with card enquiries up 48% from August 2021 to August 2022, which indicates that people are resorting to credit cards to fund the rising cost of living. As well as this, our recent research showed that 55%* of people don’t know how they’ll cope with rising costs.”

“Though it’s not the answer to the crisis, today’s announcement from the government will come as a small relief for many. Any savings made as a result could help towards people’s essential costs, and perhaps reduce the amount they’re spending on credit to make ends meet.”

“More needs to be done though. Our research also showed that 51% of people don’t know how to access cost of living support, yet 69% would find it useful.”

Richard Lane, Director of External Affairs at StepChange, said “The position of those households with the least financial resilience and the greatest vulnerability to problem debt remains precarious despite the measures announced today. Those having to rely on means-tested benefits, which have still not been uprated even though the cost of food and other essentials has risen, are already over-represented among households experiencing problem debt. The problem debt and financial insecurity that households are struggling with creates significant social costs. It will be essential that the Government remains open to finding other ways to support and nurture the financial position of those on low incomes, recognising the benefit this provides not only to hard-pressed households but also to the wider economy.”

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown “This felt like a brain dump of cunning wheezes from a clever Chancellor. There were plenty of bold steps in the Mini-Budget. We’ll just have to wait and see whether it leads to the growth the Chancellor is hoping for, or the runaway inflation the Bank of England fears.”

“This is being driven by a growth agenda, it’s why tax cuts have been the focus, despite the fact that they offer more help to those on higher incomes rather than those at the sharp end of the cost-of-living crisis.”

“The HL Savings & Resilience Barometer found that these groups had the financial resilience to weather the storm far better than lower earners anyway. A year into the cost-of-living crisis, it shows that less than one in 100 of the lowest 2/5th of earners will have enough cash left over at the end of the month to be resilient, compared to over a third of the 5th highest earners.”

“The Energy Price Guarantee will make an enormous difference to everyone, including lower earners. However, by setting the guarantee at £2,500 for the average user, it means prices will still be higher in October, which will be an enormous challenge for people who were already on a knife edge before the rise.”

“It’s not just disappointing that there was so little in this announcement for the most vulnerable, it’s also incredibly worrying. Already they’re having to make difficult decisions to make ends meet, and we’re heading into the time of year when those difficult decisions could be increasingly dangerous.”

“Nobody will complain about having a bit of extra cash at a time when millions of people are running on empty. However, the way the change has been structured means that the more you earn, the more you can expect to be poured back into your budget through all of these measures – especially axing the additional rate tax band.”

“This raises an inflation risk, because if higher earners don’t need this extra cash to fill a hole in their budget, there’s a risk their spending will rise, pushing up prices even further. It’s a difficult thing to square with the fact the Bank of England is raising rates, to try to reduce demand, and may well mean more rate rises are on the cards in future.”

Torsten Bell, Chief Executive at the Resolution Foundation, said “This may not have been a Budget, but the Chancellor has certainly blown the budget with the biggest package of tax cuts announced since the ill-fated Barber Budget of 1972. His decision to combine the largely unavoidable higher deficit caused by rising energy prices and interest rates with permanent tax cuts will drive up borrowing by over £400 billion in the coming years. No Chancellor has ever chosen to permanently increase borrowing by so much.”

“Without significant cuts to public spending, debt will be on course to rise in each and every year. This is not what sustainable public finances look like. Every scrap of Treasury orthodoxy has been torn up.”

“While the Energy Price Guarantee will do an excellent job of softening the living standards squeeze this winter for rich and poor households alike, today’s tax cuts will do little to boost the incomes of those on low and middle incomes. Someone on an income of £1 million will receive a tax cut worth £55,220 next year.”

“This borrowing surge will mean higher GDP this winter, but it will also mean higher interest rates as the Bank of England aims to suck out the boost to demand the Chancellor has provided. Even those who believe lower taxes will make a major difference to growth should be cautious about putting all their eggs in that basket. After all, the tax take will remain at levels not sustained since the 1940s – even on these plans.”

Andrew Montlake, Managing Director at Coreco said “The stamp duty change announced Friday should be applauded, as it is a permanent change rather than an unwanted holiday period that causes more issues than it solves. This will help many first-time buyers who have agreed prices now, but we need to be careful that, as usually happens, house prices don’t simply rise further to eat up any potential savings and push homes out of reach for many more, especially at a time of higher interest rates. The big fear is that all the policies announced Friday cause the very thing the Bank of England is keen to avoid: higher inflation. The result, therefore, is that Threadneedle Street will need to increase interest rates even further, and at a time when so many are already hurting so much. They have a delicate balancing act now to ensure that they do not go too far and allow people time to rebalance their budgets and expectations. This is Big Bang politics, and whilst the rewards for success will be bountiful, the cost of failure will be catastrophic for the Conservatives, as well as the country.”

Derek Ryan, UK Managing Director at Bibby Financial Services said “Freezing corporation tax at 19% will doubtless be welcomed by many.  But the former Chancellor’s proposal to increase corporation tax to 25% would only have applied to those making profits of £50,000 or more, which is approximately 70% of businesses. For a significant number of the UK’s 5.6 million small to medium sized businesses, profits fall well short of this threshold. Consequently, today’s announcement makes little or no difference to their prospects for growth or survival. Indeed, our own data shows 76% of SMEs are concerned that the current economic climate is killing entrepreneurialism and 26% can’t afford to invest in their businesses.”

“Small to medium sized businesses clearly need more direct, long-term support if they are to make a meaningful contribution to Mr Kwarteng’sambitions.”

Kitty Ussher, Chief Economist at the Institute of Directors, said “This is a good news day for British business. In a time of low confidence and economic uncertainty, the new Chancellor’s emphasis on going for growth will be very welcome to firms of all sizes across the UK. Taken together with the energy bills relief scheme, the package as whole will make it easier for businesses navigating a challenging economic environment in the coming months.”

“The reversal of the hike in employers’ national insurance, which we have campaigned for from the outset, is of particular relief, as is the cancellation of the forthcoming corporation tax increase. We also welcome the decision to simplify IR35 rules, keep the Annual Investment Allowance at £1m, extend the Enterprise Investment Scheme beyond its sunset clause and streamline the planning process for infrastructure projects. The introduction of investment zones, with a lower tax regime including for capital investment is also a welcome innovation, particularly if it channels funding into locations most in need of regeneration.”

“However, we are concerned that the Chancellor had not asked the OBR to undertake its usual independent assessment of the impact of its proposals on government debt and the wider macroeconomy. Without this, neither businesses nor parliament have the reassurance that the scale of this intervention is affordable and so does not jeopardise overall economic stability.”

“We were also disappointed that the previous Chancellor’s workstream to use the tax system to incentivise workplace training to address skills shortages appears to have been abandoned, and that there was no mention of making capital investment super-deduction permanent or incentivising smaller businesses to play their part in decarbonising the economy.”

Martin McTague, National Chair of the Federation of Small Businesses (FSB), said “The Truss Government is off to a flying start. The Chancellor has delivered pro-small business measures today and has rightly recognised that removing taxes on jobs, investment and entrepreneurs is essential for our economy.”

“Ministers need to be relentless in removing barriers to small business success – especially with the current headwinds. The Government has today signalled its determination to back small firms and we look forward to working with Ministers and departments to put in place measures to help small businesses grow and succeed.”

“It’s good that the planned Corporation Tax increase has been scrapped. The £50,000 threshold for the main rate would have captured many small firms, so keeping tax on profits over £50,000 at 19% is welcome.”

“This will free up funds for small businesses to invest, and mitigate the impact of continuing high inflation levels.”