What did the Chancellor do and what does it mean?

During the 2024 Budget, the Chancellor announced more tax cuts ahead of the election. Underlying debt in the final year has a buffer threshold of £8.9 billion against the Government’s current fiscal rules, as opposed to £13 billion at the time of the 2023 Autumn Statement. Further, the Budget Red Book states that “Total borrowing from 2023-24 to 2028-29 is forecast to be £0.3 billion lower than at Autumn Statement 2023.”

This means that Jeremy Hunt has more or less spent every penny that he has. It must have been a struggle trying to get the numbers to add up. Whilst some of the measures such as the stamp duty land tax (SDLT) changes and the abolition of the furnished holiday let regime will have a major impact on some of our clients, they are economically insignificant on the national scale. That said, with this Budget, every penny counted.

Show me the money

Whilst the forecasts go out to 2028/29, it is probably appropriate to look at 2024/25, as the latest date for the election is in January 2025. The Budget changes for that year are:

As one heads further out into the future years then the overall cost to the Exchequer reduces. The non-dom measures raise about £3 billion a year, the annual cost of the fuel duty increase deferral drops by about £2 billion a year and the improved tax debt collection raises about £1 billion a year. That means that the annual cost falls from £14 billion to about £8 billion a year.

The freezing of fuel duty was always a given. The future forecasts assume that it will increase and then every time, the Chancellor freezes it. This means that we only achieve the fiscal rules if it goes up in future – or if more headroom is created.

Choice of tax cuts

What we have had is a tax-cutting Budget and it is being funded by more debt – but within our facilities so to speak. We stay within our facilities because the forecasts assume below inflation increases in public sector spending and a freeze of tax allowances and thresholds. Is that sustainable?

This Budget doesn’t look particularly prudent and it does have echoes of the Liz Truss/Kwasi Kwarteng episode. It is probably not so extreme as to frighten the markets, although the markets may also be assuming that the tax cuts reverse after the election.

Loosening fiscal policy by reducing employees’ national insurance contributions might also cause the Bank of England to delay base rate reductions and could be inflationary. After all, the purpose of the interest rate increases was to take money out of the economy. Supposedly, cutting employees’ national insurance is less inflationary than cutting the basic rate of income tax. In part probably because of the demographic impacted, but also possibly because employers might find it easier to give slightly lower pay rises.

Notably, since Jeremy Hunt became Chancellor, the combined cut in employees’ national insurance is 5.25% (the abolition of the social care levy, a 2% cut in January 2024 and now a 2% cut this coming April) – that is two fifths reduction from the 13.25% rate that was in place in September 2022.

In September 2022, the Chancellor didn’t reduce the dividend tax rates although the rest of the social care levy was abolished. He also proceeded to increase the main rate of corporation tax to 25%. The combined effect of this has been a major realignment of the taxation of earned as opposed to unearned income. It is also quite noteworthy given that tax rate changes are typically glacial.

Dividend vs salary

Most critically, we see this in the extraction of profits from family companies. For decades, it has been more tax efficient to take a dividend rather than salary or a bonus. During the Jeremy Hunt and Rishi Sunak era that has changed.

For higher and additional rate taxpayers, it is usually now better to take a bonus or salary rather than a dividend. For basic rate taxpayers below state retirement age, it remains better to take a dividend rather than salary, but the marginal benefit was reduced further by this Budget.

Jeremy Hunt also sowed the seeds of a future where national insurance and income tax are merged, and this would most likely see the end of any advantage of dividends over salary for basic rate taxpayers.

I think it is fair to say that Jeremy Hunt does truly believe in reducing tax on earned income and believes in the benefit and value of work to society. To that extent, there is something of a legacy from these changes and I can’t see them being reversed quickly. That does go to one of the contradictions of tax, that all changes are long term, and Chancellors of different political parties usually follow the course plotted by the last incumbent, at least to begin with.

Whoever wins the coming election, it looks like high taxes are here to stay for the foreseeable future and policy choices may not be that different whoever is in power. To change the dynamic on the tax burden, we need economic growth. The drivers for that are in other government policies (planning laws, regulation, trade policy etc) and are all long term.

Read more analysis in our Spring Budget 2024 hub.