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Our household finances have been on edge for months.
Then, just when families thought it was safe to plan for the rough winter ahead, a new Chancellor, Jeremy Hunt, arrives.
He has set fire to the planned income tax cut and drastically scaled back the Energy Price Guarantee.
So what does all this mean to you? Here’s where Money Mail walks you through the fallout…
Cutbacks: Britain’s new Chancellor Jeremy Hunt has slashed the prime minister’s key energy price guarantee
Income tax
Households will no longer benefit from a planned 1 cent cut in the basic income tax rate, which will take effect in April.
The income tax cut from 20 percent to 19 percent from April 2023 was first announced in March by former Chancellor Rishi Sunak and put forward by his successor Kwasi Kwarteng.
Rather than postpone the cut to 2024, as some experts had predicted was the most likely result of a turnaround, Mr. Hunt has put the plan on hold indefinitely.
It means that the average £30,000 earner will miss out on saving £174 a year, while someone making £40,000 will forgo an annual saving of £274 and a higher earner of £100,000 will see £377 less in his pocket.
The saving grace is that the U-turn happened before the workers could feel the benefit of the cut.
Myron Jobson, senior personal finance analyst at Interactive Investor, says, “This will dent millions of payroll packages in the coming years.”
In addition, retirees and pressured middle earners face higher tax bills as income tax thresholds are frozen until 2026.
The move is known as a “stealth tax raid” as the Treasury sets aside more money as wages rise as more workers are drawn into higher income brackets.
But it’s worth remembering that taxpayers will still benefit from the cancellation of the planned 1.25 percentage point increase in national insurance, which should provide some relief.
This will save an average earner at £30,000 about £218 next year, according to wealth management firm Quilter.
Rachael Griffin, tax and financial planning expert at Quilter, says, “It’s now even more important for individuals to maximize the tax benefits they have and take advantage of the current situation.”
Energy
The Prime Minister’s flagship energy support service was reduced from two years to just six months, meaning it now only runs until April next year as planned.
Under the energy price guarantee introduced on October 1, the average household had to pay £2,500 over the next 12 months.
The new rules don’t put a limit on your total bill, but instead limit the maximum amount that suppliers can charge per unit of energy consumed, so the exact cost will depend on the energy consumption per household.
Penny squeeze: Households will no longer benefit from a planned 1p cut in the basic income tax rate, which will take effect in April
Mr Hunt’s announcement on Monday could lead to a 73 percent increase in energy bills in April, according to forecasts from Cornwall Insights.
Energy costs are then expected to fall to the equivalent of around £3,700 a year in July – but this would still be 48 per cent higher than under the current cost cap.
Mr Jobson says this change will be a kick in the teeth for those who budgeted for the next two years, assuming the plan stuck – as Liz Truss had promised.
The Chancellor has launched a Treasury inquiry into how further aid will be provided to the most vulnerable after April, but it will likely be much less comprehensive than the current scheme.
Pensions
The prime minister yesterday threatened to alienate pensioners when she refused to commit to reinstating the triple lockdown.
This policy guarantees that state pensions will increase each year at the highest of consumer price index (CPI) inflation, average income growth, or 2.5 percent. It was suspended for the 2022/2023 tax year.
But when questioned about it on Monday, Miss Truss’ spokesperson said she “made no commitments” — despite insisting she was “committed” two weeks ago.
It has already been a turbulent month for retirees. Defined benefit plans, which provide income for life, were rocked by rising government borrowing costs, prompting the Bank of England to intervene drastically.
And defined contribution pots, which are topped up by employers and employees, have been plagued by falling stock markets for years.
But the Chancellor’s turnaround has led to a rebound in the pound and a drop in government borrowing costs, which should calm the waters.
In addition, his decision to keep the basic income tax rate at 20 percent means that the pension tax credit will be higher than if the planned income tax cut had gone through.
Retirement deductions are paid at your marginal income tax rate, meaning the incentive to put money into your retirement is greater when taxes are higher.
Under the current system, taxpayers with a basic rate receive a 20 percent tax reduction on their contributions. This means that a pension contribution of £100 ‘costs’ a base rate taxpayer £80.
Hardest hit: Retirees and pressured middle earners face higher tax bills as personal income tax thresholds are frozen until 2026
But one of the biggest winners of the turmoil in recent weeks has been anyone planning to buy an annuity, which offers a guaranteed monthly income for life.
According to figures from investment platform Hargreaves Lansdown, annuity rates have risen by at least 44 percent since last year.
The payouts on new deals are linked to government bond yields, which have risen.
Right now, a healthy 65-year-old with a pension pot of £100,000 would have a fixed annual income of £8,455, 19 percent more than £7,090 two weeks ago, according to Aviva’s annuity calculator.
This is about double what the same person would have gotten three years ago.
investments
The chancellor also canceled a planned cut in the dividend tax.
In his mini-budget last month, Mr. Kwarteng announced that he would reverse former Chancellor Rishi Sunak’s plans to raise the base rate of dividend tax from 7.5 percent to 8.75 percent.
However, Mr Hunt confirmed that the tax will remain at current rates of 8.75 percent, 33.75 percent and 39.35 percent, respectively, for base rate, higher and supplemental rate taxpayers.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, says: “This comes as a hard blow to anyone with investments outside of Isas and pensions whose dividends exceed annual compensation.
“It’s not just that the rates have been increased, but the fee has also been reduced from £5,000 to £2,000 in 2017.”
She recommends putting your money in Isas as a way to protect investments from tax changes.
The decision not to lower rates will also affect entrepreneurs who pay themselves in dividends.
But it’s not all bad news for investors, as markets appear to be reacting positively to the government’s latest turnaround.
Victoria Scholar, head of investments at Interactive Investor, said: ‘Mr Hunt’s focus on reassuring markets and restoring confidence appears to have worked with lower gold returns and a higher pound.’
The FTSE 100 is making gains, meaning those with portfolios focused on these companies can benefit.
Own boss
MR Hunt also backed down on plans to scrap IR35 tax rules, which spelled bad news for many self-employed and businesses.
Under IR35 law, contractors who work for a company often have the same taxes deducted from their earnings as an employee, but may not have the same employment rights, such as sick leave and vacation days.
The legislation was introduced in the public sector in 2017 and in the private sector in April 2021 and has cost companies millions of pounds.
Dave Chaplin, CEO of tax compliance company IR35 Shield, says: “This will continue to do significant damage to the self-employed, large businesses, government and the economy.”
h.kelly@dailymail.co.uk
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