Making Sense of the Mini budget

A mind bending mini-budget

Last Friday, the new Chancellor, Kwasi Kwarteng, announced a ‘Mini-Budget’: a statement about the intended use of the UK’s money and economy.

Budget announcements usually set out how a government plans to adjust taxation, borrowing, and more – but Kwarteng’s mini-budget sent shock waves through the financial world, leading to a crash in the pound and a £65bn intervention by the Bank of England to save pensions.

So what happened? What did Liz Truss’ new Conservative government announce that will affect your lifestyle – from confronting the cost of living, to mortgage rates, to looking after your retirement.

Income Tax Cuts

A policy from the previous Conservative incarnation – spearheaded by ex-Chancellor Rishi Sunak, was to reduce the basic rate of income tax by 1p by 2024. That has now been brought forward by Kwasi Kwarteng, with the change now effective from April 2023.

However, because the income tax rate thresholds have been frozen, more people have found themselves in a higher bracket. And, when compounded by the rising cost of living, the average £170 a year in income tax reductions may not offset the increased cost of household bills or borrowing. That’s despite the Government’s suggestion that this policy will benefit 31 million people.

The most eye-watering announcement from the income tax cuts was that people who earn over £150,000 a year would benefit from an abolition of the 45% additional rate of income tax that they previously paid – driving a wedge between high and low income households. Indeed, for someone earning £200,000, they would have saved nearly £3,000 annually. The government announced a u-turn on Monday 3rd October, labelling this policy as a "distraction", and that it would be removed from the government's plan.

Remember that these changes will not affect your ‘pensionable salary’ (in other words, your pre-tax salary that is used to define your pension contributions).

National Insurance

Another policy announced by Kwarteng is to reverse the 1.25% rise in National Insurance. This change is set to take place in November. HM’s Treasury claim that this change will save nearly 28 million people an average of £330 a year, but in reality this policy will lead to minimal saving for Britain’s lowest earners.

According to the BBC’s calculations of Government data, people on a salary of £20,000 will save £93 a year, compared to £843 a year for those on salaries of £80,000. To throw this disparity into greater relief, anyone earning £100,000 a year will save £1,093 thanks to the National Insurance reversal.

Stamp Duty

Anyone looking to buy their first home may benefit from changes to Stamp Duty. Stamp Duty is a tax paid by people when they purchase property in England and Northern Ireland. Before the mini-budget, this tax would only come into effect on houses worth over £125,000. This threshold has been raised to £250,000 – but the value for first time buyers is different. Anyone looking to purchase their first home will now be exempt from Stamp Duty when buying property worth up to £425,000 – a £125,000 increase. This added incentive for first time buyers in notable, but changes will only affect those who can afford houses valued between £425,000 and £625,000 – leaving anyone looking to buy for below that figure where they were before.

If you’re considering moving house or buying your first one, check these rates and the potential change the new Stamp Duty could have on your move.

Banker’s Bonuses

Kwasi Kwarteng has lifted an EU cap on banker’s bonuses, meaning that Britain’s banks can now give executive bonuses worth up to 200% of their salary. Kwarteng’s reasoning behind this move was to increase the tax takes from high paying jobs – however, this move seems to contradict the aforementioned scrapping of the 45% additional rate income tax.

Corporation Tax

Britain’s previous level of Corporation Tax (19%) was the lowest of any G7 country. It had been scheduled to increase to 25% in 2023, but now those plans have been scrapped.

What does it all mean?

Overall, people living in the UK’s lowest income bracket will save, on average, £22.12 a year under the new tax cuts. By contrast, the richest households will receive an extra £9,187 a year.

Some first-time buyers will reap the rewards of a more lenient application of Stamp Duty – however this will – on average - mostly affect buyers in areas where house prices range between £425,000 and £625,000. Bear in mind, however, that Zoopla value the average first home at £220,000.

It's natural to feel concern about political policy and its affect on your life. If you're worried about the announcement's made by Kwasi Kwarteng and Liz Truss, MoneyHelper can help you to navigate it.