Households will have small victories to cheer as Rishi Sunak has delivered his Spring Statement, addressing some worries about the cost-of-living crisis.
Sunak has announced measures including raising the threshold at which people pay national insurance (NI) and cutting fuel duty to help workers and households with the rising cost of living.
But critics suggest his measures don’t go far enough to alleviate the rising cost of everyday living.
Here is a quick look at the most important decisions in the budget:
- From July, the National Insurance threshold will rise to £12,570 (it had been scheduled to rise from £9,568 to £9.880), equalising it with the income tax threshold.
- Income tax will be cut by the end of the parliament in 2024 – when the basic rate will drop from 20% to 19% if the Government meets its financial goals.
- The Chancellor has doubled the Household Support Fund to £1 billion
- Sunak has also cut VAT on some household energy efficiency measures, such as solar panels, heat pumps and insulation from 5% to zero, and expanded it to include wind and water turbines. He said this could cut the cost of installing solar panels by £1,000.
What do these decisions mean for your finances?
National Insurance threshold
The NI starting thresholds will rise to £12,570 from July. This means no one will pay National Insurance on the first £12,570 of their earnings, in line with income tax.
Almost three quarters (70%) of workers will now pay less National Insurance than they do this year, after Rishi Sunak’s mini-budget announcement.
Steven Cameron, pensions director at Aegon, comments: “The Chancellor’s decision to increase the lower threshold of earnings on which employees pay National Insurance by £3,000 to £12,570 will be welcomed by many as helping mitigate the cost-of-living squeeze.
“There had been calls for the Government to defer the increase of 1.25% in NI, but Rishi clearly was not prepared to do so and instead has opted to make a major increase in the NI threshold. This will reduce the impact of the 1.25% increase for all and will take anyone earning under £12,570 out of paying any NI contributions.
“However, increasing the threshold has longer term ramifications. Setting aside the 1.25% increase, which will be ringfenced to pay for social care and NHS support, raising the threshold will reduce the amount being collected in NI from today’s workers to pay for today’s state pensions.
“This will happen not just in the coming year but also in all future years, storing up longer term challenges for the funding of state pensions which are paid for out of NI on a pay as you go basis.”
Fuel duty cut
The chancellor has announced a 5p a litre cut to fuel duty, as drivers struggle with fuel prices.
Currently fuel duty costs around 58p a litre, and VAT almost 28p per litre. On a 55-litre tank, £47.30 is tax.
The cut would mean fuel duty drops by £3.30 off the cost of filling a typical 55-litre family car, VAT included.
Edmund King, president of The AA, says: “The AA welcomes the cut in fuel duty. However, we are concerned that the benefit will be lost unless retailers pass it on and reflect a fair price at the pumps. Average pump prices yesterday hit new records- despite the fall in wholesale costs.
“The Chancellor has ridden to the rescue of UK families and businesses who use their vehicles, not for pleasure, but to function in their daily lives. Since the start of the year, the 20p-a-litre surge in pump prices has been the shock that rocked the finances of families, and particularly young drivers, pensioners and lower-income workers who need to commute each day.
“AA research showed that even in November, when petrol pump prices set new records at around 148p a litre, 43% of drivers were cutting back on car use, other spending to compensate or both. That rose to 59% among young drivers and 53% among the lower-paid. Petrol started this week averaging 167p a litre.
“On top of the duty cut, there has been a substantial reduction in wholesale road fuel costs feeding through to the forecourts since 9 March. That needs to drive lower pump prices also. The road fuel trade shouldn’t leave the Treasury to do the heavy lifting when cutting motoring costs.”
Income tax cut – but not yet
Sunak said the basic rate of income tax would be cut from 20% to 19% in 2024, the first cut in income tax for 16 years.
Laura Suter, head of personal finance at AJ Bell comments: “The big rabbit out of Rishi Sunak’s hat was announcing a cut to income tax rates from 2024, and while that will grab the headlines it’s precisely zero help to families struggling with the cost-of-living crisis now – or indeed for the next two years.
“The announcement today, which clearly could have waited until the full Budget later this year, appears to be the Chancellor’s way of coming through on his promise to deliver a low-tax nation without actually handing the tax cut to the nation now.
“Opposition MPs and his own peers had called on him to do more to help families who are facing rising bills now, but on the basis that those bills can’t be paid with an IOU for two years’ time, many will think he’s fallen short of this task.”
Is ‘stagflation’ coming?
OBR forecasts biggest drop in disposable income since records began.
The Office for Budget Responsibility (OBR) estimated the budget deficit – the gap between spending and income – would be:
- £127.8bn in 2021-22
- and £99.1bn next year
The most recent Office for National Statistics (ONS) data suggests inflation rising by 6.2%. However, the OBR has forecast average inflation for the year of 7.4%.
Richard Carter, head of fixed interest research at Quilter Cheviot, comments: “While Rishi Sunak announced a number of welcome measures to help households cope with the cost-of-living crisis, these measures most likely will not go far enough to protect the consumer from a very challenging outlook.
With the war in Ukraine continuing to push up the oil price and utility bills due to rise sharply in the spring, and later in the year, inflation is beginning to bite for businesses and households. According to the latest figures, inflation in the UK is already at over 6% and will remain at worryingly high levels for most of the year while the Office for Budget Responsibility also slashed their GDP forecast for this year from 6% to 3.8%.
“While the unemployment rate is expected to be unaffected by the slowing of economic growth, it does feel as if we are entering a stagflationary period. It will be difficult for the economy to emerge from this without some additional stimulus, but with interest rates on the rise it is a tricky balancing act for the government and the Bank of England.”
Becky O’Connor, head of pensions and savings, interactive investor, adds: “With price rises so high, the Government’s measures may not quite go far enough for those facing the highest personal inflation rates.”