Mini-Budget all but reversed, what does it mean for you?

The turbulence in the markets caused by ex-Chancellor, Kwasi Kwarteng’s mini-Budget in September has all but been reversed by the new Chancellor of the Exchequer, Jeremy Hunt.

Something had to be done to calm market volatility, because the government couldn’t say where the money for all the tax cuts was going to come from, and the Bank of England can’t continue to be relied upon to bail the UK economy out of a hole.

Most of the previously announced cuts have been reversed – one reversal will certainly ruffle a few feathers – we look at what this now means for you and your finances.

husband and wife doing their finance with a laptop and bills in their living room.

The Chancellor’s announcement in summary

Most of the previously announced cuts have been scrapped.

1. The basic rate of income tax will remain at 20p, instead of being reduced to 19p.
2. Removal of the 45% top rate of income tax scrapped.
3. Corporation tax will rise to 25% from 19% as previously planned.
4. Freeze on alcohol duty scrapped.
5. VAT free shopping for non-UK visitors scrapped.
6. IR35 reforms to stay as they are, with the responsibility for determining a contractor’s employment status remaining with the hiring party.
7. The cap on energy prices charged to households will now only be guaranteed until April 2023, when it will be reviewed.
8. The previously announced cuts to stamp duty will remain – No duty on the first £250,000 of a property’s value. No duty on the first £425,000 of a property’s value for first-time buyers.
9. Reversal of the proposed 1.25% National Insurance rise retained.

Reversal in the support with energy bills

The previously announced Energy Price Guarantee, had originally been planned to be in place for two years. That will now only be in place for six months until April 2023. This is a significant blow to many as it will add to people’s household costs on top of the rise in mortgage rates.

The support will be reviewed in April 2023, with a new approach that targets those in the most need. It is likely that will include those on low incomes, while there may also be incentives for people to become more energy efficient.

It’s important to remember that the cap is on what you can be charged for unit for your gas and electricity. So, you could pay a lot less than the quoted £2,500 a year, depending on the amount of energy you used.

This will be an immediate concern for all householders, but even more so for small business owners who fear a cold winter could force many businesses to the brink of closure because of the rising costs.

Businesses closing, or significantly reducing their costs so as to ensure they stay afloat could have a significant impact on supply chains for many industry leading companies who rely on small business services.

Reversal in the promise to scrap IR35 reforms 

Just as the champagne corks have stopped popping, the government has reneged on its announcement to repeal the IR35 reforms.

The hugely unpopular reform was going to be repealed, but on Monday 17^th October the as the new Chancellor announced a U-turn on most of the previous Chancellor’s tax cuts.

So, the responsibility for determining a contractor’s employment status remains with medium and large businesses, with those contractors who work for small businesses being responsible for their self-determination.

What could the recent announcement  mean for small business owners? 

Planned increases in taxation will go ahead, adding significant extra expense to businesses who are already feeling the pinch of rising running costs, such as energy bills and fuel costs.

Corporation tax will increase from 19% to 25% from April 2023.

The cap on energy bills will end in April 2023, with a review then being undertaken, which could see help going to those who need it the most. If that is the case, small businesses could see their energy bills rise again.

Dividend tax rates will increase, which will typically affect limited company directors who are typically paid through different channels than employees.

Why has there been such a dramatic U-turn? 

With the UK economy still reeling from the effects of Covid-19, and with a huge increase in public borrowing to be paid back as a result, increasing taxes was widely expected.

As welcoming as the previously announced tax cuts in September were, whenever there are cuts announced they need to be quantified. In short, the government must explain how the cuts are going to be paid for. How is the new shortfall in tax revenue going to be made up from other sources?

In the instance of the September mini-Budget, no such explanation was put forward which caused the financial markets to spiral into turmoil and saw the pound struggle against the dollar.

It remains to be seen how long it will take for markets to fully stabilise, but the early signs on the back of the October 17^th announcement were quite positive. What is certain however, is that there will be more hard decisions to make in the near future and the next six to twelve months will likely be tough for the general public and for small business owners.

Related Links:

Plans to repeal IR35 scrapped by new Chancellor

Sources:

https://www.bbc.co.uk/news/business-63285246

https://www.gov.uk/government/news/government-announces-energy-price-guarantee-for-families-and-businesses-while-urgently-taking-action-to-reform-broken-energy-market