How will Kwarteng’s new Budget will affect you personally?

UPDATE: The government will reverse almost all tax measures announced in its mini-budget. Plans to cut the basic rate of income tax to 19% have been shelved and support for energy bills scaled back. The mini-budget caused turmoil on financial markets. Jeremy Hunt will reveal his first Autumn Statement as chancellor on Thursday, 17 November. See here for most up to date articles.

On Friday 23 September Chancellor Kwasi Kwarteng announced a new “mini-Budget”, with a promise of a fuller package of announcements to come soon. Covered in the statement were announcements not only affecting personal finance but the government also outlined support for businesses and a specific energy support package for both households and businesses. Covered in this article is a breakdown of how the new budget will affect you personally, referencing income tax, the National Insurance increase being reversed, changes to dividend tax rates, alterations to stamp duty, and universal credit.

Income Tax

Reports before Kwarteng’s fiscal statement suggested he intended changes to stamp duty to be his ‘rabbit out of the hat’ announcement, but the real shock came from his changes to income tax.

Insisting that “high tax rates damage Britain’s competitiveness”, the Government will abolish the additional rate of income tax (45%), which currently applies to income above £150,000, from April 2023. The additional rate for savings and dividends will also be removed from April 2023.

In addition, the Government is bringing forward the 1 percentage point cut to the basic rate of income tax to April 2023, reducing the rate from 20% to 19% 12 months earlier than planned.

This £5-billion-a-year tax cut will allow workers, savers and pensioners to keep an average of £170 of their income in 2023/24, according to the Treasury.

The cut applies to:

  • the basic rate of non-savings and non-dividend income

  • the savings basic rate (which applies to savings income for taxpayers across the UK)

  • the default basic rate (which applies to any non-savings and non-dividend income that isn’t subject to either the main rates or the Scottish rates of income tax).

Where rates are devolved in Scotland, the Scottish Government will receive funding through the agreed fiscal framework to allocate as they see fit.

National Insurance increase reversed

A significant portion of the new chancellor’s agenda was devoted to undoing some of the biggest tax policy changes of his main predecessor Rishi Sunak.

The Government will reduce NICs rates by 1.25 percentage points from November and cancel the health and social care levy that was supposed to replace the rise from April 2023. Former chancellor Rishi Sunak introduced the rise and corresponding levy to boost NHS and social care funding, but with a new Prime Minister at the helm, the policy has officially been killed.

Employees earning between £1,048.01 and £4,189 a month will see their NICs reduce from 13.25% to 12% from November, while earnings above £4,189 will revert to from 3.25% to 2%.

The cancellation will save 28 million taxpayers an average of £330 a year, according to the Treasury. The NICs primary threshold and lower profits limit will remain at £12,570.

The seesaw of NICs rises and reversals may, however, cause accounting headaches for a lot of people, especially the self-employed. Don’t hesitate to get in touch if you need some advice.

Dividends

From 6 April 2023, the Government is also reversing the recently implemented 1.25 percentage point increase in dividend tax rates, applied UK wide. The basic and higher rates of dividend tax will be reduced to the 2021/22 levels of 7.5% and 32.5% respectively.

Due to the abolition of the additional rate of income tax, dividends that were previously taxed at the additional rate will now instead be charged at the higher rate.

To work out how much dividend tax you pay, you need to add your dividends to all other sources of your income. After your other sources of income are taxed (taking personal allowances into account), your dividend payment will be taxed depending

on which band(s) it falls into. You get £2,000 of dividend payments tax-free.

The Government says the reduction of dividend tax rates will benefit 2.6 million taxpayers, thus saving them an average of £345 in 2023/24, while the abolition of the additional rate of dividend tax will benefit more.

Stamp Duty

As was rumoured days before the statement, the Government announced a permanent cut to stamp duty land tax (SDLT), effective immediately from 23 September 2022. The tax, which only applies in England and Wales, affects people planning to buy a property, and the amount you pay depends on how much the property costs.

Before the announcement, no tax would be paid on transactions up to £125,000 (or £300,000 for first- time buyers), and from there it rose in bands to a maximum of 12% for the portion over £1.5m, raising just under £12bn for the Treasury pre-pandemic.

 
 

Now, the limit has been doubled to £250,000 – and £425,000 for first-time buyers – in an attempt, said Kwarteng, to help families aspiring to own their own homes and boost economic growth by stimulating the property market.

Over 200,000 people will now be exempt from paying the tax, the Government estimates, and first- time buyers will now benefit from discounted stamp duty on properties costing up to £625,000 – up from £500,000.

But, according to the Resolution Foundation, those who will benefit most will be in London and the South East, saying: “It will reduce the tax bill on the sale of the average first-time buyer home in London by £6,300 compared to no gain for the average first- time buyer in the North East.”

In Scotland and Wales, where SDLT does not apply, Land and Buildings Tax and Land Transaction Tax apply respectively, with their own rates.

Universal credit

Kwarteng also announced the administrative earnings threshold (AET) will increase to 15 hours a week at the national living wage from January 2023 for universal credit (UC) claimants.

The policy will push around 120,000 claimants from the ‘light touch’ regime to the ‘intensive work search’ regime, under which they will be expected to secure more or better paid work or accept a reduction in their benefits payments. Claimants will also have to abide by clearer work expectations, including applying for jobs, attending interviews or increasing hours to receive UC.

An increase to the AET came in on 26 September, which means that UC claimants have to earn 12 hours’ worth of the national living wage. From January, it will be 15 hours.

These changes will apply across Great Britain, while the Government will work with the Northern Ireland civil service to determine the “most suitable arrangements for Northern Ireland”.

If you would like advice on the implications of these new updates on your personal finances, please don’t hesitate to get in touch with us. If you would like to read the overview of the update, or read more on the business support or energy support packages, you’ll find links to them below.

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Kwarteng’s not-so-mini Budget: Business Support

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Kwarteng's not-so-mini Budget