Chancellor of the Exchequer Rishi Sunak makes his Spring Statement in the House of Commons on 23 March – Jessica Taylor / UK Parliament
One pence cut in income tax by 2024 was promised by Rishi Sunak on Wednesday, even though his earlier plans to freeze the threshold would fall short.
The Chancellor announced his intention to reduce the basic rate of income tax from 20p to 19p before the end of the current parliament.
The move has long been rumoured, but was only announced publicly in a spring statement on Wednesday and confirms that the next election will be held in 2023 instead of 2024 because Tories are expected to go to polls before populist tax cuts take effect. is unlikely.
Lawmakers and financial analysts said its re-announcement was a clear political move by Mr Sunak to burnish his credentials as tax-cutting chancellor ahead of the next election, without existing revenue-lifters such as a hike in National Insurance (NI). undone the measures.
However, the 1p income tax cut – costing the exchequer some £5bn – will be dwarfed by the amount of tax the Chancellor will raise from British families, workers and pensioners through a freeze on income tax thresholds that will take effect next month.
An analysis published on Wednesday by the Office for Budgetary Responsibility (OBR) showed that the income tax threshold freeze would generate revenue equivalent to 0.6 per cent of GDP, while reducing the tax burden by just 0.2 per cent through a 1p deduction .
When the thresholds were first announced two years ago, the OBR estimated that freezing the threshold would net £8 billion, but now, with wage inflation, it has been estimated that this will add to the Treasury in additional tax. will generate £18 billion for
According to the Institute for Fiscal Studies (IFS), the income tax threshold freeze will also wipe out the financial benefits of the NI tax break, which Mr Sunak announced to reduce the impact of the 1.25 per cent hike in NIC on many low-wage workers.
Those earning more than £25,000 will pay higher taxes on their income, due to the combined effect of freezing the income tax threshold and increasing the NIC rate.
By 2025-26 – after cuts in the basic rate of income tax were implemented and thresholds continued to stabilize – the IFS said virtually all employees would pay more tax on their earnings than they would have paid without these changes in rates. would have done. and threshold.
IFS Director Paul Johnson said: “Almost all employees will pay more tax on their earnings in 2025 than they would be paying without this Parliament’s reforms in income tax and NIC, despite the tax cut measures announced today. “
However, Mr. Sunak used the Spring Statement to position himself as a tax reformer as well as a tax cutter, creating a tax plan based on three objectives. He was:
Helping families with living costs:
While maintaining that the economy continued to recover strongly from the COVID pandemic, he acknowledged global factors such as Vladimir Putin’s invasion of Ukraine and supply chain issues were driving up prices.
On top of raising the national living wage to £9.50 an hour, changes to Universal Credit to help 1.7 million households, an additional £1,000 to help families with rising energy bills and £350 to help keep them, they Said spring statement would cut fuel charges by 5p. and improving NI by raising the threshold.
Creating conditions for private sector-led development:
Mr Sunak laid out measures to boost growth and productivity, including tax cuts to reward companies investing in capital equipment, and tax relief for research and development.
He also indicated reforms in the tax system, including the introduction of an apprenticeship levy to support more employee training. The chancellor told lawmakers that only 18 per cent of 25-64 year olds in the UK have a vocational qualification, a third less than the OECD average.
Letting people have more than what they earn:
Mr Sunak said that while success for the economy should mean success for all, the income from a growing economy should be shared “substantially”. For this there was a 1p cut in central income tax, but in a “responsible and economical” manner.
He told lawmakers: “It would be clearly irresponsible to pursue this ambition this year – and yet I refuse to let that ambition wither and flow. By 2024, the OBR currently expects inflation to be back under control, with debt continuing to decline and the economy growing. Our financial regulations have been met with a clear safety margin.”