Households across the UK are facing further pressure on their budgets after Jeremy Hunt scrapped “almost all” of the tax cuts announced in his predecessor’s mini-budget.
The new Chancellor made an emergency announcement on Monday and confirmed a string of U-turns after weeks of turmoil that sent the pound tumbling.
Hunt ditched a previously promised 1p cut in the basic rate of income tax, which had been due to be brought forward to April, stating that it would instead remain at 20p in the pound until the country can afford to reduce it.
The cut in dividend tax promised by former Chancellor Kwasi Kwarteng will also go, along with VAT-free shopping for overseas tourists, the freeze on alcohol duty, and the easing of the IR35 rules for the self-employed.
Hunt also scrapped the energy price guarantee, which had been due to freeze household energy bills at £2,500 for two year. The universal support will now end in April, after which the government will look to target help for those most in need.
The only measures from last month’s mini-budget that will still go ahead is the planned cut to stamp duty, the reversal of the 1.25 percentage point increase in national insurance contributions and a £1 million annual investment allowance
The Chancellor’s announcement marked one of the biggest U-turns in political history and will see household budgets squeezed even further. Here is a look at what the latest announcements could mean for household finances.
What does it mean for energy bills?
The government’s energy Price Guarantee, which came into force from 1 October, replaced the £1,971 cap and means the average household would pay around £2,500 annually for their energy bill. However, the scheme only caps the cost per unit and not per bill, meaning some households could end up paying more, depending on their energy use.
The guarantee was due to last for two years but will now only run until April. Hunt said a review will be launched to find a “new approach” after April 2023 that will “cost the taxpayer significantly less”.
He said: “The Prime Minister and I have agreed it would not be responsible to continue exposing public finances to unlimited volatility in international gas prices.
“So I’m announcing today a Treasury-led review into how we support energy bills beyond April next year. The objective is to design a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need.
“Any support for businesses will be targeted to those most affected and the new approach will better incentivise energy efficiency.”
Energy market analysts Cornwall Insight is now warning that a typical household could face bills of £4,348 a year when the price guarantee comes to an end if the government does not offer further support.
Cornwall Insight said it expects annual bills to equate to £4,347.69 from April to June, with gas at £2,286.70 and electricity at £2,060.99.
Between July and September the consultancy predicts the price cap easing slightly to £3,697, followed by a slight increase to £3,722 from next October until the end of 2023. This is significantly higher than the £1,277 annual bills stood at a year ago.
The consultancy firm said targeted schemes to help those most in need of support, along with energy efficiency measures, need to be put in place.
What does it mean for mortgages and rents?
Mortgage rates have rocketed in recent weeks amid the wider turmoil in the markets, although figures from Moneyfacts.co.uk indicate there have been signs of mortgage rates steadying over the weekend.
Monday’s U-turn announcements could help to shore up market confidence, but the choice of mortgage products remains significantly lower than before the mini-budget, with around 850 fewer deals available.
Bank of England base rate hikes have also been pushing up mortgage rates in recent months and further base rate rises are expected.
Mortgage rate hikes also feed into the costs paid by buy-to-let landlords, which could mean some have to put their rents up or even sell up if letting is less profitable. Supply shortages in the rental sector are already putting an upward pressure on rents.
Simon Gammon, managing partner at Knight Frank Finance, said: “While we don’t expect mortgage rates to fall in the short term, stability in the swaps market should slow the pace of rising mortgage rates relative to some of the worst case scenarios that looked possible in the days following the mini-budget. Only time will tell as to whether this is a temporary reprieve, however.”
What does it mean for incomes?
The basic rate of income tax was due to reduce by 1p next year, meaning people would have seen a boost from their April pay packet onwards. This cut from 20% to 19% has now been put on hold “indefinitely” until the UK’s finances improve.
Had the cut come into place in April 2023 as planned, an average UK earner on £30,000 a year would have paid £174 less in tax next year, according to wealth managers Quilter.
However, a previously-announced National Insurance cut will remain in place which means a £30,000 earner could still be around £218 better off annually because of this, Quilter added.
The move to reverse the National Insurance rise means around 28 million UK workers will make an average saving of £330 in 2023-24, with an additional saving of around £135 on average this year, according to the Treasury.
It also means that businesses paying National Insurance will get to keep more of their earnings, which ministers hope will be reinvested into the economy and help those struggling amid the rising cost of living. Around 920,000 businesses are set to save almost £10,000 on average next year thanks to the change.
Former Chancellor Kwasi Kwarteng said last month: “Reversing the National Insurance rise is a promise delivered. It means an average saving of £330 a year for 28 million workers in the UK, and I’m delighted we will get a step closer to this today as the Bill passes through the Commons."
What does it mean for alcohol prices?
Plans to freeze alcohol duty rates from 1 February 2023 for a year have also been scrapped.
It is understood that plans to increase the duty in line with retail price index (RPI) inflation will save the government around £600 million a year.
Most recently, RPI inflation struck 12.6%. A similar increase to alcohol duty would be the equivalent to a roughly 39p increase on a bottle of wine.
The move will add to pressures for the hospitality industry and household budgets as costs inevitably increase, according to the Scotch Whisky Association,
Emma McClarkin, chief executive of the British Beer and Pub Association said: “The Chancellor’s decision today to reverse the alcohol duty freeze is a huge blow to brewers and pubs.
“The freeze would have delivered a £300 million saving to our industry at a time when we desperately need any relief we can get, to help to keep a lid on spiralling costs and keep the price of pint affordable for pub goers this winter.
“The cost of doing business is completely out of control for pubs and brewers and the failure to act today to reduce pressures on businesses will hit them extremely hard.”