What we can expect from the Chancellor's Spring statement - column by Nicholas Smith, director and head of tax at Duncan & Toplis

With the cost of energy spiralling higher, inflation speeding upwards, a job shortage, trade disruption and a war on the European continent, the decisions made or not made for this year’s spring statement will affect everyone in this country.
Nicholas SmithNicholas Smith
Nicholas Smith

As with each spring statement, this year’s announcements come just before many previously announced changes come into effect in April. This includes changes in alcohol duty, air passenger duty, an increase in the National Living Wage, a plastic packaging tax, more restrictions on the use of red diesel, a 50% cut in business rates for the retail, hospitality and leisure sector and the end of some of the final Covid-19 support schemes.

However, all eyes will be on the most controversial change: the planned increase in National Insurance with the 1.25% Health and Social Care Levy. This will bring tax to a record high, affecting people and businesses across the country, particularly the lowest paid at a time when the cost of living is already rocketing. This not only affects employers and their employees, there is also a similar 1.25% rise in dividend tax which will impact on shareholders, especially those of owner-managed businesses.

There’s no doubt that the tax rise in NIC and dividends will be a body blow for many and the Chancellor has faced calls from all sides for this to be scrapped.

But, because the Health and Social Care Levy is a critical piece of the prime minister’s long-promised plan to reform the social care sector and support the NHS after the pandemic, I think a U-turn is very unlikely. Instead, I think there are other levers which could be pulled to have a similar impact on businesses, the economy and ordinary people.

One of the most immediate and most decisive steps would be to announce further measures to protect people from the energy crisis and cost of living crisis. Since the £350 package of support per household was announced at the start of February, these crises have worsened and the high cost of energy looks set to last longer with the outbreak of war in Ukraine.

This could therefore justify additional steps, such as a more controlled rise in the energy price cap or even a further rebate paid for by windfall taxes on the (near-record) profits of oil and gas companies, as we’ve seen from other European states.

Another step could be to reduce the 20% green fuel levy and 5% VAT on energy bills.

While this would reduce bills in the short term, removing the levy would be controversial if the funding raised for green energy projects wasn’t replaced through other means.

Longer term, I think we can expect more money invested in greener energy, including nuclear and solar power so as to reduce our reliance on gas – the cost of which has quadrupled.

Aside from the energy crisis, it’s also possible that the National Living Wage and state pensions will increase faster than planned so as to keep ahead of inflation, which is expected to rise above 6% this year.

The chancellor may also increase other benefits such as Child Benefit or Personal Independence Payments to keep up with rising bills. The Government has already said that plans to expand eligibility for the Warm Home Discount Scheme are to go ahead and that the value of the benefit will rise to £150 from October.

To reduce the deficit, I suspect there will be a few more tax rises in certain areas and a few simplifications to close loopholes here and there in Inheritance Tax for instance, but, largely, I think the chancellor will avoid this as much as possible.

Instead, I expect him to instead rely on the affordability of debt to leave the problem for future years, or even generations.

Of course, there are more stealthy ways of raising tax revenues: the process of fiscal drag occurs when tax allowances and thresholds are kept frozen while inflation and earnings rise. As a result, the chancellor can avoid making unpopular tax rises, but, at the same time, allow more people to gradually come into higher tax thresholds.

It’s projected that millions of people will fall into the 20% or 40% tax bracket of income tax soon as well as the £325,000 threshold for inheritance tax simply through inflation.

Related topics: