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Hunt Gambles on Tax Cuts to Stimulate Growth

By Robert Leggett
6th Mar 2024

As the last major fiscal event before the general election, it was always expected that Jeremy Hunt would use his Budget in an attempt to turn around the Government’s ailing performance in the polls. With this in mind, it was no surprise to see the proverbial “rabbit from the hat”, with the 2% cut in the main rate of National Insurance for both employees and the self-employed; a measure that had been much leaked in recent days.

But away from the key headline, what did the Budget deliver, and is it meaningful? The theme of the Budget purported to be one of using fiscal policy to stimulate growth, especially by getting more people into work, but only time will tell whether the gamble will pay off.

Well, let’s start with what we’re told about that NIC cut. It’s clearly been a priority for Hunt, given the similar cut that was made back in November. The main employee rate will stand at 8% by April, down from 12% just a few months ago; that’s a big cut. So why NIC not income tax? Cynically, one might say that it grabs the headlines whilst being cheaper than cutting income tax. But the point made by the Chancellor is that NIC only applies to work, and it means that income from working is taxed at higher levels than investment income. An NIC cut is therefore more targeted at working people, and doesn’t benefit investors or pensioners (rightly or wrongly). We are told that the OBR estimates that the two cuts will result in the equivalent of an additional 200,000 workers joining the jobs market. Hunt also signalled that further cuts to NIC were the long-term priority.

In a similar vein, the Chancellor also intends to tackle the growing problem with the “High Income Child Benefit Charge”, where child benefit is clawed back as either parent’s income grows between £50,000 and £60,000 per year. The charge was introduced under austerity in 2013, and the thresholds haven’t moved since, dragging many more parents into the charge. HMRC’s handling of the charge has also proved controversial, with the levying of penalties on those who failed to report the charge properly, even though HMRC should already have had the information to impose it. The Chancellor therefore plans a temporary measure, raising the threshold where clawback starts to £60,000, and doubling the income banding over which the clawback takes place, so benefit is only fully eliminated at an income of £80,000. This effectively halves the rate of clawback. His hope is that this will increase the hours worked by parents (some of whom currently find a disincentive for working fulltime), supposedly adding the equivalent of 10,000 full time workers to the economy.

In the longer term, from April 2025, he intends to introduce a new system which looks at household income rather than the income of the higher earner. This may or may not be fairer, but signals a move away from the concept of “independent taxation” introduced in 1990, towards one where your partner’s income could affect your own tax position. Will that be the end of those changes?

A surprise was the reduction in the Capital Gains Tax rate on residential property from 28% to 24% from April; a measure designed to actually raise tax by stimulating more transactions, something previously trialled by Labour’s Alistair Darling as long ago as 2007, when he dropped the main rate of CGT from 40% to 18%.

There was good news for those in the creative industries, with additional reliefs for the audiovisual effects, and the making “permanent” of theatre, orchestral and other tax reliefs.

There were also measures to look to boost business investment, with plans to unlock funds from UK pension schemes to fund UK businesses, and an additional £5,000 ISA allowance for UK focussed assets.

However, many businesses will be disappointed that the reform of R&D tax relief, which includes reduced rates of relief for SMEs, goes ahead as planned in April, and will not be postponed.

All of this has to be paid for somehow, and there were many smaller tax rises, including:-

  • Those with holiday lets will be disappointed by the withdrawal of the Furnished Holidays Lettings regime, with the cessation of those tax breaks from April 2025.
  • Perceived abuse of the Stamp Duty Land Tax regime where a large house is purchased with an annex will be tackled, with the withdrawal of “multiple dwellings relief”.
  • The abolition of the non-dom status from April 2025, with a new residence based system for taxing the overseas income and gains of those who come to the UK, in something of that looked remarkably like the Labour party’s policy. This will be followed by a residence based system for inheritance tax as well.

We are in an interesting time economically, with continuing instability elsewhere in the world, a (shallow) recession at home, and an upcoming election. With all of this going on, we will have to watch carefully how this all plays through for employment, businesses and growth, and indeed, whether all of the policies even get fully implemented if there is a change of Government.