Financial experts discuss how it risks leaving people worse off
UK Prime Minister Liz Truss made a campaign promise to cut taxes aiming to boost the country’s economy and alleviate the cost-of-living crisis. With the period of mourning following the death of Queen Elizabeth II, the delivery of that promise was delayed, but Number 10 insists that a mini-budget to provide the promised tax cuts will still take place this month, with many expecting it to happen on Friday next week, September 23.
What are these possible tax cuts and how would they impact the UK’s financial resilience in the face of soaring inflation? Experts from financial service company Hargreaves Lansdown share their thoughts.
Sarah Coles, senior personal finance analyst, said there are five possible tax cuts that finance minister Kwasi Kwarteng could announce. These are cuts to National Insurance, removal of green levies on energy bills, cuts to VAT, portions of the current tax system – including inheritance tax, and tax breaks for people who take time out of work for caring responsibilities.
“We’ll see a major change of direction in this mini-budget as Kwasi Kwarteng drives his growth agenda, fuelled by deregulation and tax cuts, in the belief it will ease the cost-of-living crisis and boost growth,” Coles said. “But while it’s likely to offer immediate easing of the squeeze on household budgets, only time will tell whether it will improve the landscape for good, or steer us into dangerous territory.”
Coles noted that, in the short term, tax cuts will free up more money to help people make ends meet, which could make an enormous difference in the coming months to those who are already running on empty. However, she added that in the longer term, these cuts will benefit higher earners more than lower earners because they pay more National Insurance on higher earnings and more VAT on bigger spending budgets.
“While every household will be grateful for any additional help, by fuelling more spending, this could push prices up for longer, denting our longer-term financial resilience,” Coles explained. “This, in turn, could persuade the Bank of England to raise rates, which makes life even harder for those with variable rate debts.
“Tax cuts will help us all in the immediate future, cutting our outgoings during a time of runaway inflation. It is being done in the belief that this will then help people spend more and companies invest more, both of which would support growth.
“However, this comes at a cost, and there’s the risk it could end up damaging our financial resilience over the longer term. There’s also the question of whether there will be enough in this announcement to support those on the lowest incomes, or to help us build our long-term financial resilience.”
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The finance analyst pointed out that the government would be helping build resilience better if it could provide more support for those on the lowest incomes and those whose circumstances change.
Helen Morrissey, senior pensions and retirement analyst, said a permanent cut to the penalty for the Lifetime ISA would be welcome.
“At the moment, if you take cash out of the LISA before the age of 60 – for any reason other than to buy your first property or retirement – you face a penalty of 25%,” Morrissey said. “While it may look like you are just giving up the government bonus, it also takes a chunk of the money you have saved. It means anyone turning to this money while life is tough will pay a horrible price for having tried to do the right thing.
“We want to see the LISA penalty reduced to 20% to help people use their money in the way that makes most sense for them, without losing some of their own savings at a time when they can least afford it.”
The Hargreaves Lansdown analysts agreed that the government could also implement more measures to improve outgoings in the longer term, and other steps to support people’s resilience in the future, such as revisiting the money purchase annual allowance.
“People who are forced to raid their pension to pay the bills, or are returning to work to cope with higher prices, face a pension headache,” Morrissey said. “The rules mean once you’ve taken an income from your defined contribution pension, you can’t contribute more than £4,000 a year.
“This was supposed to stop people accessing their pension and then re-investing it for another round of tax relief, but the same thing could be achieved with rules which only kick in when someone has done this with the express intent to recycle the cash.”
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Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, added that measures that could be announced to support growth include a reversal of plans to increase corporation tax from 19% to 25% in April, targeted cuts to VAT for specific sectors like hospitality and possible changes to business rates, and scrapping the cap on bankers’ bonuses as part of a move towards post-Brexit deregulation.
‘’The Trussenomics agenda is all about growth, growth, growth, and that’s why corporation tax cuts and a temporary cut to VAT are on the table to try and rejuvenate output and offer support to companies dealing with the cost-of-living crisis,” Streeter remarked. “However, the effect of this is likely to be a temporary boost to help companies through the worst of their current hardship rather than helping to lay the groundwork to power growth for the longer term.
“There are also concerns that combined with the energy freeze cap, this slash and spend policy will make the Bank of England’s task of lowering demand in the economy and reining in inflation that much harder. That’s not to say such measures won’t be welcomed by sectors across the board.”
Streeter added that for the benefit of businesses, targeted tax incentives should be introduced to help companies boost productivity, and more details must be provided on the energy lifeline for businesses.
“Many businesses are still in the dark about how they will survive a pretty bleak winter ahead, with energy bills quadrupling in some cases, amid worries that consumer spending is seizing up,” she said. “Providing more details and a longer timescale on the support window will mean businesses can plan operations with more certainty instead of lurching precariously from month to month.”
