The Chancellor of the Exchequer has confirmed cuts to income tax and national insurance, and has removed the cap on bankers’ bonuses in his ‘mini-Budget’ today.
Kwasi Kwarteng said that cutting taxes and supporting growth in the UK economy would help deliver higher wages, greater opportunities and fund public services, but noted that “none of this is going to happen overnight”.
“Growth is not as high as it should be,” he said, noting that “higher taxes on capital, higher taxes on labour, have lowered returns on investment and work, reducing economic incentives and hampering growth still further.”
He added that the government was “determined to break that cycle”.
The basic rate of income tax will be cut to 19p in April 2023, a year earlier than planned, the Chancellor told the House of Commons.
“That means a tax cut for over 31 million people in just a few months’ time. That means we will have one of the most competitive and pro-growth income tax systems in the world,” he claimed.
Recent government announcements
The top rate of income tax – the 45% rate for earnings over £150,000 – is being abolished altogether.
The 1.25% increase to national insurance contributions, brought in in April 2022, will be reversed from November, as announced yesterday. The Health and Social Care Levy, which was set to be implemented from April 2023, will be scrapped, with the funding it would have provided instead being drawn from general taxation.
The rules around claiming Universal Credit will also be tightened, and claimants working up to 15 hours per week will have to take active steps to increase their hours in order to continue receiving benefits.
Plans to impose new conditions on unions wanting to strike have also been announced. Kwarteng said other countries have legislation to ensure minimum services during industrial action, and the UK wanted to do the same. It would also legislate so that unions have to put pay offers to a vote, so that strikes can only be called once negotiations have fully broken down.
IR35 reforms will also be repealed from April 2023. This will mean that workers providing their services via an intermediary will once again be responsible for determining their employment status and paying the appropriate amount of tax.
He has also confirmed that the cap on bankers’ bonuses, introduced when the UK was a member of the European Union, will be scrapped. Currently, bankers’ bonuses are capped at double their annual salary, which Kwarteng believes deters talented workers from living and working in the UK.
The plan to boost bankers’ bonuses has been widely criticised, with many commentators suggesting it will help the rich get richer.
However, Kwarteng said: “A strong UK economy has always depended on a strong financial services sector. We need global banks to create jobs here, invest here, and pay taxes here in London, not Paris, not Frankfurt, not New York.
“All the bonus cap did was to push up the basic salaries of bankers, or drive activity outside Europe. It never capped total remuneration, so let’s not sit here and pretend otherwise.”
Reforms to the pension charge cap were also announced, which he said would allow pension funds to be more easily invested in UK assets.
Plans to force low paid part time workers to work more hours could make things worse, by forcing people to change jobs or give up work entirely” – Tony Wilson, Institute for Employment Studies
Other announcements included the introduction of 40 new low-tax ‘investment zones’ in England, where planning rules will be relaxed to encourage more business investment, and scrapping the planned increase to corporation tax, which had been set to rise from 19% to 25% next year.
Rachel Reeves, Labour’s shadow chancellor, said that working people would be left to pick up the bill for the borrowing that would be necessary to fund the energy price cap.
“Borrowing higher than it needs to be, just as interest rates rise. And yet the chancellor refuses to allow independent economic forecasts to be published, which would show the impact of this borrowing on our public finances, on growth, and on inflation. It is a budget without figures, a menu without prices,” she said.
CIPD head of public policy Ben Wilmott said the NICs reversal would be a huge relief to many employers.
“We’d urge employers, where they can, to reinvest this back into supporting their people at this difficult time. Some employers have already told us they intend to use the money that would have been spent on this to help their employees during the cost of living crisis. For example, by funding a higher pay rise, a one off cost-of-living bonus, or other financial wellbeing benefits such as an increase in employer pension contributions,” he said.
Torsten Bell, chief executive of the Resolution Foundation, said: “It’s hard not to be awed by the scale of what has been announced today [in terms of] huge tax cuts and the total rejection of not just Treasury orthodoxy but Boris Johnson too.”
Tony Wilson, director of the Institute for Employment Studies, said today’s announcements will make no difference for organisations struggling to fill skills gaps, which are hampering economic growth.
“If anything, plans to force low paid part time workers to work more hours could make things worse, by forcing people to change jobs or give up work entirely. It also misses that point that part-time work has fallen since the pandemic began while full time work is rising. The problem for the economy and employers is that we don’t have enough workers, not that our workers don’t work enough hours,” he said.
“There are nearly two million people who are out of work, not looking for work but who want a job. Many of them are older and health conditions, not on benefits not getting any support at all. We need a proper plan to help people into work and to help employers fill their jobs, otherwise we’ll continue to throttle growth and fuel inflation.”
If the cap is abolished banks will be able to revert to their traditional pay strategy of rewarding performance well but reducing fixed salary costs” – Helen Farr, Taylor Wessing
Work Foundation director Ben Harrison said: “The Chancellor has also chosen to introduce stricter sanctions on those in low paid, part-time work, which will make this winter harder for the six million people in severely insecure jobs. Instead, government should bring forward the planned increase in Universal Credit payments from April 2023 to reflect the rising costs people are facing right now.”
Helen Farr, partner and employment lawyer at law firm Taylor Wessing said: ”Kwasi Kwarteng’s plan to scrap the bankers bonus cap will be well received by those who run banks in the UK.
“Following the introduction of the cap many banks were forced to introduce higher fixed pay as a way to retain staff when their bonus opportunities had been slashed by introducing the cap. If the cap is abolished banks will be able to revert to their traditional pay strategy of rewarding performance well but reducing fixed salary costs.
“This may not be the popular move amongst those working in banks who may prefer on an individual level the certainty of a higher fixed income. Nonetheless it also gives high achievers the opportunity to earn much higher remuneration which is going to be attractive to many. ”