With the UK economy facing its most challenging period for some time, the announcement of Liz Truss as the new Prime Minister is likely to bring with it some change in policy. But what tax changes are likely? Peter Webb, our Head of Tax Advisory, shares some first thoughts.
During the Conservative leadership contest both Rishi Sunak and Liz Truss made numerous commitments to try and win support. As part of these pledges, and in something of a change of mood, Liz Truss stated her plans to focus the UK towards a low-tax economy with less emphasis on wealth redistribution. Rishi Sunak had been far more reluctant to cut taxes; one of the key distinctions between the two candidates.
What immediate changes can we expect?
The first step in the new Prime Minister’s plan will be to reverse the 1.25 percentage point cent increase in National Insurance (NI) contributions which took effect in April. The proceeds of this increase had been ringfenced to fund the NHS and social care budget. Reversing the NI increase will save £155 a year for those paid £25,000, £343 for someone receiving £40,000, and £1,093 for those earning £100,000.
Unnamed Treasury sources have informed the media that Liz Truss is also keen on increasing the current level at which the higher rate of Income Tax at 40% kicks in. The current threshold is GBP50,270 and the possibility is this may rise by a rather significant GBP30,000. This means that higher earners will enjoy a further GBP30,000 taxed at 20% rather than 40%. The result will see around three million people no longer paying higher rate tax, with the saving sitting at around £6,000 for those earning more than £80,000.
The new PM has also pledged to scrap the planned increase in Corporation Tax, which was set to rise from 19% to 25%. This increase was due to take effect from 1 April 2023.
One of Liz Truss’ first tasks was to outline her plans to deal with rising energy costs faced by UK households and businesses. At its heart is a move to limit the 80% rise in domestic bills earmarked for October, and now the cost of electricity and gas will be capped for the next two years. This is on top of reliefs already announced including the GBP400 reduction in fuel bills this winter. The Guardian reported that the cost of these measures could be as high as GBP100bn.
At the moment the UK government is borrowing billions of pounds more than forecast as soaring inflation drives up the cost of servicing national debt. Official figures published in July 2022 revealed the budget deficit at GBP22.9 billion in June; up more than 20% compared with the same month last year. The deficit was already forecast to reach GBP140bn by the end of this year, without taking into account the tax reductions and spending commitments outlined by the new Prime Minister.
A close friend of Liz Truss, Kwasi Kwarteng, has now been installed as the new Chancellor. He’ll hold a “fiscal event” in the House of Commons later this week, pencilled for 23 September. We can expect further detailed plans in that announcement.