UPDATED: A Spring Budget/Statement takes place on 23 March 2022 to address a triple whammy of inflation soaring to a 30-year high, fiscal drag from frozen tax allowances and National Insurance increases from April.
With local elections taking place on 5 May 2022, when the impact will be first felt of the 1.25% NIC rise, frozen income tax thresholds and higher fuel bills, and maybe a further rise in interest rates, will the Chancellor seek to reduce the impact of these costs on families and businesses?
Just before Christmas, the Chancellor asked the Office for Budget Responsibility (OBR) to produce an economic and fiscal forecast for Wednesday 23 March 2022.
Such a forecast is normally required to accompany a fiscal statement or Budget, which will happen on 23 March.
In 2021 we had Budgets in the Spring and the Autumn, so it is possible that with the ongoing economic uncertainty, the situation in Ukraine, as well as rising costs the Chancellor will wish to tweak taxation measures in March 2022 and then maybe make more substantial changes in October/November.
There have been calls for the Chancellor to hold an emergency budget, but he appears reluctant to do so whilst the economic situation is highly volatile. He may want to wait until the autumn before announcing new measures, but may be forced into new announcements much sooner.
Watch our short YouTube video - Will there be a Spring Budget in 2022?
Some of the key challenges right now for the Chancellor are summarised below.
Fiscal drag is caused by tax allowances and thresholds remaining frozen, whilst incomes increase. This results in more income being brought into higher rates of tax purely through stealth.
Back in March 2021, the Chancellor announced that personal allowances and income tax thresholds would be frozen until 2026.
A report by the House of Commons library reveals that this freezing means that an extra 1.25m people will be dragged into the 40% tax bracket due to wage and price inflation. The report also predicts that around 1.5m people on low wages will be dragged into paying the basic level of income tax.
According to the OBR, if there was no freeze then by tax year 2025/26 the higher rate threshold would have increased from it current £50,270 to £56,270 and the personal allowance would have increased to £14,070 from its current £12,570.
This stealth taxation has been the subject of much debate in the media.
On 7 February 2022, HMRC published Rates and Thresholds for employers 2022/23.
The government borrowed record amounts during the pandemic and that debt incurs interest which has to be paid. As interest rates rise, so does the amount the government has to pay its lenders.
There has been some good news for the government. A recent Office for National Statistics report shows that that the public sector borrowed £146.8 billion in the financial year-to-December 2021 (April to December 2021), £129.3 billion less than in the same period a year earlier and £12.9 billion less than the official Office for Budget Responsibility (OBR) forecast.
So the argument is that the Chancellor has around £13 billion more to play with than originally estimated, at least for the moment. Coincidentally, that is almost the same amount that is expected to be raised by the new Health & Social Care levy and could be used to defer the NIC rise for a year.
From April 2022 an increase in taxes on share dividends of 1.25% as well as an increase in the rate of National Insurance Contributions by 1.25% for employers and workers has been announced to help raise money for social care reform.
The tax rise is labelled a Health and Social Care Levy and is meant to raise £12bn a year (£36bn over the next three years).
For directors of their own companies, the levy is 2 x 1.25% = 2.5% due to it being charged on both employers and employees NICs. This is despite the fact that many directors were excluded from any financial support from the government during the pandemic.
There could also be problems for employers in low wage sectors. With the rise in the National Minimum Wage in April, the social care levy could see employers wanting to use more salary sacrifice arrangements to mitigate the rise in employer NICs. But they cannot do that if this would result in wages falling below the National Minimum Wage.
There is pressure on the Chancellor to delay the introduction of the levy to help alleviate other rising costs. And as can be seen from government borrowing (above), there is room for a deferment of the measure.
However, The Times reported on 29 January 2022 that the Chancellor and the Prime Minister agreed that the rise will proceed as planned. If it doesn't, that won't be the first U-Turn of the Chancellor.
There are other tax rises in the pipeline. In particular there is a new 4% Residential Developer Tax from 1 April 2022.
The current 12.5% rate of VAT on hospitality and tourism is meant to revert to 20% from 1 April 2022. That is a 7.5% VAT increase.
On top of that, VAT-registered businesses must spend money on software and training to join Making Tax Digital for VAT from 1 April 2022. However, with many yet to sign up there could be a Budget announcement of a deferment of this requirement or, maybe businesses will be allowed to continue to submit VAT Returns as now for a certain period. HMRC is unlikely to make it too difficult for businesses to submit VAT Returns and pay any tax due.
In addition, there is a new Plastic Packaging Tax from 1 April 2022 which could affect the price of food.
Slightly further on there is the 6% rise in Corporation Tax from April 2023.
There is also a consultation on the introduction of a new Online Sales Tax in a form and from a date yet to be decided. The consultation closes on 20 May 2022.
There was speculation in 2020 and 2021 of the Chancellor increasing Capital Gains Tax.
Is it time for business owners to act? Check out our separate article on Members' Voluntary Liquidations.
Will he revisit this in the Budget? Will he consider a one-off wealth tax to help pay for the pandemic, or something more long term?
Is this something that could be effective from Budget Day to prevent any forward planning?
It has been 40 years since inflation was a concern in the UK, but it rose to 5.5% in January 2022 (5.4% in December 2021) and is expected to rise above 7% in 2022, making goods and services more expensive for businesses and individuals.
This means that the planned increase in state pensions (3.1%) and the rise in the National Minimum Wage in April this year will actually be a fall in real terms.
For pensioners, who were told back in September 2021 that the state pension "triple lock" would be suspended for 22/23, this is a further disappointment. Along with a promise of no rise in NIC rates, the 2019 Conservative Party manifesto also promised that the triple lock was secure. That is two promises not kept.
One possible suggestion that has been floated in the media is for the Chancellor to have the pension increase in April 2022 linked to new inflation forecasts in a one-off measure to reflect the rising cost of living. The proposed 3.1% pension increase is based on the inflation rate back in September 2021, but prices have risen substantially since then, particularly energy bills.
On those energy bills, the Chancellor could look to temporarily reduce the 20% green fuel levy and 5% VAT. Alternatively, he could remove these levies from fuel bills altogether and include them in general taxation instead.
As the cap on fuel prices is raised on 1 April 2022, households and businesses will see a 54% increase in fuel bills. As fixed-rate energy agreements end, the pressure on businesses to pass on those cost increases to their customers will build. Energy-intensive businesses such as in the manufacturing sector will be particularly hit.
Reducing VAT and green levies could save up to £400 on an average household's annual fuel costs.
For the moment, the Chancellor is offering £350 per household to help with rising energy costs. All domestic electricity customers will get £200 off their energy bills from October, with 80% of households receiving a £150 Council Tax rebate from April.
The government will provide billions of pounds in state-backed loans to energy companies, who will in turn pass this on to every household. The companies will then recover the rebate from consumers in later years to pay back the government loans as energy prices fall - if they fall.
The Federation of Small Businesses has called on the Chancellor to match the rebate for households by an equivalent business rates rebate to help firms.
If wholesale gas rates stay roughly where they are now, we could see another rise in the fuel cap in October of 20%.
Back in 2016, writing in the Sun newspaper, Boris Johnson said VAT on energy bills was “unfair” and that on leaving the EU it could be scrapped.
One issue outside the control of the Chancellor is the impact on energy prices of the Russian invasion of Ukraine. Media reports suggest the UK government expects petrol prices to rise well above £1.60 a litre and household energy bills to possibly reach £3,000 a year as a result of the invasion.
It seems very likely that the invasion will force the Chancellor to do more to avoid more people suffering fuel poverty. He could, for example, delay, or write off, the scheduled charge of £70 per household to cover the costs of energy companies that collapsed last year.
The planned expansion of benefits could also be accelerated and the national insurance increase delayed.
On a wider point, the invasion increases the likelihood of a UK recession through rising inflation and a shortage of supplies of commodities.
A report in The Times suggests that the Treasury will gain up to £2.9bn more from motorists due to petrol and diesel prices. Whilst the Chancellor has dismissed calls to use his Spring Statement to cut fuel duty, other European countries, such as France, Germany and Ireland, are planning temporary cuts in the duty. He may decide to hold on to this money to be used later for a pre-election tax cut, in the same way that it might be suggested the planned NIC increase would do.
Over £4bn is being written off by the Treasury due to Covid loans fraud, particularly the Bounce Back loans. That represents roughly 1p on Income Tax.
The government's handling of the issue led to the resignation of Lord Agnew, Minister for Efficiency and Transformation in the Treasury and Cabinet Office, citing the government’s “lamentable track record” in combatting fraud in the Covid business support loan scheme.
What will the Chancellor do about this? Will he seek to recoup the money through stealth taxes?
The government has issued a white paper on The Benefits of Brexit. It contains proposals to lift regulatory burdens on businesses now that the UK has left the EU.
On 21 February 2022, the Economic Secretary to the Treasury announced a post-Brexit removal of red tape for the insurance industry, which was welcomed by the sector.
This followed the appointment on 8 February of Jacob Rees-Mogg MP as Minister for Brexit Opportunities and Government efficiency.
Will we see the Chancellor announce a whole raft of Brexit dividends in his Budget?
On 2 February 2022 the government published its Levelling Up the UK proposals to invest more in infrastructure across the country. This will require cash from the Treasury, and the Chancellor may seek to announce investment commitments in the Budget.
On 24 February 2022 the Chancellor set out his vision for the economy. Key points included:
"I am going to deliver a lower tax economy but I am going to do so in a responsible way, and in a way that tackles our long term challenges."
"So as I deliver the tax strategy for the years ahead, it would be sensible to make sure our tax regime for innovation is globally competitive and so properly incentivises higher business investment in R&D.
Capital. People. Ideas. Three priorities to foster a new culture of enterprise. That’s how we’ll rejuvenate our national productivity; that’s how we’ll build a future economy that restores hope and opportunity."
Whilst the Chancellor appears keen on tax cuts, he is not going to make any at the moment due to higher spending required for pensions, health and social care.
He also feels that previous cuts to corporation tax have failed to create private sector investment and instead will focus on more targeted tax reliefs such as R&D tax credits.
In fact, R&D tax relief might be the biggest takeaway in the Budget; we will soon find out.
You can download a full summary and tax tables from the Autumn 2021 Budget here:
You can also watch our Post-Budget Webinar on YouTube.
Finance Bill 2021-22 received its Royal Assent on 24 February 2022.
Bishop Fleming will be analysing any fiscal statement the Chancellor makes in March and its impact on the rising tax burden.
In the meantime, if you have concerns about rising taxes or costs generally and how they impact on your business, please contact your usual Bishop Fleming advisor.