The fiscal headline was that the UK will avoid a recession and that inflation will fall to 2.9% by the end of this year, with growth picking up from 1.8% next year to 2.5% in 2025. And the policy measures were framed on Rishi Sunak’s key priorities which were set out in January: halving inflation, reducing the national debt and increasing growth. Hunt ticked these off in turn before focusing on the growth priority through the lens of ‘four Es’: enterprise, education, employment, and everywhere.
Restraint was the order of the day, but there were some eye-catching measures. The reform of childcare, meaning 30 hours of free childcare for every single child over the age of nine months, ticks a number of boxes.
Elsewhere, an increase in the pensions annual tax-free allowance from £40,000 to £60,000 and abolishing entirely the Lifetime Allowance – previously set at £1.07m.
Elsewhere there are multiple giveaways for workers and families, including reforms to stamp duty, cuts to income tax and NICS, and the abolition of the health and social care levy.
The pension reforms were pitched as a measure that will encourage doctors and other professionals to remain in the workforce longer. And there were many other measures with a similar objective in mind: encourage working-age people who are not currently in employment to return. The Chancellor even entered a new word to the Westminster lexicon – ‘Returnerships’ – a new apprenticeship targeted at the over-50s including career advice for those on Universal Credit.
Despite heavy pressure from business groups Hunt decided to keep the rate of corporation tax as is at 25%. However, he introduced a more generous regime for pre-profit, fully expendable deductions with an amended continuation of the super deduction scheme, which in most cases should have the same net effect but ensure that firms keep investing.
On the cost-of-living front, he maintained the energy price guarantee £2,500 cap for the next three months. The planned increase of 11p in fuel duty this year will be cancelled, and rates will be kept the same for the next 12 months. This is expected to save the average driver £100.
The chancellor will return home tonight confident that he has fulfilled his brief to keep the momentum going and demonstrate a serious grip on the public finances. But could today really mark a turning point in the governing party’s fortunes? Keir Starmer’s Labour is 10% ahead on the economy, according to a poll this morning, which is remarkable by historic standards and a tough lead to overcome. However, the same poll also scored Starmer’s net approval rating at minus 12% - almost exactly the same as Neil Kinnock’s score this far out from an election. Whatever way you cut it, nothing is certain about the next election.
- Pensions Annual Allowance (AA) increased – The AA for pensions input is to be increased from £40,000 to £60,000 from April 2023. This is intended to incentivise people to stay in work longer.
- Pensions Lifetime Allowance abolished – The government will remove the Lifetime Allowance charge from 6 April 2023, before fully abolishing the Lifetime Allowance in a future Finance Bill, meaning there will be no penalty limit on what people can save before they stop working. Like other measures, this will incentivise doctors and other professionals to remain in work for longer.
- Money purchase annual allowance (MPAA) increase – The MPAA, which limits what older savers can pay into their pots while still getting tax relief after taking an initial drawdown, is to be increased from £4,000 to £10,000.
- Expansion of free childcare – From April 2024, working parents of 2-year-olds will be able to access 15 hours of free childcare per week, in a bid to enable them to work more. From September 2024, this will be extended to working parents of children aged above 9 months. From September 2025, all eligible working parents of children aged 9 months up to 3 years will be able to access 30 free hours per week.
- Increase in the staff-to-child ratio for childcare provision – From September 2023, the staff-to-child ratio for childcare providers in England will change from 1:4 to 1:5.
- Help to Save – The Help to Save scheme, a type of savings account for people on lower incomes, will be extended by 18 months until April 2025. In the meantime, a consultation will be launched to seek views on longer term options to support low-income savers.
- ISAs – The starting rate for savings will be frozen at £5,000. Annual subscription limits for Junior ISAs and adult ISAs remain at £9,000 and £20,000 respectively.
- Capital gains assessment time period - The government will legislate to close an avoidance loophole that can leave HMRC out of time to assess capital gains tax when an asset is disposed of under an unconditional contract. The changes will apply in April 2023.
- Alcohol duties – Duty rates of all alcoholic products produced in, or imported into, the UK will increase in line with RPI. Draught Relief will increase from 5% to 9.2% for beer and cider draught products and from 20% to 23% for wine, spirits based and other fermented draught products. These changes will take effect from 1 August 2023.
- Simplification for trusts and estates– The Government will formalise and extend an existing income tax concession of low-income trusts and estates. It will also provide further changes to make calculations and reporting more straightforward. HMRC also announced intentions to change inheritance tax regulations to remove non-taxpaying trusts from reporting requirements.
- Economic growth - The UK is not forecast to enter a technical recession next year. The Office for Budget Responsibility (OBR) forecasts economic contraction of 0.4% in Q1 2023, stagnation in Q2, and then a return to growth over the rest of the forecast period. The economy is forecast to grow 1.8% in 2024 and 2.5% in 2025, and then 2.1% in 2026 and 1.9% in 2027.
- Inflation – The OBR now forecasts that inflation, as measured by CPI, will fall to 2.9% by the end of 2023. It then forecasts inflation to fall to 0.9% in 2024, and then to remain near 0.0% until mid-2026. It is forecast to return sustainably to the 2% target by 2027-28.
- Unemployment– The OBR forecasts a modest increase in unemployment to a peak of 4.4%, coming down to 4.1% by the end of its forecast period in 2027.
- Public debt – Public debt currently stands at 98.9% of GDP. It is forecast to fall to 94.6% of GDP by 2027-28. Public borrowing is due to fall from 6.1% of GDP in 2022-23, to 1.7% of GDP by 2027-28. The overall public budget is forecast to be in surplus from 2026-27.
- REITS – In addition to measures already announced as part of the Edinburgh Reforms, the Government will seek to make REITs more competitive by reducing the administrative burden for certain investors from later in 2023.
- Qualifying Asset Holding Companies rules - The Government will make changes to this regime so it becomes more accessible to the investment fund types which are intended to fall within its scope, boosting the attractiveness of the UK as a jurisdiction for establishing holding companies
- Carried interest – A new “elective accruals” basis will be established for the taxation of carried interest.
- Sovereign immunity from direct taxation – Following conclusion of a recent consultation, the Government has decided to leave the current exemption unchanged.
- Social Investment Tax Relief – This relief on social impact investing will be allowed to expire in April 2023. New investments made on or after 6 April 2023 will no longer qualify for Income and Capital Gains Tax relief.
- Consultation on employee share schemes with a view to simplification – The Government will launch a call to evidence on two non-discretionary tax advantaged share schemes: the Share Incentive Plan and Save As You Earn schemes.
- Write-downs for annuities products and insurer liabilities – The government is legislating to address the pensions tax and corporation tax consequences of write-downs of liabilities of insurers in financial distress under the proposed new section 377A Financial Services and Markets Act 2000 and any subsequent court-ordered variation or termination of those write-down orders.
- Review of the VAT treatment for financial services – No announcement today but the Government will continue to “consider” potential reforms to simplify VAT treatment of financial services, building on the recommendations of a recent working group.
- Housing forecast – Alongside the budget, the OBR shared its forecast for the housing market, stating that they expected house prices to fall by 10 per cent from their high in the fourth quarter of 2022, as well as property transactions are expected to drop by 20 per cent relative to their peak in the same quarter. They linked this to low consumer confidence, the squeeze on real incomes, and the expectation of mortgage rate rises to come are expected to contribute to continued falls inhouse prices and a reduction in housing market activity.
- Savings forecast – The OBR also stated that households’ saving (excluding adjustments to net equity in pension funds) is expected to drop to around zero in 2023 and 2024 to support consumption in the face of weak real income growth.
- Corporation tax – The planned corporation tax rise in April, from 19% to 25%, will be retained. The super-deduction will be replaced with full capital expensing for the next three years, with an intention to make it permanent.
- Capital allowances: full expensing – Capital allowances allow businesses to write off the cost of qualifying expenditure against taxable income, thus cutting businesses’ overall tax bill. From 1 April 2023 until 31 March 2026 investments made by companies in qualifying plant and machinery will qualify for a 100% first-year allowance for main rate assets. This means companies across the UK will be able to write off the full cost in the year of investment, known as full expensing.
- Business rates– The Government has published responses to the latest Business Rates Review and consultations on digitalisation and anti-avoidance. There is no change today on existing rates but local retention of business rates will be expanded in the next parliament for interested councils.
- Annual Investment Allowance – The AIA provides 100% first-year relief for plant and machinery investments, subject to an annual maximum. From April 2023, this will be permanently set at £1m. It was temporarily set at £1 million in January 2019.
- R&D tax relief - Increased rate of relief for loss-making, R&D intensive SMEs. Eligible companies will receive £27 for every £100 of R&D investment. This will apply for companies where qualifying R&D expenditure constitutes at least 40% of total expenditure.
- Delay to restriction on overseas expenditure in R&D tax reliefs – The previously announced restriction on tax relief on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023.
- Encouraging investment intro strategic growth sectors – Various measures have been announced including the extension of British Patient Capital by 10 years and the launch of a new “Long-term Investment for Technology and Science” scheme. These are intended to create stimulus and enable access to capital in hi-tech and fast-grown industries such as life sciences and green tech.
Encouraging people back to work
- Encouraging older workers to return – Newly labelled “Returnerships” – apprenticeships for those who have left work – will be launched for the over-50s to promote training and skills to help them re-enter the workforce. These will be supported by a £63.2 million investment for an additional 8,000 Skills Bootcamps in 2024-25 in England and 40,000 new Sector-Based Work Academy Programme placements across 2023-24 and 2024-25 in England and Scotland.
- People with disabilities and long-term sickness– The government will introduce a new programme to support people with disabilities and long-term sickness into work. A new Universal Support programme will match individuals in England and Wales who want to work with existing job vacancies, and ensure they are supported to enter and stay in work by funding the necessary training and workplace support.
- Ukrainian refugees – An £11.5m fund will be set up to help refugees from Ukraine boost their language skills and enter employment.
- Midlife MOT – The government will expand and improve the free online “Midlife MOT” support tool to support individuals with planning for later life across Great Britain.
- Work capability assessments– These have been abolished on the grounds that it allows more disabled people to try to work without fear of losing their benefits.
Energy, infrastructure, innovation
- 12 new investment zones – The Government will seek to emulate the success of past regeneration projects such as Canary Wharf in locations across the UK and Northern Ireland, as part of the levelling up agenda. Around £80mn of government financing will be made available over five years to each Investment Zone.
- Levelling up– New Levelling-Up Partnerships will be rolled out, providing £400m of regeneration to deprived council areas, many in the midlands and north. Multiple other regeneration and capital projects were announced.
- Devolution of economic powers – The Government will consult on transferring responsibility for local economic development from LEPs to local government. Ministers will also seek to negotiate “a new wave” of devolution deals across England, building on past example.
- New powers and accountability for Metro Mayors – The government has agreed “trailblazer” devolution deals with the West Midlands Combined Authority and the Greater Manchester Combined Authority. These deals equip the authorities with new levers over local transport, employment, housing, innovation and Net Zero priorities, a long-term commitment to local authorities retaining 100% of their business rates, and include a commitment to provide these MCAS with single multi-year funding settlements at the next Spending Review.
- Fuel duty– The Government has announced a one-year extension of the 5p cut in fuel duty, at a cost of £6 billion.
- Investment in domestic energy – A £20bn support plan has been announced for carbon capture and storage, attracting investment and creating 50,000 jobs in addition to the technology’s impact on helping to meeting climate targets.
- Plan to boost nuclear - Nuclear power will now be classed as “environmentally sustainable”, subject to consultation, making it subject to the same investment incentives as renewable energy. Other measures include the launch of a competition to create small modular nuclear reactors. This work will be led by Great British Nuclear, a new organisation being launched today.
- Energy support for businesses– The Energy Bills Discount Scheme will provide all eligible businesses and other non-domestic energy users across the UK with a discount on high energy bills until 31 March 2024, following the end of the current Energy Bill Relief Scheme.
Prepared by H&K Strategies on behalf of NFP.