Tax cuts only beneficial if volatile market settles

The first major fiscal announcement for any new Chancellor is always a potentially career-defining moment.

Last week when Kwasi Kwarteng MP stepped up to the dispatch box to deliver his heavily trailed mini budget was no different, and he certainly delivered a suite of stark headlines and policy turnarounds.

Set to the backdrop of increasing calls for enhanced energy cost support measures, much of what the Chancellor delivered around National Insurance Contributions, investment zones and bankers’ bonuses was already in the public domain ahead of Friday.

Yet, in the initial days since the announcement, the interventions sent the markets into a spin as the value of the pound fell and some UK mortgage lenders halted new deals. There is no doubt we are at a major economic moment. So, what will it mean in reality for business owners and consumers?

In terms of tax policy, the changes are straight forward. With no hidden deadlines or complex reliefs, they will, when taken at face value, put a little money back into everyone’s pocket. These include the reversal of the temporary National Insurance Contribution increase from November, which will be evidenced immediately on pay packets at the end of next month, and cancellation of the planned Health and Social Care Levy.

The basic rate for income tax will also be cut by 1% in April 2023, a change we were not previously expecting to see until the following year. The impact of this has, however, been overshadowed in many ways by the removal of the 45% additional rate income tax band for those earning more than £150,000. Designed to stimulate economic growth, there is no getting around the public sentiment that it will benefit the better off.

What’s important to remember from the tax cuts is that the reversal of the National Insurance rise will ease the pressure on businesses also, as their monthly contribution for each employee drops. This comes alongside the move to scrap the planned increase in Corporation Tax, which will remain at 19% for most companies.

With the fanfare of Friday’s announcement now complete, the gambles that were taken are being felt across the financial ecosystem. There is no way to be certain whether it will have the desired effect, and the announcement has in the first instance sparked volatility right across the markets.

All eyes are now on the Bank of England, which is poised to hike interest rates once again to stabilise things. It will take some time for the economy to get back on track, and in the meantime, we see concern around tracker mortgages and a greater divide among businesses.

Some will find they are no longer turning a profit and may go out of business as energy costs rise and consumer confidence drops. On the other hand, there will be larger businesses benefiting from tax breaks and the wave of cuts announced by the Chancellor on Friday.

As we look ahead to the Medium-Term Fiscal Plan and full fiscal forecast on November 23, the best advice for individuals and business owners is to plan well in advance, budget accordingly, and seek reliable advice early if signs of financial distress begin to emerge.