With the tax burden at its highest level for 70 years, Britain’s new Prime Minister Liz Truss has promised a shake-up of the UK’s taxation system. With lower taxes at the heart of her promise to “govern as a Conservative”, as Truss moves into Downing Steet she’s banking that reducing the tax burden will ease the cost-of-living crisis, help stave off recession and ultimately boost the economy. Publicly committing to “no new taxes”, she’s promised early action, including an emergency budget within the first month of her premiership.
As the new Prime Minister gets down to business, what sort of changes can individuals and their families expect and how are they likely to affect their finances?
According to press reports, Truss is set to end the freeze on income tax thresholds introduced by former Chancellor Rishi Sunak, with increases likely in the annual personal allowance of £12,570 and the 40% higher rate tax threshold of £50,270. Even before inflation took off this year, the freeze on thresholds which was set to last until April 2026, would have brought a further 1.3m people into the tax system, and taken 1m into the higher rate tax band. A cut in the 20% basic rate of tax is also possible. While these changes would clearly boost the incomes of taxpayers, the downside of cutting income tax is that it reduces the value of tax relief on pension contributions.
During her campaign for leader of the Conservative Party, Truss made a pledge to “ease the tax burden on families”. So, it wouldn’t be a surprise if her rumoured plans to allow one member of a married couple to transfer more than the current £1,260 a year of their personal tax allowance to their spouse (via the marriage allowance) came to fruition. Potentially, a person’s full personal allowance of £12,570 could be transferred, a tax saving of £2,514 a year.
The amount raised through Inheritance tax (IHT) has been rising steadily over the last few years driven by rising asset prices and fiscal drag, where allowances and reliefs haven’t kept up with inflation, so Truss’s promise to review it will be welcomed by many families.
In 2021/22 the amount raised through IHT was up 14% on the previous tax year to £6.1bn. Although this is only a tiny amount when compared to the enormity of total UK tax receipts, IHT can be a significant burden on families that have to pay it. Possible options are to cut the 40% rate and/or raise the £325,000 nil rate band and the residence nil rate band of £175,000 that were due to have been frozen until April 2026.
The Triple Lock
The new Prime Minister reiterated her commitment to the Triple Lock under which people on the State Pension are guaranteed an increase of whichever of the following is the higher; average earnings, prices as measured by the Consumer Prices Index, or 2.5%. With the Triple Lock set to be restored from April 2023, it’s predicted that the State Pension will rise by around 10% in line with September’s CPI inflation rate.
Truss says she will reverse the planned 1.25 percentage point rise in National Insurance, giving workers an immediate boost to their take home pay.
Business and the self-employed
The self-employed and those who have their own limited companies could benefit. Truss plans to scrap the proposed rise in corporation tax from 19% to 25%. She has also indicated that she intends to look on the self-employed more favourably because they are “the future of our economy.”
It’s understood that Truss will also consider various options to temporarily cut the headline rate of VAT by either 2.5% or 5%.
Truss said she will impose a temporary moratorium on the green levy, which is used to fund energy-efficient schemes, claiming this would cut £153 a year from energy bills. However, according to the Institute for Fiscal Studies (IFS), soaring energy prices have changed this and the total net cost of these levies is expected to be just £11 to the typical household’s bill over the 3 months beginning 1 October. It’s unclear what will happen to the green levy if Truss decides to keep energy prices at their current level.
Truss ruled out any additional windfall taxes on the energy sector, potentially giving a boost to the returns of companies in the sector, notably Shell and BP, which are staple holdings in many people’s pension holdings and investments.
Cutting taxes will certainly mean that people will hold on to more of their money at least in the short term. But as to how sustainable these changes are if inflation and borrowing are not contained and economic growth doesn’t pick up, potentially necessitating tax rises further down the road is less clear.