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The spring statement – what it means for you

With the Chancellor Rishi Sunak delivering the spring statement yesterday, we look at the main takeaways and what they could mean for your finances.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Sarah Coles
Senior Consumer and Personal Finance Analyst

Published on 24 March 2022

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

The spring statement speech ended with a rallying cry that the measures announced by the chancellor would constitute the biggest cut to personal taxes in over quarter of a century. But while this news was greeted in the House of Commons with cheers, those of us mulling it over at home will likely be less excited about the bigger picture.

In the short term, higher earners will still see taxes rise. We also face accelerating inflation, meaning all of us are likely to feel worse off in the coming months. There will be some help with energy bills for those on the lowest incomes, and a small cut to fuel duty. But the overall impact will leave a lot of people disappointed.

National Insurance

Raising taxes in an environment like this was always going to be controversial. In the run up to the statement, the chancellor faced calls to shelve the National Insurance hike on the grounds it was the wrong tax at the wrong time. He resisted this pressure, but he did lessen the financial pain by moving the threshold. The threshold will rise to £12,570, to match the personal allowance in July.

This move, the chancellor said, will leave 70% of National Insurance contributions payers better off – despite the rise in the rate – and lift another 2.2 million out of paying this tax entirely.

Essentially it means average and lower earners will be better off, but higher earners will still pay more. Our calculations show that the tipping point comes at just over £40,000, and someone earning £50,000 will still pay £108 more than they do right now.

If you’re keen not to pay more NI, and your employer operates a salary sacrifice scheme, there is an alternative. In some cases, the government will let you give up a portion of your salary and spend it on certain things free of tax (and in some cases National Insurance too). This includes pensions, childcare vouchers, bike-to-work schemes, and technology schemes. This won’t boost your take-home pay, but it will cut your tax bill.

Income tax

Talking of lower tax bills, the big surprise in the speech was the promise of an income tax cut by the end of the parliament in 2024. The basic rate will fall by 1p, to 19p in every pound. This was the second tax tweak that formed the basis of Rishi Sunak’s bold tax cut claims. It offers us some hope for the future, although there’s an awful lot of inflationary pain to get through between now and then.

For anyone who donates to charity, the accompanying spring statement documents revealed a small additional benefit. While from 2024 you’ll be taxed at 19%, Gift Aid will be paid at 20%. It’s not going to put any extra cash in your pocket, but it’s a way for charities to get an extra benefit from your generosity.

Inflation

However, on the flip side of the better news on tax was bad news on price rises. The Office for Budget Responsibility (OBR) forecast that inflation would hit 8.7% by the end of the year. As a result, it expects real wages (after inflation) to fall both this year and next.

Figures out earlier in the day revealed an awful lot of this inflation is from the essentials in life that are incredibly difficult to cut back on. This included a 22.8% rise in the price of petrol, 28.3% rise in the cost of gas and a 19.2% rise in the price of electricity. And these were the figures from February, before April’s energy price cap hike feeds into the figures, and before the Ukraine crisis pushed petrol prices at the pump to £1.67.

Energy bills

The looming energy price cap will see prices rise an eye-watering 54%, and affect 22 million of us. So you’d be forgiven for hoping that the statement would offer more help with bills. However, for the vast majority of people all we had was a reminder of the burn-now-pay-later loan in October, and the £150 council tax discount for some in April.

For lower earners, instead of any extra help through the Universal Credit system, there was a reminder of previous tweaks. The only new help announced in the statement was another £500 million through the Household Support Fund.

For anyone considering investing in energy efficient measures, to cut their bills in the long run, there was also some good news. That’s because VAT was cut on some of these measures – including solar panels, heat pumps and insulation - from 5% to zero.

The chancellor also expanded the measures subject to lower tax to include wind and water turbines. He said this could cut the cost of installing solar panels by £1,000, and the cost of annual energy bills by £300. This will certainly cut costs for those who were considering this kind of outlay. But if you’re struggling to pay higher energy bills, it’s unlikely the solution will involve spending thousands of pounds on improvements in the short term.

Fuel

There was marginally better news on the price of petrol, with a temporary 5p cut in fuel duty until next March, but even this is a drop in the ocean. Fuel duty currently 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 just £2.75.

With the cost of unleaded petrol now at £1.67 a litre on average, we’re still going to have to make some difficult decisions about how and where we travel in future. It’s also going to continue inflating the cost of transporting anything to stores, which will gradually feed into the price of everything on the shelves. Life is going to keep getting more expensive, and this cut isn’t going to change that.

Once we’ve worked our way through some really tricky years of higher prices, and higher taxes for those on bigger wages, we have lower income tax to look forward to. But while this tax cut might be a light at the end of the tunnel, it’s a pinprick of light at the end of a very long tunnel.

This article isn’t personal advice, if you’re not sure what’s right for you, ask for financial advice.

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