Inflation in the UK hit heights of 11.1% in October last year, creating a big strain on our purse strings. However, this has fallen to 6.7% in August and September this year. See figures underlined in orange below:
The Bank of England say they expect inflation to fall further in the coming months, with predictions of a rate of around 5% by the end of the year.
They also expect inflation to continue to fall in 2024, reaching the target rate of 2% in the first half of 2025.
It is important to note here that a fall in inflation (disinflation) does not mean goods and services are getting cheaper (which would be deflation). It simply means that the rate of inflation is decreasing, so costs are still rising, it’s just happening more slowly.
Food Costs
The rate of inflation for food and non-alcoholic beverages is much higher than the average overall inflation rate. This is because the inflation rate is an average, and the prices of different goods and services rise at different rates.
48% of Great British adults say they have spent more than usual to get their usual food shop within the last two weeks.
However, the inflation rate for food and non-alcoholic beverages has eased to 12.2% in September this year, acting as a decrease from 13.6% in August and from highs of 19.2% in March.
Why is Inflation Falling?
One key reason why the Bank of England expect continued disinflation is that energy bills should reduce more due to recent falls in gas prices.
They have also stated that higher interest rates will help bring down inflation further. This is because higher interest rates discourage spending by decreasing the cost of borrowing and increasing the reward of saving money.
What About Wages?
In June to August 2023, annual growth in regular pay for the public sector was 6.8%, acting as one of the highest regular annual growth rates since 2001. However, this rise was 8% the private sector, meaning there remains a gap between public and private wage increases.
Importantly, data from The Office of National Statistics (ONS) shows a positive annual growth rate in real pay for August 2023 (real pay accounts for inflation). This is certainly much needed to help reduce some of the pressure on household budgets among the continued cost-of-living crisis.
The International Monetary Fund (IMF) has upgraded the UK’s economic growth forecast earlier this week, with predictions that the UK economy will contract by 0.3% rather than 0.6% as previously forecasted. However, this contraction still sees the UK settling into its position as the worst performing G7 economy this year.
Here you can see that the IMF predict 0.3% negative real GDP growth alongside a 6.8% inflation rate in the UK for 2023.
The rate of inflation is certainly heading in the right direction when compared to its rate of 9.1% last year. Nevertheless, this is still far higher than the Bank of England’s 2% target rate of inflation.
The above graph, taken from BBC News, using IMF data, shows UK growth forecasts in 2023 and 2024 in comparison with other G7 countries.
This graph clearly illustrates that the UK is facing a very different situation to its companions, acting as the only G7 nation with negative growth for 2023.
This said, it does also appear that we are on the right path, as despite predictions of a 0.3% contraction in GDP this year, the IMF also forecasts that we will move away from this shrinkage and into growth of 0.9% in 2024.
Given that the IMF has reduced how much they expect our economy to contract this year and increased the growth they predict us to experience next year, we can certainly see an increasing optimism in the UK’s economic outlook.
The Mini-Budget’s Aftermath
One of the reasons for the decline in the UK’s economic environment is the continued aftershocks of Kwarteng’s September mini-budget under Truss’ leadership.
“In the UK, investor concerns about the fiscal and inflation outlook after the announcement of large debt-financed tax cuts and fiscal measures to deal with high energy prices weighed heavily on market sentiment in late September. Amid high market volatility, the British pound depreciated abruptly, while yields on UK sovereign bonds rose sharply. The scale and speed of yield increases, especially at the long end of the curve, reportedly had a significant impact on levered positions held by UK institutional investors, particularly pension funds”
The fiscal policy proposed in the September mini-budget worked to counteract the Bank of England’s monetary policy. This is because Kwarteng proposed unfunded tax cuts in a somewhat frenzied attempt to stimulate economic growth, whilst the Bank of England sought to stabilise inflation through interest rate rises (which of course have the opposite effect on growth).
If we combine the aftermath of the mini-budget with continued high energy prices, rising mortgage costs and continued labour shortages, the IMF’s forecast comes as little surprise.
To look at the IMF’s World Economic Outlook for the UK in more detail, click here.
by Red Star Wealth
Jeremy Hunt’s decision to scrap the pensions lifetime allowance, announced on Wednesday 15th March during his Spring Budget, has been met with controversy.
What was the Lifetime Allowance?
The lifetime allowance previously capped the amount that individuals could save into their private pension before incurring a tax charge. Previous to the Spring Budget, the lifetime allowance was set at £1,073,100, with expectations that Hunt would increase this figure to £1.8 million. However, in a surprise move he instead decided to abolish the lifetime allowance completely.
For most lower and middle earners, the scrapping of the lifetime allowance will not affect them. This decision will mainly affect higher earners as these tend to be the people who can afford to build bigger pension pots.
“It is a pension tax reform that will stop over 80% of NHS doctors from receiving a tax charge and incentivise our most experienced and productive workers to stay in work for longer”
“I have listened to the concerns of many senior NHS clinicians who say unpredictable pension tax charges are making them leave the NHS just when they are needed most”
The decision to scrap the lifetime allowance is aimed to keep people close to retirement in the workforce for longer, as well as encouraging those who have already retired to return to work. This is because there is more incentive for employees to stay in work to continue building their pension as they won’t face tax penalties for doing so. The idea is that this will help stimulate economic activity and produce economic growth.
Criticism
However, this decision has been met with controversy, with some arguing that whilst these changes would indeed combat the issue of 55% tax penalties faced by doctors, they would also give a big boost to many wealthy people.
David Brooks, head of policy at Broadstone, has argued that scrapping the lifetime allowance and increasing the annual pensions contributions has acted as a “huge tax giveaway to the wealthiest people in the country”
The following images is taken from the director of the Social Market Foundation, James Kirkup’s, twitter:
Perhaps the government should be focussing on getting more people to start building pensions, rather than helping those with large pensions make them even bigger.
Shadow Chancellor and Labour MP, Rachel Reeves stated:
“The only surprise in the budget was a huge handout to the richest one percent of pension savers […] Labour believes that the tax burden should be shared fairly. That is why I’ve announced today that Labour will reverse the changes to tax-free pension allowances. It is the wrong priority at the wrong time”
Given that Labour is favoured to win the next general election, it is a real possibility that Hunt’s scheme may not be in place for very long…
To read more about other changes announced in the Spring Budget, check out our previous blog.
by Red Star Wealth
In yesterday’s Autumn statement, Hunt announced £30 billion worth of spending cuts and £24 billion worth of tax rises over the next 5 years. This increased taxation and cuts to government spending is aimed at rebuilding the economy after instability from the Covid pandemic, Truss and Kwarteng’s failure of a mini-budget, and the ongoing war between Russia and Ukraine.
“Stealth Taxes”
Income tax’s personal allowance, the main national insurance thresholds and inheritance tax thresholds have been frozen for a further two years.
Some members of the opposition have branded these as “stealth taxes”. This is because the freezes effectively means that people will have to pay more tax as wage increases (due to inflation) will push them into higher tax brackets.
This payment of higher taxes alongside continuing inflation will mean the cost of living crisis will be hitting us all even harder.
Higher Rate Tax Payers
Currently, those earning between £50,271 and £150,000 a year fall into the higher rate income tax band of 40%. Those earning above £150,000 a year then pay the additional rate of income tax of 45%.
As of April 2023, this threshold will reduce from £150,000 to £125,140, meaning higher earners will be paying more tax.
Protecting the Vulnerable
Hunt has announced additional cost-of-living payments for the most vulnerable:
£900 for those claiming benefits
£300 for pensioners
£150 for those on disability benefits
He has also introduced a cap on the increase in social rents, at a maximum of 7% in the 2023/2024 tax year.
The triple lock on pensions has been maintained, meaning state pensions will increase in line with inflation. Working age and disability benefits are also to increase in line with inflation.
The national living wage is to increase by 9.7%, rising to £10.42 in April 2023, which will benefit the lowest-paid employees in the UK.
Funding the NHS, Schools and Social Care
Hunt has announced an extra £2.3 billion per year to be invested in schools over the next two years.
He has also announced an increase in the NHS budget by an additional £3.3 billion in each of the next two years.
Additionally, Hunt has allocated adult social care additional grant funding of £1 billion next year and £1.7 billion the year after. As well as this, the implementation of the Dilnot reforms has been delayed by two years. These reforms would cap the amount any one person in England would have to pay towards social care to £86,000. Delaying this means we will have more funding for the social care sector.
Energy and Electricity
In May 2022, Rishi Sunak introduced a tax as chancellor called the Energy Profits Levy. This was a 25% surcharge applied to companies profiting from extracting UK oil and gas, and was to run as a temporary levy until the end of 2025. In yesterday’s Autumn statement, Hunt announced that this windfall tax will increase to 35% from January 2023 and will also stay in place for longer, until March 2028.
A temporary new electricity generator levy will also be introduced. This will impose a 45% windfall tax on profits of selling electricity above £75MWh.
From 2025, electric vehicles will no longer be exempt from Vehicle Excise Duty (often referred to as Road Tax), which will help further raise Government funds.
It was also confirmed that plans for £700 million of Government funding into the Sizewell C nuclear power plant in Suffolk are to go ahead. This new nuclear power plant is expected to create 10,000 jobs and generate enough power for 6 million homes. The aim is to get the UK on the road to energy independence, so that we are no longer so heavily affected by changes in global gas prices in the future. It also signals the first UK state backing for a nuclear project in over 30 years. However, over the plant’s expected 13-17 years of construction, the government has predicted it will add an average surcharge of around £1 a month to household bills. This means that, yet again, our finances are likely to be under even more strain.
by Red Star Wealth
If you’re feeling a bit dizzy from all the U-turns in economic policy under Truss’ leadership recently, we can’t blame you! It’s difficult to keep up with it all at the moment, so we are here to help. Let’s have a look at what’s been going on…
Goodbye Kwarteng, Hello Hunt
Jeremy Hunt has recently replaced Kwasi Kwarteng as Chancellor, bringing with him even more economic changes.
Liz Truss has stated that Government spending will low grow less rapidly than she planned, meaning lots of U-turns on her previous plans.
The Medium-Term Fiscal Plan
On 26th September 2022, Kwarteng revealed that his Medium-Term Fiscal Plan would be presented on 23rd November.
This announcement is still in place, except now it’s happening earlier than planned and being delivered by a different man (Hunt). The Treasury announced on 10th October that the Chancellor would bring forward the announcement of this plan to the 31st October as opposed to 23rd November.
Triple Lock Confusion
The triple lock means that the state pension rises each year in line with either inflation, average earnings, or 2.5%, depending on which figure is the highest.
On 17th October, Hunt indicated that the Government was considering shelving the triple lock on pensions. However, two days later during Prime Minister’s Questions, Truss confirmed that the triple lock was there to stay.
“Firstly, we will reverse almost all the tax measures announced in the Growth Plan three weeks ago that have not started Parliamentary legislation” -Jeremy Hunt
Income Tax U-Turns
Hunt has announced that he’s reversing the proposed 1% cut in the basic rate of income tax announced in Kwarteng’s mini-budget. Instead, the basic rate will remain at 20%.
He’s also announced that the Government will not proceed with abolishing the 45% additional rate of income tax, as was previously announced in the mini-budget.
Alcohol Duty Freeze U-Turn
Hunt has also abandoned Kwarteng’s plans of freezing alcohol duty rates for a year, commencing 1st February 2023. This freeze is no longer going ahead, which is estimated to save the Treasury £600 million a year.
Corporation Tax Double U-Turn
Kwarteng announced in his mini-budget that the previously planned rise in corporation tax due to come into force in April 2023 would no longer go ahead.
Since his replacement, Truss has stated that the rise will go ahead next year after all, rising from 19% to 25%.
Energy Bill Price Cap
During Prime Minister’s questions on 19th October, Truss seemed to lean heavily on her energy bill price cap as a supportive measure for those most vulnerable. However, this energy bill support to ensure that the typical household’s average bill doesn’t exceed £2,500 is only to last until April 2023. The support is only actually in place for half a year.
Stamp Duty Land Tax
One remaining element of Kwarteng’s mini-budget is the changes to Stamp Duty Land Tax. The nil-rate tax threshold will stay at the increased £250,000, and £425,000 for First-Time Buyers.
So, that’s all of the recent changes summed up… for now! Things may be due to change again with Truss’ resignation, so stay tuned.
by Red Star Wealth
Last Friday, on 22nd September 2022, Kwasi Kwarteng, the Chancellor of the Exchequer, announced in his mini-budget statement a set of economic policies which have been the subject of much discussion. Read on for an overview of some of the changes he’s made.
National Insurance and the Health and Social Care Levy
Since 6th April 2022, workers and employees have been paying an extra 1.25% National Insurance, taking the rate up to 13.25%. This increase was due to be replaced by the Health and Social Care Levy (a 1.25% levy on top of a 12% National Insurance rate).
Details of the Health and Social Care Levy were announced by Boris Johnson on 7th September 2021 and it was to be introduced by April 2023. The levy was for increased health care spending to deal with the backlog of patients awaiting treatment on the NHS.
Some of the levy was to be channelled into the social care system due to our ageing population, effects from the pandemic, staff shortages and lack of government spending.
The levy was to be calculated the same as National Insurance but would’ve also been paid by those at state pension age.
The levy was expected to raise around £13billion for health and social care. Despite cancelling the proposed levy, the Chancellor has claimed that funding for health and social care services will remain at the same level as if the levy was actually in place. I guess we will have to see…
The good news is that Kwarteng, along with cancelling the levy, is reversing the 1.25% rise in national insurance come 6th November 2022. The aim of this is to reduce workers’ and businesses’ tax burden and encourage growth to stimulate the economy.
Income Tax
As well as the decrease in income tax, Kwarteng announced some changes to income tax. The basic rate of income tax will decrease from 20% to 19% as of April 2023 (a year earlier than planned). Additionally, the additional rate of tax (set at 45% and applied to incomes above £150,000) is to be abolished.
In the short term, it seems as though most people will be paying less tax. However, former chancellor Rishi Sunak announced in 2021 that the personal allowance and higher rate threshold would be frozen from the 2022-23 tax year until the 2025-26 tax year.
This freeze will essentially offset the tax reduction announced by Kwarteng for most ordinary people.
It is the high earners who will fare the best. The rich, as always, seem to be getting richer. Abolishing the additional rate of income tax means that the highest earners, including millionaires, are in the same tax band as anyone earning over £50,271.
Corporation Tax
The Chancellor has cancelled the proposed rise in Corporation Tax. The tax was to increase to 25% starting April 2023 for firms which make over £250,000 profit. However, this will now be remaining at 19% for all firms, regardless of their profit.
Stamp Duty Land Tax (SDLT)
The 0% SDLT band has been doubled from £125,000 to £250,000. The idea is that cutting SDLT will promote residential property investment and spending on household goods.
The threshold before paying SDLT has also been increased for first-time buyers from £300,000 to £425,000, making it easier to get your foot on the housing ladder. The average house price for first-time buyers in the UK in 2021 was around £264,000, but if you’re spending more than this, the increased threshold is certainly handy.
Universal Credit
Households on universal credit may find it more difficult to claim. Those earning less than the equivalent of around 15 hours a week at National Living Wage will have to regularly meet with their work coach. If failing to do so, they risk a reduction in their benefits
There have certainly been mixed reactions to Kwarteng’s mini-budget, but how you feel about it is entirely up to you.
