Mini-Budget: Basic rate of income tax cut from 20% to 19%

The Chancellor announced a series of tax cutting measures in his mini-Budget today (Friday, September 23) aimed at easing the cost-of-living crisis.

The basic rate income tax will be cut from 20% to 19% from April 2023, after being brought forward from April 2024.

The additional rate of tax will also be axed, so anyone earning over the higher rate threshold will pay 40%.

It comes alongside the National Insurance cut announced yesterday (Thursday, September 22), which will save a person £93 a year if they are on £20,000 a year, £343 a year if they are earning £40,000, £593 a year if they are making £60,000 and someone on £100,000 will save £1,093.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown: "This felt like a brain dump of cunning wheezes from a clever Chancellor.

“There were plenty of bold steps in the mini-Budget. We’ll just have to wait and see whether it leads to the growth the Chancellor is hoping for, or the runaway inflation the Bank of England fears.”

As predicted, there was nothing in this fiscal statement about company car tax rates or fuel duty. A Budget proper is expected before the end of the year.

Matthew Walters, head of consultancy services and customer value at LeasePlan UK, said: “This was called a mini-Budget, but in truth its contents were pretty big.

“With a 1p cut to income tax next year and the abolition of the additional rate altogether, the new Prime Minister and her Chancellor have made a clear statement about how they intend to govern the economy.

“But the challenges facing the economy are big, too. The ongoing effects of Brexit, the pandemic, and now a cost-of-living crisis, mean that the UK faces a number of years of uncertainty and sluggish growth.

“Even without the Office for Budget Responsibility’s usual economic forecasts, we know that the situation is extremely worrying for many businesses and individuals.

“We also know that the fleet industry is well placed to overcome these challenges, just as we have overcome similar challenges in the past.

“Not only did we account for half of all new car sales in 2021, but we are also leading the adoption of the cleaner motoring technologies that will define the future.”

National Insurance cut

Walters added that the cut in National Insurance was a “money-saving” measure for both employers and employees – although also, specifically, for fleet professionals.

He explained: “Because of the way the tax is calculated for cash allowances and company cars, with NICs forming part of the equation, fleets and their motorists stand to save, too.

“However, it ought to be noted that the Health and Social Care Levy was due to be removed from NICs in April, anyway – so this is only a temporary boon for fleets.”

He added: “Separately, businesses should also pay attention to the scrapping of the much-disliked IR35 regulations.

“Under the new regime, which will take force in April, workers providing their services through an intermediary will, once again, be responsible for confirming their own employment status – rather than the liability sitting with the employer. This could be another significant money-saver for companies and fleets.”

Fuel duty

Walters says he was surprised that the Chancellor didn’t choose to act on fuel duty. “While it’s true that petrol and diesel prices are lower than they were in the summer, they are still historically high overall – so motorists would have appreciated the extra relief of a fuel duty cut,” he said.

“Then there is the unanswered question of what happens to fuel duty in the longer term. We have heard a lot of hints and speculation in recent years about a new tax regime to replace fuel duty, such as road pricing, as the revenues from petrol and diesel vehicles decline. Yet nothing substantive has been done to help solve this multi-billion-pound problem. 

“If we are all to prepare properly for an electric future, it’s vital that the Government doesn’t bury its head in the sand. Truss and Kwarteng need to engage with businesses, fleets and motorists about fuel duty’s future – and soon.”

Dividend tax rates

The Chancellor, Kwasi Kwarteng, did announce a cut in dividend tax rates, however, which had been boosted to match the NI hike.

This will come as a welcome change for business owners paid in dividends and for investors who hold assets outside an ISA.

Meanwhile, former additional rate taxpayers will pay dividend tax at a lower rate too.

Helen Morrissey, senior pensions analysis at Hargreaves Lansdown, said: “Both annuity and drawdown incomes are subject to income tax, so this will be a shot in the arm for pensioners.

“The 1% cut may only sound minor, but it can add up to serious savings with someone on a £25,000 income paying over £125 less per year.

For pension savers, the tax relief for basic rate taxpayers is going to be less generous – instead of getting an extra £20 for every £80 you contribute you will now only get £19 for every £81.

The relief for former additional rate taxpayers will also fall. It means it’s a good idea to take as much advantage of your allowances as you can sensibly afford, while you receive relief at the higher rate.

Lifetime ISAS

The move could boost interest in Lifetime ISAs as the bonus stacks up in a similar way to pension tax relief while it’s at 20%.

The fact pension tax relief drops to 19% could make LISAs an attractive option – plus income from a LISA is also tax free. LISAs have always been a good option for the self-employed with the bonus mimicking the effect of pension tax relief but this shift could prompt other groups to take a closer look

The stamp duty threshold has been raised from £125,000 to £250,000, and the threshold for first time buyers has been raised from £300,000 to £425,000.

The value of properties that can benefit from first time buyer relief has risen from £500,000 to £625,000.

Coles said: “The stamp duty cut will ease some of the pressure on buyers right now, and will be a nice bonus for people on the verge of completing, who will have accidentally saved thousands of pounds in tax. However, over the medium term it could do more harm than good. 

“We can learn something from when stamp duty relief was introduced for first time buyers: it cut the cost of buying by up to 0,5 percentage points, but increased prices by up to 0.7 percentage points – wiping out any cost saving for buyers.

“Higher prices coupled with higher mortgage rates would push properties further out of reach for millions of people, which could in itself end up scuppering sales.

“The property market is a delicate beast, and tinkering with tax incentives always risks producing a result you weren’t fully expecting.”

Walters says that he hopes to see some detail around future company car tax rates in the next Budget.

“Top of our wish list are the new rates of company car tax for 2025-26 and beyond,” he said.

“The previous Chancellor, Rishi Sunak, began his time in the Treasury by giving us ample warning of upcoming rates, but the numbers that he provided are now starting to age.

“Fleets and motorists entering into new contracts today are unlikely to know how much they’ll be paying in company car tax at the end.

“As much as tax cuts, the fleet industry thrives on tax transparency. Prime Minister Truss and Chancellor Kwarteng have to let us see as far into the future as possible.”

Transition to net zero

Karl Howkins, managing director of Sogo, added: “While any attempts to boost the economy are welcome in a world that’s facing increasing uncertainty and headwinds, the fleet sector must be concerned that the transition to net zero appears to have taken a back seat in this Government’s priorities.

“Companies and individuals need further incentives if we are to accelerate the adoption of electric vehicles. While further investment in the charging infrastructure is required if it is to continue to keep pace with demand.”

James Maden, sales and marketing director at Nexus Vehicle Rental, says that, while he welcomed the Government’s renewed focus on mitigating barriers to infrastructure projects in the UK, this must include much needed development charging networks to drive the transition to electric vehicles quickly.

“As we move ever-closer towards the 2030 ban on petrol and diesel vehicles, and of course, the ambition for net zero in 2050, there is a big job to do in supporting businesses in the transition to greener fleets given rising energy costs,” he said.

“Further corporation tax cuts and incentives announced today should buoy industry, but anticipated ongoing challenges mean businesses will likely remain cautious for the immediate future. 

“The additional support announced will act as a small relief for the fleet industry against a backdrop of continued supply shortages and ongoing challenges associated with this – particularly as we approach peak season for the fleet rental sector.”