When Chancellor of the Exchequer Jeremy Hunt stood at the ballot box on Wednesday, 22 November, much of his "giveaway" budget had already been leaked. Or so we thought!
Leaks regarding inheritance tax were wrong, but there was a more substantial giveaway in the shape of national insurance changes. So what exactly happened, and what can we expect in the future?
Taxation and income
From 6 January 2024, the primary rate of national insurance will fall from 12% to 10%, helping around 27 million people. Class 2 national insurance, paid by the self-employed and those earning more than the tax free threshold, will be abolished from April 2024. In the same month, Class 4 national insurance for the self-employed, paid on profits between £12,570 and £50,270, will be reduced by 1%, from 9% to 8%. These are some pretty hefty tax reductions!
We also saw an increase in the legal minimum wage, often called the national living wage, which now rises from £10.42 an hour to £11.44 from April 2024. For the first time, this rate will also apply to people aged 21 and 22 rather than those aged 23 and over. So what is the catch?
While this is a significant giveaway, which will feed straight back into the economy, it's important to remember that income tax allowances have been frozen. This means that more people will pay tax for the first time, with many moving into the next tax band due to wage inflation. Smoke and mirrors, balancing the books, you decide.
Pensions
Interestingly, the government has chosen to retain the triple lock on the state pension, which will increase by 8.5% from April 2024. This is in line with the higher of wage inflation, price inflation or 2.5%, despite suggestions the protection would be scrapped.
Looking at personal pensions, the government has opened a consultation period over the right for employees to choose which pension scheme their employees pay into. At the moment, contributions to anything but a workplace pension are optional, and while many employers are flexible, this is not across the board. The idea is simple, individuals will be able to retain one pension scheme throughout their working life, which could see the average person have 12 different jobs, potentially 12 separate workplace pension pots under the current legislation.
Economy
Economic forecasts for the next two years have been slashed, with the OBR expecting the UK economy to grow by 0.6% this year, 0.7% next year, then 1.4%, 1.9%, 2% and 1.7% over the next four years. On a more positive note, inflation is expected to fall to 2.8% by the end of 2024 and back within the Bank of England's target range sometime in 2025.
Borrowings as a percentage of GDP are expected to fall, but debt as a percentage of GDP is expected to increase, peaking at around 93.2% in the 2026/27 tax year. While the Chancellor introduced 110 measures he believes will help economic growth, on a more sobering note, living standards are not expected to reach pre-pandemic levels until 2027/28.
Business
In the days leading up to the budget statement, the Chancellor announced a £4.5 billion funding package for the manufacturing sector. In the budget, we saw several additional business initiatives, including:-
· The full expensing tax break will be made permanent, allowing companies to offset investment against profits.
· The 75% discount on business rates will be retained for retail, hospitality and leisure firms for a further 12 months.
· An enhancement in planning services across the UK.
· A budget of £500 million has been put aside for artificial intelligence innovation centres across the UK.
· Tax incentives for investment zones and freeports will be increased from five years to 10 years.
Ultimately, any recovery in the business sector will have the main drivers tied to a broader economic recovery. At the moment, economic growth looks relatively subdued for the next six years.
Summary
There are suggestions that today's budget statement is simply the start of an ongoing campaign to roll out tax incentives before the next general election. While officially, the government could wait until 2025 to call the next election; speculation is rife that either May 2024 or towards the end of next year appear to be the target dates. At the moment, it isn't easy to see any real economic recovery occurring in 2024. However, there may be potential for upgrades towards the end of next year if some of today's forecasts turn out to be overly pessimistic.