As you will be aware the Chancellor stood up in the Commons yesterday and delivered his Spring Statement. Here are the key elements:
Economic Backdrop
Higher global energy, metals and food prices pose risks to the outlook for inflation, consumer spending and production. The Ukraine invasion, and the resulting effect on global markets, will inevitably have an adverse effect on the UK economy and the cost of living in the relative short term.
Consumer Prices Index (CPI) inflation has risen to a 30-year high in recent months. The Office for Budget Responsibility (OBR) forecasts inflation to remain elevated through 2022 and 2023, peaking at 8.7% in Q4 2022. On an annual basis, inflation is forecast to be 7.4% in 2022, before decreasing to 4.0% in 2023 and 1.5% in 2024. Inflation is then forecast to be 1.9% in 2025 and 2.0% in 2026.
The economic recovery over the past year has exceeded expectations, with GDP growth of 7.5% in 2021. The UK economy recovered to its pre-pandemic level around the end of 2021 with real GDP having regained its February 2020 level by November 2021. Across the final quarter of 2021, GDP was on average 0.4% below its pre-pandemic size.
Taking into account the pandemic economic recovery to date, continued global supply chain pressures and the initial invasion of Ukraine though, the OBR expects UK real GDP to grow by 3.8% in 2022. GDP is then forecast to grow by 1.8% in 2023, 2.1% in 2024, 1.8% in 2025 and 1.7% in 2026.
Fiscal Measures
From last night, a temporary cut will be introduced to duty on petrol and diesel of 5p per litre that will last until March 2023.
From 6 April 2022, the Employment Allowance will increase to £5,000 (from £4,000).
From 6 July 2022, the annual National Insurance Primary Threshold and Lower Profits Limit will increase from £9,880 to £12,570. This aligns the Primary Threshold and Lower Profits Limit with the income tax personal allowance.
From 6 April 2022, Class 2 National Insurance liabilities will be reduced to nil on profits between the Small Profits Threshold and Lower Profits Limit. This will ensure that no one earning between the Small Profits Threshold and Lower Profits Limit will pay any Class 2 National Insurance while allowing individuals to be able to continue to build up National Insurance credits.
Expand the scope of VAT relief available for energy-saving materials and ensure that households having energy-saving materials installed pay 0% VAT.
From April 2024, the basic rate of income tax is planned to reduce from 20% to 19%
Financial Planning implications
In relation to the impact of these changes on financial planning strategies:
The increase to the National Insurance threshold:
For SME owners to take at least £12,570 in salary before considering dividends; paying a working spouse/partner up to the £12,570 threshold. Beyond the threshold though, the salary/dividend comparison remains as it is currently
Proposed future reduction to the basic rate of income tax:
Defer a basic rate taxable chargeable event gain from an investment bond, or other basic rate taxable income, until after the rate drops.
Basic rate taxpayers
Invest in pensions before the income tax rate drops to 19% (getting 1% more front end tax relief);
Defer taking income from a pension (if possible) until after the income tax rate drops to 19%.
The UK life company rate for policyholders’ funds is linked to the basic rate of tax so (provided the life co rate were not “decoupled” from the basic rate) would also fall to 19%. This would be relevant for the non-dividend income and capital gains of UK life funds and, thus, UK investment bonds.
Investors in international (offshore) investment bonds – there would a lower rate of basic rate tax on encashment post the reduction.