In a matter of days after being made Chancellor, Jeremy Hunt has reversed almost all of the fiscal policy announcements made in the mini budget. Liz Truss's growth agenda has been ripped up after a surge in the cost of borrowing for UK gilts following its unveiling and widespread unrest in the money markets.
The problem had been that the tax cutting agenda was going to require the government to take on yet more borrowing. This came off the back of all the additional expenditure during the COVID-19 pandemic that had added to the nation's debt load. This led to questions as to how tax receipts would bring down the budget deficit of £99.1bn and could the government therefore manage it's £2.4trn debt burden.
The result was interest rates (yields) on British government securities soared with investors demanding more interest for lending to the UK government. The cost of borrowing was becoming more expensive for the government and Jeremy Hunt was brought in as Chancellor to rectify the situation and bring confidence to the markets regarding the government's fiscal plans.
These were his announcements:
| What was reversed from the mini budget | What remains from the mini budget |
| 1. Income tax | 1. National insurance |
| 2. Corporation tax | 2. Stamp duty land tax |
| 3. Dividend taxes and IR35 | 3. Annual Investment Allowance |
| 4. Support with energy bills | |
| 5. VAT and alcohol duty | The impact of the reversals |
The first U-turn was announced by Kwasi Kwarteng (the former Chancellor) by scrapping plans to eliminate the 45% additional rate of income tax. This then eliminated an estimated £2bn from the government's additional borrowing requirement following the tax cutting plan.
Jeremy Hunt then took things further by reversing the planned cut to the basic rate of income tax. Originally this was scheduled to reduce to 19% in 2024, the mini budget brought this forward by a year to 2023. Not only did Hunt reverse the speed at which the rate would fall, he went even further by announcing that the rate will now remain at 20% indefinitely.
The Prime Minister, Liz Truss, had already cancelled the planned reversal of the April 2023 corporation tax rise from 19% to 25%. This now means if your taxable profits exceed £250,000 then you'll be subject to an upper limit of 25%. If however, your profits are £50,000 or less then you'll be subject to the lower limit rate of 19% (being the current rate already in place).
Where your profits are in between the lower and upper limits, you'll pay an effective rate of 26.5% albeit with the benefit of marginal relief.
|
Corporation tax rates from 2022 - 2023 |
||
|
2022/2023 |
2023/2024 |
|
|
Upper limit (Profits >£250,000)
|
19% | 25% |
|
Marginal rate (£50,000 - £250,000)
|
19% | 26.5% |
|
Lower limit (≤£50,000)
|
19% | 19% |
The 1.25% cut to the dividend tax rate has also been reversed. Plans to reverse the reform of IR35 tax rules have also been scrapped bringing in an estimated £2bn a year in tax revenue. The U-Turn on IR35 reform means that all public authorities and medium and large-sized clients outside the public sector will continue to be responsible for deciding if the rules apply.
The Energy Price Guarantee Scheme has also been reworked. Originally energy prices for both consumers and organisations were going to be capped for 2 years under the mini budget. Hunt has now amended this and the support will end in April 2023. It will be replaced with a more targeted support scheme following that date, which will be considered as part of a Treasury lead review.
The plan to introduce VAT-free shopping for overseas based visitors to the UK has been scrapped. Alcohol duties will now also go up next year as had been planned prior to Kwarteng’s mini budget.
The cut to national insurance from the health and social care levy remains. The minimum stamp duty land tax threshold level will still double from £125,000 to £250,000. Good news also for some businesses, the Annual Investment Allowance will remain at £1m indefinitely.
It is estimated these latest announcements will raise an additional £32bn in tax receipts. The initial market reaction was positive with interest rates on UK 5 years gilts dropping from 4.5% to just under 4%.
Market estimations for peak interest rates have also now dropped to 5% compared to over 6% when the mini budget was first announced. The reality however, is a stark one, Hunt has warned that there will be more tax rises to come and potential spending cuts.
Unfortunately the damage has been done elsewhere. According to MoneyWeek, mortgage interest rates jumped because lenders tend to hedge their mortgage book by using derivatives called swaps. The price of these swaps are linked to gilt yields.
This meant when UK 30-year gilt yields were trading at interest rates of 5% or more, it directly impacted on mortgages. Consequently the average two-year mortgage interest rate now stands above 6%. The announcements, and then the reversals, have created uncertainty meaning whilst gilt yields have dropped, mortgage providers aren't necessarily going to follow suit on their products.
The question now is, have the events following the mini budget ushered in an era of higher borrowing costs across the board? Time will tell to see if the markets have really been calmed, or if this is just a temporary reprieve.
The content of this post was created on 18/10/2022.
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