As always, the devil is in the detail with days like today and we will keep you updated you as developments unfold.
We are all shaped by personal experiences and traumas and it is probably true that this generation of politicians will be scarred by Liz Truss’ budget. Not only was Truss the shortest serving prime minister since the office was created in 1721, at just 49 days, but Kwasi Kwarteng was the shortest serving chancellor not to die in office. He might have taken the all-time record were it not for the unfortunate demise of fellow Tory chancellor Iain Macleod in 1970, after just a month in Number 11.
The scars of the Truss budget run deep, so Rachel Reeves was at pains to stress her responsible financial credentials and her desire to give stability to the nation’s finances throughout her budget speech. Judging by the behaviour of sterling and government bond yields, she was largely successful.
The budget was a lesson in expectation management. Fears of large tax hikes did not materialise, at least not to the worst of our fears. Capital Gains Tax did go up, but not too much. Pensions were raided, but not as badly as some thought. Private equity carried interest will be taxed at a higher rate, but not enough to send the industry to Monaco. Inevitably, some taxes were adjusted as expected; VAT will now go on private school bills and the non-dom tax status will be abolished.
About £40bn in new tax is set to be raised, with most of that burden falling on Employers National Insurance. The tax rate will go up by 1.2% to 15%, raising about £25bn of the overall total. In one of the few proposals to draw a gasp from the Commons, the threshold on which it is paid will fall from £9,500 p.a. to £5,000 p.a. There was some relief for very small enterprises, but all but the tiniest will bear the burden of the tax increases.
The biggest change in Capital Gains Tax was the increase in the basic rate from 10% to 18%, and the higher rate from 20% to 24%. This is a far cry from the suggestions prior to the budget that CGT rates would be harmonised with income tax rates.
Pension pots will now fall into the scope of Inheritance Tax having previously been exempted, but there were no changes to pension arrangements otherwise, including the tax-free lump sum. AIM stocks will also suffer Inheritance Tax, but the blow will be softened somewhat by a 50% allowance; in effect IHT on AIM shares will be taxed at 20%, not 40%.
Family businesses and farmland worth over £1m will also suffer higher Inheritance Tax, though the details are, as yet, unclear. The CGT rate that is paid on carried interest will go up from 28% to 32% with Treasury officials consulting on how to simplify the rules around the taxation of carried interest.
The biggest beneficiary of these tax rises is the NHS, which is set to receive an extra £23bn as it grapples with lengthy waiting lists. Education will receive an extra £7bn of funding, and there will be smaller boosts in spending for local governments and the governments of Scotland, Wales and Northern Ireland.
Rachel Reeves has been very clever. She waited for four months to deliver her first budget, thus ensuring that she lasted longer than Kwasi Kwarteng’s 39 days, and in that time she let us ruminate on all the tax increases she might devise. Of course, our imaginations ran away from the reality, so when the actual tax increases came along, they paled in comparison to such gloomy expectations. As Charles Dickens wrote: “Take nothing on its looks; take everything on evidence. There’s no better rule”.
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