Springing Forward into Difficult Times

My opinion and analysis on what happened earlier this week in Parliament. What impact could the Spring Statement have on YOU and your family for the rest of 2022? And, should you be concerned?

The sun shone yesterday, and with the warmer weather tempting us out of doors, things seemed brighter, lighter and more optimistic. This, despite our current cost of living crisis, and of course, the ever-alarming news coming from Ukraine.?

The Spring Statement (not a Budget as such) came up sharply against the widely reported fact a few hours beforehand, that inflation has now reached a previously unthinkable 6.2%. And, it’s forecast to average 7.4% for the year, with a peak of 8.7%.

Combine all of this with sharp rises in energy costs, and interest rates in the doldrums – it’s fair to say that not everything in the garden looks rosy.

The Office of Budget Responsibility forecasts that the UK economy will grow by 3.8% this year. Good news indeed.

However, with inflation outpacing growth, and tax due to rise in April, the OBR also warns that real living standards could fall by 2.2% in 2022-23 – their largest financial year fall on record – and not return to pre-pandemic levels until 2024-25. In fact, the OBR referred to it as a “historic fall”.

For many, a dark, personal finance storm is looming on the horizon. Perhaps it’s already here, even for those on higher incomes, as we touched on in our previous blog. So, at the risk of underplaying all this, Mr Sunak certainly faced a tricky day.

Giving, and Taking Away

During the pandemic, the Chancellor exercised a degree of largesse, repeatedly rolling out extensive economic rescue measures, with mainly borrowed money. ?

Then, last year’s hotly anticipated October Budget (2021) set out a number of “around the edges” tax changes designed to start paying everything back, which you can read about here. In contrast, it appears that yesterday’s Statement was mooted as less of a mini-Budget – rather, more of an economic forecast and update. Nevertheless, with households coping with the cost of living squeeze, the Chancellor had been facing pressure to release the pressure valve. Hence, the following.

Let’s start with the Spring Statement headlines:

·???????The basic rate of income tax will be cut in April 2024 from 20p to 19p in the pound, to take place before the end of the current Parliament – the first of its kind for 16 years.

·???????The threshold at which people start paying National Insurance will rise to ￡12,570 in July.

·???????Fuel duty will be cut by 5p per litre until March 2023.

·???????Greener homeowners who install energy efficiency materials such as solar panels, heat pumps or insulation will see VAT on these cut from 5% to zero for five years.

·???????The Employment Allowance, which gives relief to smaller businesses’ National Insurance payments will increase from ￡4,000 to ￡5,000 from April.

Of Note

Pension reform failed to make it into the Chancellor’s address to Parliament. However, the above-mentioned changes to income tax and National Insurance could have a knock-on effect for pensions. Taxpayers receive tax relief at the highest rate of income tax that they pay, and those on a basic rate receive currently benefit from a 20% tax relief on their pension contribution.

So, a tax cut means a tax relief cut, meaning that to achieve the same retirement income, savers will have to pay a little bit more into their pensions.

National Insurance

The Chancellor has been under pressure regarding NI, so for lower earners, yesterday’s announcement of an increase in the level at which it becomes payable (from ￡9,880 to ￡12,570 per year) will be welcome.???

Does National Insurance count as tax? Officially, no. Unofficially, yes – in a way.

If you have higher than average earnings, news earlier in the year regarding NI will not have filled you with unalloyed joy.

From April you will have to weather an increase of 1.25% in your contributions. Whilst this figure may seem manageable, try extrapolating it to earnings of say ￡100,000. Having already lost your personal allowance (and therefore paying more), you will owe an extra – that’s an extra - ￡1,131 per year to HMRC.

Also of Note, and Worth Bearing in Mind

Further to the Autumn 2021 Budget, Capital Gains Tax is static, and remains at ￡12,300 until April. Should you dispose of personal possessions worth more than ￡6,000 (apart from your car), property that’s not your main home, non-ISA or PEP shares, or business assets, you will pay tax on your gains. In other words, your profit. These are known as “chargeable assets”

Regarding CGT, conjecture and analysis amongst those in the know has been getting louder. Why? Because the threshold is so much lower than the basic rate tax threshold for actual earnings, and therefore is generally considered unfair. No doubt, we’ll keep an eye on this one.

Also, Inheritance Tax stays where it is. Whilst this tax looms large in the minds of many, currently only about 4% of estates are valuable enough to pay it. Likewise, Corporation Tax – nothing to report. All these measures were announced in the last budget, and they may come under the spotlight later this year.

In General

We live in changeable times.

Certainly, with market fluctuations, increasing inflation and moribund interest rates, you may be concerned about your investments. Equally, perhaps you’re keen to explore new ways to protect or grow your assets. Delaunay works with clients for longer-term returns, and of course, we aim to see the bigger picture.

What does your financial future look like? For more certainty in an uncertain world, we may be able to sharpen the image. Get in touch to arrange a review today.

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