In this blog, we explore the anticipated fiscal strategies, the constraints faced by the Chancellor, and the broader implications for the UK economy.
As the UK braces for Chancellor Jeremy Hunt’s Spring Budget on 6 March 2024, speculation abounds regarding potential fiscal measures amidst a complex pre-election landscape. This announcement, pivotal for shaping the Conservatives’ economic stance, comes amid heightened scrutiny from both the public and private sectors. Below, we explore the anticipated fiscal strategies, the constraints faced by the Chancellor, and the broader implications for the UK economy.
The UK is currently experiencing its highest tax burden in 70 years, with inflation stabilising around 4% and interest rates pegged at 5.25%. The Chancellor’s task is to reconcile increasing spending commitments, including the servicing of public debt, against the necessity of generating sufficient revenue.
Jeremy Hunt has tempered expectations for sweeping tax cuts, citing “major structural weaknesses” in the UK economy, notably lower productivity levels compared to peers like France, Germany, and the US. This caution is echoed by the International Monetary Fund (IMF), which has downgraded Britain’s growth prospects, urging the Chancellor to prioritise public spending in areas such as health, education and tackling climate change over tax reductions.
The looming general election adds a layer of complexity, with the Chancellor and Prime Minister under pressure to deliver policies that could boost the Conservatives’ electoral prospects. However, the scope for aggressive tax cuts seems limited, with Hunt emphasising “smart” tax reductions aimed at incentivising work and stimulating growth, rather than broad fiscal loosening.
Tax Adjustments
A significant issue for taxpayers has been the freezing of tax allowances until 2028. This policy, known as fiscal drag, leverages inflation to push more individuals into higher tax brackets without increasing the nominal tax rates. As a result, people end up paying a higher proportion of their income in taxes as their earnings increase over time but tax thresholds do not adjust for inflation. This has not only led to an additional 3 million calls to HM Revenue & Customs in 2022/23 compared to the previous year but also placed additional pressure on individuals’ disposable income and the administrative resources of HMRC.
With the prospect of inflation trending downwards and indications of a potential interest rate cut by the Bank of England within the year, the economic landscape might afford the Chancellor greater flexibility in implementing tax reductions. Furthermore, he could opt to increase certain tax thresholds, providing relief to low-income families and individuals who have found themselves in higher tax brackets due to fiscal drag
With Corporation Tax set at 25% for profits above £250,000 since April 2023, expectations lean towards maintaining the current rate while potentially introducing further reliefs. The upcoming budget is also anticipated to detail the introduction of a unified Research & Development tax relief regime and the permanency of Full Expensing relief, aimed at bolstering business investment.
Should Labour ascend to power in the next election, Shadow Chancellor Rachel Reeves has outlined plans that echo a commitment to fiscal prudence. Key announcements include maintaining the 25% Corporation Tax rate until 2029, upholding Full Expensing and the Annual Investment Allowance, and a cautious approach to managing tax thresholds and fiscal drag.
Considerations are being made to either eliminate or diminish the Business Asset Disposal Relief, formerly known as Entrepreneurs Relief —a measure initially introduced by Alistair Darling during his tenure as Labour’s Chancellor.
Additionally, there’s a proposition on the table to end the VAT exemption for private school fees. According to the Institute for Fiscal Studies, such a move could generate an additional £1.6 billion annually in taxes, based on the present enrolment figures in private schools. However, integrating the potential influx of students into the public school system could incur costs ranging from £100 million to £300 million each year.
As Chancellor Hunt prepares to unveil the Spring Budget on 6 March 2024, the UK stands at a fiscal crossroads, balancing economic growth ambitions against the backdrop of structural challenges and fiscal responsibility. With the IMF’s cautionary advice and the looming election, the 2024 Budget is expected to reflect a conservative approach to tax cuts, coupled with strategic investments in public services and infrastructure. This careful balancing act aims not only to address immediate economic concerns but also to set a sustainable fiscal path forward.
Amidst this pivotal moment in the UK’s economic policy landscape, Recruitment Accountants is committed to providing timely insights and analysis of the budget’s implications. We invite you to join our Spring Budget question time webinar on Thursday, 7 March 2024, at 10 am, where our tax experts will delve into the Chancellor’s announcements. This session promises to be an invaluable resource for understanding the budget’s impact on businesses and individuals alike, offering expert guidance and answering your questions to help you navigate the changes effectively.
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