Spring Statement 2022: not all it appears to be

NATIONAL INSURANCE & INCOME TAX

Earlier today the Chancellor announced an increase to the National Insurance Primary Threshold for Class 1 NICs and the Lower Profits Limit for Class 4 NICs from 6 July 2022, aligning it with the equivalent income tax personal allowance, which is set at ￡12,570 per annum, something AAT had long advocated. This amounts to a ￡6bn tax cut for 30 million UK workers.

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Speaking in Parliament this afternoon, the Chancellor stated this is, “… the largest increase in thresholds ever, the biggest personal tax cut in a decade.” ?

He went on to state that, “…combined with the other tax cuts we have announced today, this plan represents the biggest net cut to personal taxes in a quarter of a century.”

This is of course technically accurate but completely ignores the fact that at the previous Spring Statement in 2021 he announced a four year freeze on income tax rates, which the Treasury forecast would raise ￡8bn through fiscal drag but due to soaring inflation this year is now likely to raise over ￡21bn (according to figures published by The Institute of Fiscal Studies (IFS) earlier this month).

In other words, aligning the NICs threshold with income tax this year and a reduction in the basic rate of income tax to 19% from April 2024 is being funded by Government imposed fiscal drag, which sees more and more people paying tax at higher levels due to inflation and earnings growth. Over one million people will be dragged into the 40% higher rate tax band by 2025-6, taking those in this tax bracket to 5.9m equating to over 17% of those paying income tax. To put this into perspective, less than 4% were in this bracket back in 1990-1991.

So, yes it may be the biggest personal tax cut in a decade, but as the IFS rightly highlighted today, “By 2025-26 - after the cut to the basic rate of income tax has been implemented and thresholds have continued to be frozen - virtually all workers will be paying more tax on their earnings than they would have paid without these changes to rates and thresholds. This is because freezing thresholds for four years is now set to have such a large impact, given the rise in expected inflation over this period.”

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FUEL DUTY

An immediate reduction in duty on diesel and petrol came into effect this evening, by 5 pence per litre, for 12 months. This populist measure may be understandable against the backdrop of rapidly rising petrol prices but does nothing to help inequality given well over a third of the poorest households in the UK don’t own a car compared to the wealthiest who own more than one. Indeed, Department for Transport data shows the top 20% of UK households spend around five times more on fuel than the bottom 20% so this temporary cut will benefit the well off more than any other section of society. Environmental considerations seem to have taken a back seat too. There was much evidence to suggest the rises in fuel prices were prompting a welcome acceleration of the switch to Electric Vehicles (EV) with EV sales rising well in excess of forecasts. That may now be undone, temporarily I hope, by this reduction in fuel duty.

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Of course, Government could scrap fuel duty completely and still meet its net zero ambitions. As AAT suggested many years ago, fuel duty, VAT on fuel, Vehicle Excise Duty should be scrapped in favour of existing telematics technology that would charge motorists depending on the time of travel, the type of road used and the distance travelled – a fairer and more environmentally friendly means of taxing motorists. This was also a recommendation we made to the cross-party Transport Select Committee last year and was pleasingly adopted by the Committee a few weeks ago.

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VAT ZERO RATING

VAT zero rating on the installation of energy saving materials is a small step in the right direction. It’s something that AAT has recommended on several occasions and although only represents a 5% saving is welcome, nevertheless. However, it is disappointing that the zero rating is for a time-limited period only. If we are serious about reaching net zero, the Government should not just make the VAT exemption permanent, but it must go much further and faster, incorporating renewables into housing policy and providing a range of incentives for homeowners and housebuilders to install solar panels, heat pumps EV chargers and the like as well as incentivising businesses to go green. It’s not just renewables either, but a range of other environmental taxes. As AAT has repeatedly highlighted, improvements to the Plastic Packing Tax (due to come into force next month) and the Deposit Return Scheme (again delayed) should be made, and the frankly ridiculous decision to scrap Air Passenger Duty (APD) for short haul domestic flights (the most polluting of all air travel) should be immediately reversed.

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