Tax changes: here is what the mini-Budget means for you

Today’s mini-Budget was all about taxes. The new chancellor, Kwasi Karteng, announced that the government will scrap the 45p top rate of income tax, leaving a top band of 40p. The move took many by surprise and was one of the biggest treats handed out by the chancellor.

What else did the chancellor announce on taxes?

Changes to income tax

Apart from abolishing the 45% income-tax band, the chancellor also announced a cut in the basic rate of income tax. From April 2023, the basic rate will be cut by a penny in the pound to 19%.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

“The decision to scrap the 45p rate of income tax, which affects 629,000 people who earn more than £150,000 a year, is potentially politically explosive,” says The Times.

It will stir controversy with Labour who will argue that it benefits the rich when many Britons are grappling with a cost of living crisis.

However, the Tories argue that it will foster greater investment in the UK.

National Insurance

The chancellor reiterated changes to National Insurance that were announced on Thursday ahead of the mini-Budget.

The 1.25% percentage-point increase in National Insurance contributions, introduced by former chancellor Rishi Sunak, will be reversed on 6 November.

The government will also cancel the planned health and social care levy, a separate tax which was expected to come into force April 2023.

Stamp duty

As widely anticipated, the chancellor announced changes to stamp duty. He increased the threshold at which home-buyers must pay stamp duty from £125,000 to £250,000 and onwards.

First-time buyers will only start paying stamp duty on properties valued at more than £425,000, up from the previous threshold of £300,000.

And in more good news, the value of property on which first-time buyers can claim tax relief increased from £500,000 to £625,000.

Corporation tax and investment zones

Kwarteng confirmed that he is scrapping next year’s planned rise in corporation tax, which was due to rise to 25%. Corporation tax will remain at 19%.

He estimates the move will put roughly £19bn back into the economy and will leave the UK with one of the lowest corporation tax rates in the G20.

The government will also be setting up new investment zones across the UK, which will benefit from lower taxes, simpler planning regimes, increased funding, zero-rate NI employer contributions for certain employees, and stamp duty land tax relief.

VCTs, EIS and SEIS

The government announced that Venture Capital Trusts (VCT), the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) will be protected beyond 2025.

EIS is an investment scheme which allows private investors to generate tax savings by investing in growth businesses.

The amount of money businesses can raise via the SEIS rose from £150,000 to £250,000 and the maximum age of the business raising capital increased to three years.

What does this mean for you?

For pensions, the budget is both good and bad news.

As Helen Morrissey, senior pensions analyst at Hargreaves Lansdown, points out: “Both annuities and drawdown are subject to income tax, so this will be a shot in the arm for pensioners.”

She adds that while the 1% cut may sound small it can generate decent savings, with someone on “£25,000 income paying over £125 less per year” and basic-rate taxpayers will be happy to pay less in taxes. She cautioned that these changes don’t kick in immediately.

“By that point, pensioners waiting for their state pension to be uprated with inflation may well be running on empty,” she said.

Tax relief for basic-rate taxpayers saving into their pensions is going to be less generous, she says, but pensions remain a very tax-efficient way to save.

“All contributions are completely tax free”, she adds. “The fact that workplace pensions receive tax relief and a contribution from your employer still make them incredibly powerful places to save for the future,”

Will the stamp duty cut drive house prices higher?

According to Rightmove the changes to stamp duty could increase UK house prices.

Rightmove’s housing expert Tim Bannister said: “Demand has been softening over the last few months but today’s announcement is likely to stimulate some more demand. If it does lead to a big jump in prospective buyers competing for the constrained number of properties for sale then it could lead to some unseasonal price rises over the next few months.”

But Bannister expects the increase in UK house prices to not be as drastic as those announced during the temporary stamp duty holiday in 2020 as the stamp duty change is permanent.

But Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, points out that the biggest issue with the UK housing market is lack of supply, as most agents only have 36 properties at hand, which she argues this mini-budget did not address.

“Higher prices coupled with higher mortgage rates are going to 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,” she warns.

What could be more significant for house prices, however, could be the rise in interest rates. One of the principal reasons houses are so expensive is the years of ultra-low interest rates – if homebuyers are able borrow more money at lower rates, the price of houses goes up. But with interest rates now rising steadily, we could see house prices fall, with London leading the decline.

What does this mean for businesses?

For businesses the cut in corporation tax will be welcome.

“While the planned hike in corporation tax from 19% to 25% has been consigned to the bin, while 'Investment Zones' in England, with specific tax cuts and liberalised planning rules, have been announced. The case for making tax cuts now is that they could stimulate greater consumer spending and encourage more investment in UK businesses,” says Myron Jobson, senior analyst at Interactive Investor.

Many experts welcomed the changes to EIS and said it would benefit businesses.

Simon Emary, COO of Growthdeck, comments: “The Chancellor’s decision to back EIS and SEIS is a shot in the arm for growth businesses in the UK and for the economy overall.”“EIS has been a huge net positive for the economy and the tax base over the last 28 years. It has helped many thousands of businesses to grow and created a vast number of jobs.”

“Enabling SEIS to do more to get funding to smaller scale businesses is another big positive. A lot of people in the investment industry have long felt that its impact has been limited by the restrictive cap on the size of investment people can make through it. It’s good to see the government take a step toward improving that,” he added.