The situation in Ukraine reminds us that the United Kingdom’s security and ability to be a force for good in the world is in large part based on the strength of our economy. Thanks to our actions, the economy is recovering well, with record job vacancies and unemployment back at pre-crisis levels. But the steps we are taking to sanction Russia are not cost free for us at home: the biggest impact will be on the cost of living for working families.
That is why we are today publishing a new Tax Plan to reduce and reform taxes over the Parliament: helping families with the cost of living, creating the conditions for private sector-led growth, and sharing the proceeds of growth fairly. This Tax Plan delivers the biggest cut to personal taxes in over a quarter of a century.
It is only because a Conservative government is capable of the tough but responsible decisions to fix our public finances that we can announce today that taxes are being cut, debt is falling, and public spending is increasing. Delivering this Tax Plan requires continued discipline on public spending that only a Conservative government can provide.
We are only able to provide today’s support because of the tough but responsible decisions we have taken to repair the public finances and ensure our economy recovers strongly.
The IMF said the UK was the fastest growing economy in the G7 last year, although growth will be lower this year due to Ukraine and the OBR have said there is ‘unusually high uncertainty’ about the outlook.
Furthermore, the OBR have revised down their forecast for unemployment to 4 per cent, which is now back at pre-crisis levels (lower than Canada, France, Italy, Spain and Australia) and record numbers of job vacancies. We’re also meeting our fiscal rules: debt and borrowing expected to continue falling over the Parliament.
However, given ‘unusually high uncertainty’, and rising interest rates and inflation forecast to peak at 8.7 per cent, we must continue to remain responsible on public spending and the public finances. Next year, we will spend £80 billion just paying interest on our debt, almost four times what we spent last year. The OBR have made clear that today’s fiscal headroom ‘could be wiped out by relatively small changes to the economic outlook’. This is particularly noteworthy given the high economic uncertainty.
That is why we are today publishing a new TAX PLAN that will reduce and reform taxes over the Parliament in three ways set out below. We will take a principled approach to cutting taxes: maintaining space against our fiscal rules and continuing to be disciplined – with the first call being lower taxes, not higher spending. This Tax Plan delivers the BIGGEST CUT to PERSONAL TAXES in over a quarter of a century.
(1) HELPING FAMILIES WITH THE COST OF LIVING WITH £22 BILLION NEXT YEAR
• Slashing fuel duty by 5p for twelve months – a £5 billion tax cut for drivers together with the freeze. Conservative governments have frozen fuel duty for twelve consecutive years. But in recognition of the unprecedented circumstances pushing up fuel prices, we are today cutting fuel duty by 5 pence for a full year – only the second cut in twenty years, the LARGEST EVER cut across all fuel duty rates, and a new tax cut itself worth £2.5 billion, adding up to over £5 billion together with the cost of the freeze. Together with our freeze, this will save car drivers £100, van drivers £200, and HGV drivers £1,500 this year. Furthermore, 40 per cent of the cut will benefit businesses. And this will come into effect immediately from 6pm this evening, across the United Kingdom.
• The National Insurance personal threshold will rise from £9,500 to £12,570 from July. At Budget 2020, we increased the amount people can earn before paying National Insurance to £9,500. Today, we are going further by raising this threshold to £12,570 from July – the largest increase in a personal tax threshold in British history, equivalent to a £6 billion tax cut for nearly 30 million workers and worth over £330 a year starting in July, across the entire UK. This is the largest single personal tax cut in a decade.
• Most people will be better off even after paying the new Health and Social Care Levy. Around 70 per cent of all workers will have their taxes cut by more than what they will pay through the levy to sustainably fund the NHS and social care.
• This change will deliver a manifesto commitment to cut tax on workers and simplify the tax system. By raising the National Insurance personal threshold to £12,570, we are bringing it in line with the equivalent Income Tax personal allowance. This simplification means that from July, people will be able to earn £12,570 a year without paying a single penny of income tax or national insurance. The independent Institute for Fiscal Studies said this is ‘the best way to help low and middle earners through the tax system’.
• Scrapping VAT on energy saving materials – a £250 million tax cut for homeowners. Our current VAT relief for families installing energy saving materials like solar panels, heat pumps or insulation used to be more generous. But the European Court of Justice in 2019 forced us to add complex red tape which limited eligibility, removed certain items from qualifying, and restricts VAT relief to 5 per cent. Now we have left the EU, we are using our Brexit freedoms to remove this 5 per cent VAT charge over the next five years, reverse the EU’s decision to take wind and water turbines out of scope, and remove all the complex EU-imposed red tape. This adds up to a £250 million tax cut for energy efficiency. A typical family installing roof top solar panels will save £1,000 on installation, and then £300 annually on their energy bills.
• Doubling the existing Household Support Fund to £1 billion. We are adding an additional £500 million to the Household Support Fund, which helps our most vulnerable families with the cost of living. The fund is distributed through local authorities in England, who have discretion over exactly how the funding is used. We expect it will benefit 3 to 4 million vulnerable households.
(2) CREATING THE CONDITIONS FOR PRIVATE SECTOR-LED GROWTH
As the Chancellor set out in the Mais Lecture, the government intends to cut and reform business taxes in order to create a new culture of enterprise that will drive up our growth and productivity. We will create the conditions for the private sector to invest more, train more and innovate more: Capital, People, Ideas. Today’s Tax Plan sets out the options we will work on with businesses over the summer, with final announcements made at the Autumn Budget.
• CAPITAL. Capital investment by UK businesses is considerably lower than the OECD average of 14 per cent – and accounts for half our productivity gap with France and Germany. Once the super-deduction ends next year, our overall tax treatment for capital investment will be far less generous than the OECD average. That is why we will cut the tax rates on business investment in the Autumn Budget.
• PEOPLE. The UK lags international peers in adult technical skills – just 18 per cent of 25-64-year-olds hold vocational qualifications, a third lower than the OECD average. And UK employers spend just half the European average on training their employees. So we will examine whether the current tax system (including the operation of the Apprenticeship Levy) is doing enough to incentivise employers to invest in the right kinds of training.
• IDEAS. Over the last fifty years, innovation drove around half the UK’s productivity growth. But since the financial crisis, the rate of increase has slowed more than other countries – and our lower rate of innovation explains almost all our productivity gaps with the US. That is why we will reform R&D tax credits so they are more effective and better value for money, we will expand the scope of the reliefs, and we will consider whether to make R&D expenditure credit more generous.
• But we know small businesses need our help now, so today we are raising the employment allowance to £5,000 – a £1,000 TAX CUT FOR SMALL BUSINESSES. The Employment Allowance cuts employers’ national insurance tax bills. At Budget 2020, we increased made it more generous. Today, as recommended by the Federation of Small Businesses, we are increasing the employment allowance even further to £5,000 from April – that’s a new £1,000 tax cut for half a million small businesses.
• This builds on other measures we are taking to help small and medium-sized businesses. Our 50 per cent business rates discount for retail, hospitality and leisure businesses worth up to £110,000 will take effect in April – a tax cut for hundreds of thousands of small businesses worth £1.7 billion (£5,000 tax cut for a typical pub) and the largest single-year business rates tax cut for 30 years outside of the pandemic. We have also increased the Annual Investment Allowance to £1 million, providing full expensing for all SMEs. Our Help to Grow: Management scheme offers businesses generous government-subsidised mini-MBAs worth up to £8,000, and Help to Grow: Digital offers businesses 50 per cent discounts on purchasing new software worth up to £5,000. Taken together, this is significant cash support for SMEs.
(3) SHARING THE PROCEEDS OF GROWTH FAIRLY
• The knowledge that you can keep more of what you earn is a powerful incentive for people to work hard. And economic security for your family means keeping more of what you earn. That is why we will cut the basic rate of income tax to 19 pence in 2024. It would be irresponsible to do this today, but by 2024, inflation is forecast to be back under control, debt will be falling sustainably and the economy growing. We will therefore cut the basic rate of income tax by 1p, a tax cut worth £5 billion for over 30 million workers, pensioners and savers – only the second income tax cut in two decades and the first income tax cut for 16 years. This will be worth around £175 for a typical taxpayer.
The policies announced today boost the whole United Kingdom
• Most of today’s changes are UK-wide: increasing the National Insurance personal threshold to £12,570, cutting fuel duty by a record 5p, scrapping VAT on energy saving materials, and raising the Employment Allowance to £5,000 for small businesses. The £500 million extra funding for the Household Support Fund is UK-wide, with Scotland receiving £41 million, Wales £25 million and Northern Ireland £14 million in Barnett consequentials.
• The Scottish Government will be given funding to deliver its own income tax cut. Cutting the basic rate of Income Tax by 1p in 2024 will apply in England, Wales and Northern Ireland. It is a devolved responsibility in Scotland so the Scottish Government will receive additional funding each year (approximately £350 million in 2024-25) through the agreed income tax Block Grant Adjustment, which they can use to deliver their own Income Tax cut.
Only this government can be trusted with taxpayers’ money and to deliver significant tax cuts
• We are launching a new Cabinet committee on efficiency and value for money. Every pound of taxpayers’ money should be well-spent, which is why we are today launching a new Chancellor-chaired Cabinet Committee on Efficiency and Value for Money, which will aim to prevent £5.5 billion of waste, including by doubling the NHS efficiency target and finding savings across quangos.
• This government is delivering on its promise to cut taxes, but doing so in a responsible and sustainable way. Cutting taxes is not easy – it requires hard work, prioritisation and the willingness to make difficult and often unpopular arguments elsewhere. We need to maintain discipline on future public spending in order to deliver this Tax Plan. Our priority now must be more tax cuts – not a bigger state and more spending.