Friday 23rd September saw Kwasi Kwarteng unveil his first (“mini”) budget in his new post as the Chancellor of the Exchequer. Budget chalkboardAccording to Kwarteng, the Governments priority is economic growth – this message being backed up with the introduction of a series of tax cuts, aimed at encouraging growth both at home and from overseas investments.

Despite being labelled a ‘mini budget’, the Chancellor announced a range of measures which amounted to the biggest tax cuts in 50 years. Following the budget, the Pound fell sharply against all currencies, and by Monday 26 September, had reached the lowest level on record against the Dollar before recovering slightly. The markets are concerned about how the tax cuts will be funded (increased Government borrowing) and the impact this will have on inflation, interest rates and the overall health of the UK economy.

Kwasi Kwarteng called the Budget ‘a new approach for a new era’ but this may not be how he envisaged the beginning of his new era.

Interest Rates & Inflation

In the same week as the September budget, the Bank of England (BoE) raised interest rates to 2.25%, the highest level since 2008. The BoE believes that the economy has shrunk by 0.1% between July and September and has raised interest rates for the seventh time in a row in an attempt to tackle inflation and halt soaring prices. Shortly after the interest rate hike announcement, the BOE stated that Britain’s economy is now in recession.

Following the market’s reaction to the Budget, the BoE released a statement:

“The BoE will not hesitate to change interest rates as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit.”

Meaning that further emergency interest rate raises maybe introduced to help sure up the Pound and restore confidence in the UK economy.

In terms of inflation, there are concerns that the tax cuts could mean that more people have increased spending power, which will mean further inflation. However, rising interest rates will mean that people are spending more on their mortgages and debt payments which may limit spending. Time will tell, but currently inflation remains at the highest level since the 1980s and it is expected to rise further in October, peaking at around 13% by the end of the year.

Key Announcements

In the budget, the Chancellor announced a series of growth measures that the Government thinks will help businesses and households in the short to medium term. These announcements include:

  • Income Tax – The basic rate of income tax will be cut from 20% to 19% from April 2023. The 45% ‘additional rates’ of income tax that apply to income over £150,000 will be abolished from 6 April 2023.
  • National Insurance – The 1.25% percentage point rise in National Insurance Contributions will be reversed from 6 November 2022 and the Government will not go ahead with the planned April 2023 levy to fund health and social care.
  • Corporation Tax – The planned increase in Corporation Tax from 1 April 2023 will not happen and it will remain at 19%, irrespective of the level of company profits.
  • Dividend Tax Rates – Dividend tax rates will reduce by 1.15 percentage points from April 2023, with ordinary and upper rates of dividend tax set to be reduced to their 2021-2022 levels (7.5% and 32.5% respectively) from 6 April 2023.
  • Stamp Duty – Stamp Duty Land Tax (SDLT) in England and Northern Ireland has been permanently cut from 23 September 2022. The cut is delivered by an increase in the threshold before SDLT is payable from £125,000 to £250,000. First time buyers currently pay no stamp duty on the first £300,000 and that will be raised to £425,000.
  • Investment Allowance – The annual investment allowance, allowing 100% tax relief on certain capital expenditure including computer equipment and vans, will remain at £1million beyond April 2023, when a reduction had been planned.
  • IR35 Rules – From April 2023, workers providing services via an intermediary will once again be responsible for determining their employment status and paying the correct amount of tax and National Insurance contributions under the IR35 rules. The complex ‘off-payroll’ working rules for larger employers will be repealed.
  • Investment Zones – New ‘Investment Zones’ are to be established across England, with the Government currently in discussions with 38 local authorities. Within each Zone there will be targeted and time limited tax cuts for businesses on offer.
  • Enhancements to the tax advantaged Company Share Option Plan (CSOP) Scheme – The maximum employee share option limit will be increased from £30,000 to £60,000 for any new options granted from 6 April 2023. There will also be increased flexibility for share options granted from 6 April 2023 due to a removal of conditions around the class of shares used.
  • Universal Credit – Modifications will be made to the Universal Credit regime, to support claimants to secure more or better paid work.

Market conditions continue to be difficult at the moment, not just in the UK but overseas. Despite this, it is important to remain invested and take a long-term view on your investments. If you have any questions or concerns, please do not hesitate to contact your adviser.

Budget chalkboard