These include:
- An increase in national insurance threshold
- Employment allowance raised to £5,000
- Fuel duty cut by 5p per litre
- Zero rate VAT for solar panels
- 1p income tax cut in 2024
- No change to benefits
£2.7k hike in national insurance threshold
In a move to give taxpayers some respite from the cost of living crisis, Chancellor Rishi Sunak announced plans to raise the national insurance threshold by £2,690.
The threshold will increase by £2,690 from the current £9,880 to £12,570 from 6 July 2022, equalising the NICs and income tax thresholds for the first time, and potentially pointing towards a merger of income tax and NICs into a single threshold.
Sunak said: ‘The current threshold for national insurance is £9,500 and I will increase this by £3,000 – equalising the NICs and income tax thresholds from July 2022. This is a £6bn tax cut for 30m people, and is the largest increase in the basic rate threshold ever. It is a tax cut that rewards work.’
The rise in the threshold will cut tax by an average £330 per worker and will effectively balance out the new social care levy for employees which comes into effect from 6 April. The total saving for the 2022-23 tax year will be £267.
The government is also taking steps to ensure that self-employed individuals with lower earnings fully benefit. From April 2022 self-employed individuals with profits between the Small Profits Threshold and Lower Profits Limit will continue to build up National Insurance credits but will not pay any Class 2 NICs.
This measure will increase the Primary Threshold (PT) for Class 1 NICs and Lower Profits Limit (LPL) for Class 4 NICs from 6 July 2022, aligning it with the personal allowance for income tax, which is set at £12,570 per year. The rate will remain until tax year 2025-26. From tax year 2026-27 onwards, the PT and LPL will follow the default position of being increased in line with the Consumer Price Index (CPI).
Tim Walford-Fitzgerald, partner at accountancy firm HW Fisher, said: ‘The decision to raise the threshold people earn before they pay National Insurance (NIC) is a long overdue simplification and will make it easier for the Chancellor to take the next step in aligning income tax and NIC.
‘We see this as part of an opportunity to merge both income and NIC into one single tax further down the line. There are some barriers that still exist, but these are not insurmountable. Expect a further change on this when the Chancellor has the political courage to do so. It’s a psychological hurdle to overcome between one higher income tax rate and two separate taxes - even if they add up to the same total.’
Robert Pullen, private client partner at Blick Rothenberg said: ‘The Chancellor has been able to pull another rabbit out of the hat, despite a difficult economic backdrop. Extending the lower NIC threshold will save almost £400 per year, although this will be eroded by the health and social care levy. With NIC rates now aligned, it may be only a matter of time before NIC and income tax are aligned.’
Christine Cairns, tax partner at PwC, added: ‘Last year’s announced 1.25% increase from April brought NI sharply into focus and having reaffirmed his commitment to the rise, increasing the threshold was one of the only options left to try and soften the blow for those who will feel it most.
‘While it might seem curious to be effectively both increasing and cutting NI at the same time, today’s change is clearly targeted at helping those with the lowest earnings who may already be below the income tax threshold.
‘The true impact of this cut, as well as of the future decrease of the basic rate tax rate, for middle income earners will need to be assessed against the impact of the freezing of the income tax bands until 2026.
Employment allowance raised to £5,000
In a bid to support businesses, the Chancellor announced a rise in the employment allowance from the new tax year
This measure will increase the employment allowance by £1,000, from £4,000 to £5,000. This will come into effect from 6 April 2022.
Eligible employers are those who have secondary Class 1 National Insurance contributions (NICs), and additionally from the 2024 to 2025 tax year onwards health and social care levy liabilities of under £100,000 in the previous tax year.
As a result, businesses will be able to employ four full-time employees on the national living wage without paying employer NICs. This measure will benefit around 495,000 businesses, including around 50,000 businesses which will be taken out of paying NICs and the health and social care levy entirely.
In total, this means that from April 2022, 670,000 businesses will not pay NICs and the health and social care levy due to the employment allowance.
Fuel duty cut by 5p per litre
As petrol and diesel prices rise at unprecedented rates, the Chancellor cut fuel duty by 5p per litre across the UK from 6pm tonight
The cut in fuel duty is going to be in place for the next 12 months with the Chancellor Rishi Sunak stating that the cut will represent savings for 36m consumers worth around £2.4bn over the period.
With the freeze in fuel duty, which was announced in the Autumn Budget, Sunak stated that savings for consumers will reach £5bn when taking into account that there no rise in the fuel duty escalator last year. The cut is worth £100 for the average car driver, £200 for van drivers and £1,500 for hauliers.
The fuel duty also includes a reduction of 5% for aviation gasoline (Avgas).
This will cost the Exchequer £45m in 2021-22 and £2.3bn in 2022-23.
For unleaded petrol, the tax will drop from the current rate of 0.5795 to 0.5295 per litre. Other fuels are highlighted in the Spring Statement.
The Chancellor claimed that this move is the ‘biggest cut ever’ on fuel duty rates and means a one-car family will now save on average £100.
Derek Leith, global head of tax for oil and gas at EY said: ‘The reduction in fuel duty highlights that in the short to medium term, the government will have to wrestle with the re-emergence of the energy trilemma: simply put, how does the government address the competing demands of energy affordability, energy security and sustainability?
‘Whilst the current pump price is providing more than enough to deter any unnecessary mileage, more is needed to promote the adoption of new technologies and trigger a change in consumer behaviour. More investment in renewable generation and solutions to supply chain challenges are needed.
‘Where that leaves us is with some uncomfortable truths. Whilst we must continue to focus our efforts on reducing demand for fossil fuels in our economy, and take bolder steps in that direction, it will be extremely difficult to pass the costs of the necessary investment onto the consumer.’
Zero rate VAT for solar panels
Addressing the energy crisis, the Chancellor set out plans to remove VAT from investment in solar panels and heat pumps, but stopped short of offering grants
Chancellor Rishi Sunak said: ‘As energy costs rise, for next five years homeowners having solar panels and heat pumps installed will pay zero rate VAT, and there will be a zero rate for investment in wind and water turbines.’
To help households improve energy efficiency and keep heating bills down, the government will expand the scope of VAT relief available for energy saving materials including solar panels and wind turbines, so that households having energy saving materials installed pay 0% VAT. The current rate is 5%.
The zero rate VAT scheme will start on 1 April and will run until March 2027.
A typical family having roof top solar panels installed will save more than £1,000 in total on installation, and then £300 annually on their energy bills. The changes will take effect from April 2022.
It also brings wind and water turbines into scope of the relief, previously excluded from the discounted VAT rate.
Sunak said that this measure was only possible as the UK had left the EU, as previously reducing VAT to zero was not allowed following a ruling by the Court of Justice of the European Union.
Alan Pearce, VAT partner at Blick Rothenberg, said: ‘The 5% reduced rate of VAT that currently applies to eligible energy saving materials will be reduced to zero. In addition, the strict limitations introduced by the EU will also scrapped. These meant that the VAT relief was often limited to certain residential properties and to eligible persons such as those in receipt of benefits and the over 60s.
‘The Chancellor appeared to sweep these restrictions aside and open up the relief to all. It will be interesting to see if the withdrawal of ‘red tape’ will also extend to larger refurbishment projects that include an element of eligible energy saving material.
‘At present, the relief only applies if the work being undertaken is a specific contract for the installation of eligible energy saving material. Where supplied as part of large refurbishment or extension to a property (so that the energy saving materials was not the main supply) the 5% would not have applied. Therefore, the detailed legislation for the new zero rate will need to be closely scrutinised to see if this limitation has also been scrapped.’
Chris Gardner, co-founder of development lender Atelier, added: ‘With the cost of building materials surging once again, the Chancellor’s surprise tax cut on energy-saving technology offers a welcome safety valve – both to the construction industry and to homeowners looking to save money on their energy bills.
‘The scrapping of VAT on vital, but still comparatively expensive, tech like solar panels and heat source pumps is a logical and popular response to the spike in energy prices that kicks in next week. But it will also offer long-term benefits to homeowners, the environment and UK energy policy.
‘Every home fitted with solar panels can be one less home drawing power from Britain’s energy grid, and every home heated by an air source pump means one less boiler burning imported gas.’
The removal of VAT is a negligible cost for government, with costings of £45m in year one, rising to £65m by 2026-27.
1p income tax cut in 2024
In the Spring Statement, the Chancellor announced long-term plans to cut the basic rate of income tax from 20% to 19% in 2024
The Chancellor Rishi Sunak stated that the tax cut will affect 30m people applying to the basic rate which applies to employment income and non-savings, non-dividend income for taxpayers in England, Wales, and Northern Ireland.
Income tax rates are devolved in Scotland, but the Chancellor announced that the Scottish government’s funding is automatically increased as a result of this tax cut in order to benefit people in Scotland which will be initially worth £350m in 2024-25.
The Spring Statement notes that it is for the Scottish government to use the additional funding as they choose, including on reducing income tax or other taxes, or increased spending.
Sunak also claimed that in 2024-25, taxpayers will have an extra £175 in their take home pay annually, citing the Office of Budget Responsibility (OBR) predictions that inflation, which is forecast to hit 7.4% this year, will reduce down to pre-pandemic levels by 2024.
There will also be a three-year transition period for Gift Aid relief to maintain the income tax basic rate relief at 20% until April 2027. This will affect almost 70,000 charities and is worth around £300m.
The 1p cut to income tax is set to cut tax by £5.3bn in 2024-25, by £6bn in 2025-26, and by £5.9bn in 2026-27.
In the Spring Statement, the Chancellor said that this is the first cut in the basic rate of income tax since 2008-09.
The Spring Statement documents state that the change will be implemented in a future Finance Bill ‘provided that the fiscal principles set out above are met in future. The government will confirm plans for reforms to reliefs and allowances ahead of implementation’.
Tim Walford-Fitzgerald, partner at accountancy firm HW Fisher commented: ‘Dropping the one penny from the basic rate of income tax is a tactical and political move from the Chancellor.
‘Assuming it comes into effect from April 2024, the first payslip you will see this in will arrive at the same time as election leaflets ahead of the next planned general election in May 2024 - a coincidence, or a well-planned strategy?’
In the Autumn Budget, Sunak froze income tax thresholds at the current level until 2026.
No change to benefits
In April the state pension and other benefits are due to rise in line with September’s inflation figures – so by 3.1%. The chancellor’s decision not to announce a bigger increase means the payments are far behind keeping up with inflation. February’s figure was twice that, at 6.2%, and it is predicted to average 7% during the year.
Pensioners on the full state pension will be about £290 a year worse off if inflation stays at 6.2%. For most, the £289-a-year increase will not cover the rising cost of energy, let alone other price rises.
The standard allowance for universal credit will rise from £324.84 a month to £334.91 a month for a single person over 25. Again, keeping in line with the current rate of inflation would have required the increase to be doubled, meaning instead a real-terms cut of about £10 a month.
