Better economic news creates room for headline tax reductions
Commenting on the Autumn Statement, HURST tax partner Adrian Young says better economic news created room for chancellor Jeremy Hunt to make headline tax rate reductions.
Adrian added: “It was interesting to note the chancellor’s rapid change in his approach to tax cuts in the Autumn Statement. Only a week ago, Mr Hunt was hinting that taxpayers should not have high expectations of good news. Cuts would have to be measured, limited and sustainable, he said.
However, a week is a long time in fiscal policy. The key measures outlined, being a two per cent reduction in employees’ national insurance rate from 12 to 10 per cent, and further tax relief for businesses, allow Mr Hunt to point to first positive steps on a longer path to lower taxation.
The opportunity to do this has been afforded by last week’s news that inflation has fallen from its earlier 11 per cent high to 4.6 per cent now. This is coupled with declines in the government’s debt costs and overall borrowing. Added to continuing restraint on public spending and forecast economic growth, all of this is the first glimmer of upbeat economic news for a while.
It’s worth reminding ourselves in this context that the tax burden on individuals remains at an historic high, and so the above reductions will be welcomed by most.
But, and it’s a big ‘but’, there remains the perennial issue of fiscal drag. This describes the phenomenon whereby tax allowances and rate bandings are frozen while incomes rise. Given recent wage growth, driven by high inflation, fiscal drag will result in many more people paying more tax.
Since 2021, the number of people falling into the higher rate tax band has increased by around 40 per cent.
Some estimates suggest this measure alone could raise additional tax of up to £50bn a year over the next few years, and other commentators have said this is the largest tax increase in living memory. This obviously counters the chancellor’s narrative of tax cuts.
So, what Mr Hunt gives with one hand, he takes back with the other – and then some.
Politically, though, it is clear why these measures are so attractive. They allow the government to point to genuine reductions in tax rates (in this case national insurance), while simultaneously growing tax revenues. It’s a clever sleight-of-hand, but the high tax burden continues to impact individual taxpayers.
That said, there does appear to be some more positive news in the chancellor’s approach to business taxation.
Firstly, the much-trailed change to make full relief for capital expenditure permanent is welcome. This measure will help businesses plan for capital investment, and to offset that cost against their tax bills quickly.
Secondly, there will be new incentives for creative and innovative businesses, including a simplification of the existing research and development tax credit regime, and further investment into high-end manufacturing and pharma. Further financial incentives and tax breaks were also announced for Investment Zones and freeports, with the benefits extended from five years to 10.
Thirdly, the additional freezes of business rates and extensions of reliefs will be welcome to many smaller businesses.
One final measure of note is the increase in the national minimum wage from £10.42 to £11.44 per hour, plus its extension to 21-year-olds for the first time. With this move, national minimum wage levels have doubled in cash terms since 2010 to around £21,000. No doubt this is a positive move but, as it is wholly employer-funded, it will put added pressure on businesses that are also struggling with other inflationary issues.
To conclude, the measures announced can be seen as positive indications of economic health. But there is no escaping the cold reality of the numbers, as the tax burden on individuals continues to grow. No doubt Mr Hunt hopes his positive measures grab the headlines, but a cooler-headed analysis reveals there is still much for Mr Hunt to do to deliver sustainable, lower-tax economic growth.”