Rishi Sunak on Wednesday sought to highlight his credentials as chancellor of tax cuts, cutting fuel taxes by 5p and promising an income tax cut ahead of the next election.
But overall, his spring statement means an increase in fiscal pressure just as the country faces a huge reduction in living standards.
So beyond the bluster and rhetoric of the House of Commons dispatch box, what does all of this mean for your finances?
Drastic drop in standard of living
Of all the figures announced, the one that has by far the most impact is the one that the Chancellor failed to mention.
After adjusting for the rising cost of living, household disposable income will fall 2.2% over the next 12 months – the biggest annual drop since records began in the 1950s.
A combination of slowing economic growth and sharp rises in the cost of a range of goods means living standards will fall sharply, the Office for Budget Responsibility (OBR) said.
The consumer price index – which tracks the cost of 720 goods and services – rose 6.2% in the 12 months to February. The OBR estimates that it will reach 7.4% this year.
Anyone who gets a pay rise less than this will therefore effectively get a pay cut. Low-income people, who spend more of their income on energy and food, will be hardest hit.
Raising the national insurance threshold
Sunak’s biggest announcement was to raise the threshold at which people start paying National Insurance from £3,000 to £12,570 from July.
This means that the NI and income tax thresholds are aligned. It also means millions of low- and middle-income workers will benefit from a tax cut of around £330 a year.
The Chancellor said around 70% of people would pay less NI under the new plan. However, the Resolution Foundation think tank has warned that only a third of the £6billion cost will go to the poorest half of earners.
Increase in national insurance contributions
As the NI threshold will increase, the contributions will also increase. Under the current system, NICs are 12.5% on earnings over £9,568. This will increase to 13.75% on earnings over £12,570.
This means people earning up to £41,000 will pay less than before, while those earning more than that will see their contributions rise.
Reduction of fuel taxes
Fuel tax will be reduced by 5 pence per litre, which will relieve drivers. This means refueling an average family car will cost around £3 less. However, this is only a small part of the recent increase in gasoline and diesel costs.
Petrol now costs £1.67 a liter and diesel £1.79 – both up around 50p a liter from before the pandemic. The war in Ukraine threatens to push those prices even higher as oil reserve stocks dwindle.
Critics have pointed out that the biggest winners from a fuel tax cut will be the wealthiest fifth of households, who spend nearly five times as much on fuel as the poorest fifth.
The Chancellor has promised to cut the basic income tax rate from 20p to 19p – but not before voters go to the polls in 2024.
It will do nothing to help people who are struggling to pay their bills this year. Labor leader Sir Keir Starmer had accused Sunak of being “cynical” in waiting before an election to cut taxes.
State benefits and pension
Payments for state pension, universal credit and other benefits are due to rise by 3.1% next month, well below inflation at 7.4%. This means that many of the country’s less affluent people will see their purchasing power plummet.
Activists and charities have warned it will push large numbers of families into poverty.
There wasn’t much in that mini-budget to help deal with massive increases in energy bills. The Chancellor highlighted a £200 ‘loan’ and council tax refund he had previously announced, but did not offer much further support. It doubled a discretionary fund to help pay bills ranging from £500million to £1billion. The Household Support Fund is given by councils to people who apply for it and who are considered to be most in need of help.
VAT will be reduced from 5% to zero on installations of solar panels, heat pumps or insulation.
Installing a heat pump costs between £6,000 and £18,000, depending on the amount of heat required, according to the Energy Saving Trust. So reducing VAT would mean a saving of £300-900.
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This notice was published: 2022-03-23 19:45:52