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The BTC Analysis

If at his last Budget the Chancellor aped Gordon Brown, this time he borrowed from David Cameron promising ‘to share the proceeds of growth’: a mantra common in the run up to the 2010 election.

In fact, rather than sharing the proceeds of growth (for which forecasts have been downgraded to 3.8%) he is in fact redistributing the effects of inflation, which is expected to peak at an eye-watering 9% this year and will swell tax take for the Exchequer.

Whereas the imperative in 2010 was to soften the economic image of the Conservatives, today’s tax announcements were made to target (or give the perception of targeting) the increasing cost of living – culminating in a boast that this Spring Statement amounted to the ‘biggest cut in personal taxes in over a quarter of a century’.

This highly political Statement, both for the government and for the Chancellor to burnish his personal credentials as a low tax Conservative, saw him cut fuel duty for the first time in 15 years, cut the basic rate of income tax by a penny, and increase the National Insurance floor significantly – partially compensating around 70 per cent of workers for the previously announced rate increase set to take effect this April.

The Treasury had toyed with making the income tax changes effective next year, but instead they will kick-in in 2024. Given the current economic uncertainties prompted by Russia’s invasion of Ukraine (which the Chancellor rooted his Statement in) it is a bold move to so clearly confirm the government’s economic and re-election strategy this far in advance.

Despite the tax-cutting headlines, given the income tax thresholds will be frozen for the next four years (and presumably the National Insurance threshold too now that they are again equalised), increasing inflation will claw back much of the largess as more workers are dragged into higher tax bands. In fact, with the OBR expecting inflation to average 7.4% this year and peak at 9%, overall tax take will continue to rise despite the Chancellor’s personal tax cuts. Business should be dismayed that the action to reduce the impact of the National Insurance increase for workers was not matched for firms – as it confirms that the Chancellor sees no political peril in increasing rates of business taxation, and could target them in the future should he need to.

In line with the principles expressed in his Mais lecture, he also outlined measures to boost the UK’s long term productivity, including tax incentives to encourage R&D spending and re-examining the tax system to encourage investment in adult skills.

Overall, it is another tactical fiscal event that lacks overall coherence. While the cost of living loomed large (with the OBR projecting the biggest squeeze in living standards since 1956-7 when records began), there was nothing to help those relying on benefits or the state pension; and action on income tax will widen the gulf between those living off rents at the expense of workers who will still feel the impact of National Insurance increases.

The Chancellor is both cutting and raising tax, and while the red meat will please his backbenches, it will be hard for working families to discern in the coming months and years whether this is a government that is boosting pay packets or raiding them.

Key economic facts

  • Ukraine –theOBR has stated an unusually high uncertainty for outlook on economic forecasts due to the invasion of Ukraine
  • Growth – GDP growth expectations have been downgraded to growth of 3.8% in 2022 and forecast to grow by 1.8% (2023) 2,1% (2024) 1.8% (2025) and 1.7% (2026)
  • Unemployment – has fallen for twelve consecutive months to 3.9%, below the pre-pandemic rate. Despite the rise there are 420,000 more inactive workers aged between 16-64 in the three months to January 2022
  • Wages – the OBR expects nominal wage growth of 3.3%
  • Inflation – has risen to a record 30-year high in recent months and is expected to average 7.4% this year and remain elevated at 4% in 2023. There is an expected peak in Q4 of 2022 at 8.7%
  • Debt – the UK is expected to spend £83bn in debt interest payments this year

Cost of living support

  • The Chancellor began by noting that the war in Ukraine is having a significant impact on the cost of living in the UK, in particular due to the impact on supply chains and the price of oil and gas.
  • He confirmed that the Government will support people with the rising cost of energy, building on the £9bn plan for help pay household bills from April.
  • The Chancellor announced three new measures to do this:
  • Fuel duty: Tohelp motorists, the Chancellor announced a temporary fuel duty cut of 5p per litre. The measure will come into effect from 6pm tonight and be in place until March 2023.
    • This measure represents a tax cut of around £2.4 billion over the next year. It is expected to save the average UK car driver around £100, van driver around £200 and haulier around £1,500, based on average fuel consumption.
  • Energy bills: To help people make improvements to their homes and increase energy efficiency to tackle rising bills, the Chancellor announced a VAT cut on the installation of energy saving materials (ESMs). This will take the VAT from 5% to 0%.
    • This VAT cut will include additional technologies and remove the complex eligibility conditions set by the European Court of Justice.
    • The Chancellor noted this will represent a tax savings worth £1000 and savings on bills of £300 a year.
    • At this time, this VAT cut will not apply to Northern Ireland due to the Protocol. The Government will raise this with the EU Commission as a matter of urgency. The Northern Ireland Executive will receive a Barnett share of the value of this relief until it can be introduced UK-wide.
  • Household Support Fund: Finally, the Chancellor announced that the Household Support Fund will double to £1bn with new funding, on top of the £500m announced in October 2021. This aims to help the most vulnerable households with the cost of essentials such as food, clothing and utilities.

Personal tax

  • The Chancellor announced his Tax Plan which would take a responsible approach to tax reduction over the course of this Parliament.
  • The new Tax Plan has three goals:
  • Helping families with cost of living
  • Boosting productivity and growth by creating the right conditions for private sector investment
  • Sharing the proceeds of growth fairly
  • National Insurance threshold: While the Chancellor said that the Health and Social Care Levy increase to National Insurance contributions would be maintained, he announced that the National Insurance threshold would increase from £9,880 to £12,570 from July 2022. He said this would result in 70% of employees paying less in National Insurance contributions, even with the Health and Social Care Levy.
  • Income tax: Before the end of this Parliament, by 2024, the basic rate of income tax will be cut from 20p to 19p in the pound. The Tax Plan said that the Government would also look to simplify the complex system of personal tax reliefs.
  • Self-employed people: From April 2022 self-employed individuals with profits between the Small Profits Threshold and Lower Profits Limit will continue to build up National Insurance credits but will not pay any Class 2 NICs.

Environmental and energy

  • Energy Security Plan: TheStatement notes the Energy Security Plan is due to be published shortly with measures across hydrocarbons, nuclear and renewables to support energy resilience and security to help deliver affordable energy to consumers. The strategy will build on the Prime Minister’s Ten Point Plan for a Green Industrial Revolution.
  • Green relief for business rates: Targeted business rates exemptions for eligible plant and machinery used in onsite renewable energy generation and storage, and a 100% relief for eligible low-carbon heat networks with their own rates bill. These measures will now take effect from April 2022, a year earlier than previously planned.

Skills and jobs

  • Employment Allowance for small businesses: The Spring Statement announces an increase from April 2022, meaning eligible employers will be able to reduce their employer NICs bills by up to £5,000 per year.
  • Adult technical skills funding: The Chancellor said he will re-examine how the tax system – including the operation of the Apprenticeship Levy – can be used to encourage employers to invest in adult training.
  • R&D tax relief reform: R&D tax reliefs will be reformed to deliver better value for money. The Spring Statement announces that:
    • From April 2023, the scope of reliefs will be expanded to cover data and cloud computing
    • The Government will legislate so that expenditure on overseas R&D activities can still qualify where there are material factors such as geography, environment, population or other conditions that are not present in the UK and are required for the research, and where there are regulatory or other legal requirements that activities must take place outside of the UK
    • The definition of R&D for tax reliefs will be expanded by clarifying that pure mathematics is a qualifying cost
    • Further announcements will be made in the Autumn.
  • Help to Grow: This will offer SMEs 12 weeks of world class leadership training through the UK’s top business schools, with government covering 90% of the cost. The cost of apprenticeship training is 95% subsidised for SMEs that do not pay the Apprenticeship Levy.
  • UK listings: The Government is also reforming listing rules to make it easier for companies to raise public funding.
  • Visas: The Government is focused on creating a visa regime that will attract highly skilled and entrepreneurial individuals from across the world.

Infrastructure

  • Levelling Up Fund: TheGovernment is launching the second round of the Levelling Up Fund. The Fund provides £4.8 billion for local infrastructure projects, with £1.7 billion already allocated to 105 successful projects from the first round.
  • Changing Places Fund: The Government is allocating £25.3 million to install over 500 life-enhancing Changing Places toilets, in public places and tourist attractions. An additional £6.5 million will be allocated to areas where there is little or no provision.
  • Capital Allowances Regime: TheGovernment announced that once the super-deduction has ended, the UK’s capital allowances regime will include:
    • Annual Investment Allowance: the limit has been temporarily increased from £200,000 to £1 million until 31 March 2023. It is available to sole traders and partnerships, as well as to incorporated companies, covering the qualifying plant and machinery expenditure of over 99% of businesses
    • Structures and Buildings Allowance: this allows businesses to deduct 3% a year of the cost of construction and renovation of non-residential structures and buildings
    • Allowances for specific assets or activities: including 100% First Year Allowances for zero emission cars
    • The government is considering wider options ahead of Budget later this year, and as part of this will continue to review the latest evidence, including the impact of the super-deduction and views of businesses

Health

  • NHS efficiency: The Government will double the NHS efficiency target from 1.1% to 2.2% a year, freeing up £4.75 billion to fund NHS priority areas over the next three years and ensuring that the extra funding raised by the Health and Social Care Levy is well spent.
  • AI Centres for Doctoral training: The Government will partner with industry and academia to create 1000 new AI PhDs, with a focus on areas such as healthcare.