New Chancellor Jeremy Hunt steers tax U-Turn

Story updated 15 October

Key Points:

• Jeremy Hunt replaces Kwasi Kwarteng as Chancellor
• Mini Budget U-Turn on tax measures
• Corporation Tax will rise by 6% to 25% from 1 April 2023
• Proposed 1p cut off Income Tax expected to be delayed by a year until April 2024
• Medium Term Fiscal Plan will still take place on 31 October 2022
• Bank of England will review interest rates on 3 November 2022
• Projected £72bn hole in public finances
• Further changes announced on 17 October

Former Health Secretary and Foreign Secretary, Jeremy Hunt, has been appointed the fourth Chancellor this year following the departure of Kwasi Kwarteng after just 38 days in the post. 

The market turmoil following Kwarteng's Mini Budget three weeks ago forced Prime Minister, Liz Truss, to change direction on corporate tax policies.

In a major U-Turn, the freeze in the rate of Corporation Tax at 19% announced in the Mini Budget has been scrapped, meaning previous Chancellor Rishi Sunak's plan to increase the rate to 25% from April 2023 will now proceed.

The move will raise around £18 billion a year and act as a down payment on the government's full Medium-Term Fiscal Plan.

Interestingly, during the Tory leadership contest Jeremy Hunt promised the most aggressive tax cuts of all the candidates. He said that he would cut Corporation Tax from 19% to 15% straight away. Yet one of his first acts as Chancellor is to oversee the rate rise to 25%.

Corporation Tax will rise to 25% from 1 April 2023 for companies making more than £250,000 profit, around 10% of actively trading companies.

Companies making between £50,000 and £250,000 will also face a rise in Corporation Tax, with the rate increasing incrementally from 19% to 25% depending on how much profit a company is making.

For the remaining 70% of actively trading companies, those who make profits of £50,000 or less, Corporation Tax is to remain at 19%.

Implications of the U-Turn

Creating two rates of corporation tax will create complexity and avoidance issues at the margin between small/large companies.

The old associated company rules scrapped in April 2015 will return from April 2023 to catch more companies. This will also affect companies that pay corporation tax via the quarterly instalment scheme.

The economic benefits of taking dividends instead of salary are made less attractive by this rate increase.

Companies will be disappointed that they will now re-face an extra 6% tax on their profits from next year. This may affect their growth and recruitment policies.

They may also demand an extension to the Super Deduction, which is meant to end next April.

It is entirely possible that many large companies had already priced in the 6% rise, as they had known it was coming since March 2021. And with Labour promising to take the rate back to 25% if they win the next election, companies may have assumed it was going to rise anyway within a few years.

Corporation tax rates

New Chancellor's priorities

Speaking to the media after his appointment as Chancellor, Jeremy Hunt signalled how he will proceed in the job.

He warned that taxes may have to rise along with spending cuts to balance the books. He told Sky News: “We won’t have the speed of tax cuts we were hoping for, and some taxes will go up.”

On spending cuts, Hunt appeared to rule out any return to the austerity measures undertaken by Chancellor George Osborne, but said he had some tough decisions to make.

1p Income Tax cut delayed by one year

The Times reports the new Chancellor will delay by a year the planned 1p cut in Income Tax announced in the Mini Budget.

In his Spring Statement 2022, former Chancellor Rishi Sunak had proposed the 1p cut from April 2024, but Kwarteng wanted to bring this forward to April 2023. Under Hunt, the planned cut will revert back to April 2024, presumably not long before a general election (if there isn't one before then).

This delay comes on top of the reversal in the scrapping of the 45p Income Tax rate.

Medium Term Fiscal Plan 31 October 2022

The Prime Minister has confirmed that the 31 October Medium Term Fiscal Plan will still go ahead with the new Chancellor. Hunt therefore has a short amount of time to draw up plans to balance the books

It is understood that the Office for Budget Responsibility forecasts a £72bn hole in the public finances by year 2026/27 unless tax and spending policies are amended. This is a lot worse than the £60bn hole predicted by the Institute for Fiscal Studies.

After the U-Turn on Corporation Tax, the reversal of the scrapping of the 45p Income Tax rate and the delay in the 1p cut to the basic rate, it remains to be seen what other tax measures announced in the recent Mini Budget will also be reversed in order to fill in the public finance hole.

The reversal of the 1.25% NIC rise is already in law so should be safe, but other proposals such as the scrapping of the off-payroll rules have yet to make their way through Parliament.

Public Finance Hole

With a projected £72bn hole in public finances, the measures taken so far since the Mini Budget plug around £38bn, leaving Hunt still to find another £34bn.

Interest rates

There was enormous fear in the markets that Kwarteng's unfunded tax cuts in his Mini Budget would fuel inflation and thus force the Bank of England to raise interest rates.

The Bank of England will hold fire for now and will review interest rates on 3 November 2022, once it has had an opportunity to digest Hunt's Medium-Term Fiscal Plan.

The official bank interest rate has risen from 0.25% at the start of 2022 to the current rate of 2.25%, and there is a strong possibility it will rise even further to keep inflation in check.

Prior to Hunt's appointment as Chancellor, the markets were expecting a full percentage point increase in interest rates from November. We wait to see if the new Chancellor can calm the markets and reduce pressure on the Bank of England to increase rates by that much.

[Gary Mackley-Smith]