Spring Statement 2022 – Part one: Reflections

Source: OBR Economic and Fiscal Outlook, March 2022

Chancellor Rishi Sunak is clearly faced with a difficult balancing act in trying to address concerns over the cost of living, particularly rising energy costs, and the competitiveness of the UK tax landscape, while also aiming to protect the public finances in the aftermath of COVID-19. This is all in the context of rising inflation, the highest ever forecast expenditure on debt interest (£83 billion in the 2022/23 financial year), geopolitical turmoil, and creating the conditions for economic recovery after the worst of the pandemic. Undoubtedly there are also political drivers at play, not least manifesto commitments to keep.

So what tax choices were actually made in this Statement? The announcements had three key themes – reducing taxes on income, reducing taxes on consumer spending and net zero measures.

Reducing taxes on income

The main headline of the day was the increase to the income thresholds above which employees and the self-employed pay Class 1 and Class 4 National Insurance Contributions (NICs) and (from 2023/24) the Health and Social Care Levy. With effect from 6 July 2022, the thresholds will be raised from £9,880 to £12,570, to the same level as the Income Tax Personal Allowance. This is forecast to cost £25.9 billion between 2022 and 2027. 

This measure went further than many predicted taking 2.2 million people out of paying NICs and the Health and Social Care Levy, tracking directly back to the 2019 Conservative manifesto. However, we saw no U-turn on the new 1.25% rise to NICs which under the original thresholds was expected to raise £86.6 billion between 2022 and 2027. In essence, this means taxpayers will effectively be paying a higher rate of tax on a slightly smaller amount of their income.

The announcement of a future cut in the basic rate of income tax from 20% to 19% for taxpayers in England, Wales and Northern Ireland from 2024 is actually a significant £6 billion per year giveaway to workers earning over the Income Tax Personal Allowance. Although this was the second biggest measure announced on Wednesday, it doesn’t address immediate cost of living or inflation concerns and so got significantly less interest – taxpayers can’t bank as a benefit something which won’t even start to save them tax until two years time. 

The rate cut will need to be incorporated into a future Finance Bill, and will take place after or around the next election. Cuts in the headline rate will be welcomed, but its actual impact is lessened because of freezing the Income Tax Personal Allowance and the Basic Rate Limit for five years from 2020/21 to 2025/26, which was announced last spring. The freezing of allowances was originally forecast to save £5.8 billion by 2024/25, rising to £8.2 billion by 2025/26 – but due to inflation amplifying the effects of fiscal drag, on 23 March the OBR raised their forecasts of the additional tax receipts arising from freezing thresholds by a huge 30% just since their October 2021 forecast. 

The £6 billion per year future income tax cut will therefore actually cost less than the significant savings forecast from the frozen allowances and thresholds.

Taxpayers may be a little unclear on the net effect to their take-home pay from the combination of rising thresholds and rates for NICs and a future reduction to the basic rate of income tax, so here’s an example. For an employed worker with a salary of £30,000 per year:

• The worker would have paid £2,452 of NICs in the 2021-22 tax year, being 12% of the salary above the 2021-22 primary threshold of £9,568. 
• The same worker will pay £2,398 of NICs in the 2022-23 tax year, being 13.25% of the salary above the blended 2022-23 primary threshold of £11,901 – saving £54 compared to 2021/22.
• In the 2023-24 tax year, the worker’s employee NIC plus Health and Social Care liability will fall to £2,309, being a combined 13.25% of the salary above the primary threshold of £12,570.
• If there were no further changes in salary or NICs / income tax, in the 2024-25 tax year the 1% reduction in the basic rate of income tax would reduce the worker’s income tax liability by £174.

You can use our Budget Calculator for further permutations of what the Spring Statement means in numbers.

Reducing taxes on consumer spending

As had been widely predicted, the Chancellor reduced fuel duty by 5p per litre on diesel and petrol. This is the first time that fuel duty has been cut since the penny reduction at Budget 2011. This means that, if the reduction is fully passed on to consumers, each litre of fuel at the pumps would be 6p cheaper, because VAT at 20% is applied on fuel costs inclusive of fuel duty. However, it will be interesting to see whether market forces or other pressure result in a change to the price of fuel at the pumps and the extent of the saving for consumers.

This measure was aimed to show the government’s focus on supporting consumers, in particular motorists, and is affordable as whilst costed at £2.4 billion it will only apply for 12 months. It comes against the backdrop of rising fuel prices which deliver greater than expected VAT receipts for the Exchequer. With a straight-line one sixth of the price at the pump being VAT, a 10% rise in the pump price leads to a 10% increase in the government’s VAT receipts. 

One measure that businesses hoped for but we didn’t see was an extension to the temporary 12.5% VAT rate for hospitality, accommodation and admission to certain attractions. This reduction will therefore lapse as planned on 31 March 2022, with the standard rate of 20% applying again from 1 April 2022.

Net zero

It’s encouraging to see net zero is still in the government’s sights, despite the reduction to fuel duty, and we did see some discrete climate-related measures. 

The first related to the supply of installing energy saving materials in residential properties (such as solar, heat pumps and insulation) which will be zero-rated for VAT from April 2022 to March 2027. This was called for in the House of Commons Environmental Audit Committee’s March 2021 report ‘Energy Efficiency of Existing Homes’. Previously, VAT was applied at 20% on the installation of energy saving materials into homes unless one could claim a specific relief to reduce VAT to 5%, which applied, for example, for those aged over 60 or claiming certain benefits. 

Chancellor Rishi Sunak referenced the fact that these restrictions, which amended and limited the UK’s application of the reduced rate, were brought into effect in 2019 following infraction proceedings brought by the European Commission against the UK and that lifting such restrictions and bringing the VAT down to 0% for all was therefore only possible following Brexit. It was noted that under the Northern Ireland Protocol, the position in Northern Ireland will remain unchanged, although the Northern Ireland Executive will receive a Barnett share of the value of the VAT relief until it can be introduced UK-wide. It is worth noting on the one hand that the Protocol only covers goods and not services. Therefore, for the example of installing solar panels on a roof in Belfast, the panels themselves may not initially be zero-rated but their installation could be. Furthermore, the European Union is currently looking at zero-rating solar panels and allowing member states to choose up to seven other products, which may eliminate this issue in the near term. 

Whether this VAT reduction will materially increase the number of homeowners making such investments, above and beyond what had already been planned for, remains to be seen with the squeeze on disposable incomes growing.  That said, VAT is a really powerful and well understood tax lever as we saw for the hospitality sector during the pandemic, so it is a positive measure to try to achieve net zero and could be an effective behavioural driver.

The second measure, building on the £7 billion business rates package the government had already announced at the Autumn Budget, was to bring forward by twelve months the business rates relief for ‘green’ investment at a cost of £35 million, intended to incentivise earlier adoption of ‘green’ investment by businesses. There was quite a bit of confusion around the quantum of this announcement, and it does come somewhat at the eleventh hour. Business investment cycles won’t have much time to react, and the Valuation Office Agency, which is responsible for all business rate assessments in England, will have its work cut out in rapidly recalculating all such assessments in order to administer this extension. However, it is a positive relief for those that are moving their businesses towards net zero and was something that industry groups had been hoping to see more of in the Spring Statement. We expect more to come in this space with the government’s new Energy Strategy due out soon.

For further information on the measures announced, visit our dedicated Spring Statement website.