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‘A tax cut in two weeks’: which taxes Nadhim Zahawi will target first

·4-min read
Nadim Zahawi - Paul Grover /
Nadim Zahawi - Paul Grover /

The new Chancellor Nadhim Zahawi will appease lower and middle earners by undoing his predecessor's tax hikes and frozen allowances, experts have predicted.

Mr Zahawi has promised “nothing is off the table” when it comes to tax cuts after taking up his new role in the Cabinet last night. A snap Budget is on the cards before Parliament breaks for the summer later this month, where the new Chancellor could target “easy wins” to win over voters.

Income tax

Earlier this year Rishi Sunak announced he would cut basic-rate income tax by 1p in the pound from 2024, with the rate dropping from 20pc to 19pc. But as households struggle amid the cost of living crisis, experts have called for the cut to be accelerated and increased.

Chris Etherington, of accountants RSM UK, said: “Taxpayers are feeling the financial pinch now and a two year wait is too long to have any meaningful impact. The new Chancellor could bring the income tax cut forward, although he will need to find billions to do so if he wants to balance the books.”

Any changes to income tax would need to take effect at the beginning of a new tax year, meaning the cut would not come into force until April 2023 at the earliest.

Nimesh Shah, of accountancy firm Blick Rothenberg, said an emergency Budget was likely before the end of the month.

Mr Shah said: “Boris Johnson and Nadhim Zahawi will want a headline grabber and accelerating the changes to income tax would give them that, as would increasing the cut from 1pc to 2pc.

“That would affect the biggest demographic of taxpayers and also play to the Red Wall electorate.”

National Insurance

“The recent National Insurance hike is the elephant in the room”, said Mr Shah. The tax rate increased by 1.25 percentage points in April at the start of this tax year – equivalent to a 10pc jump for many workers.

The raid went ahead despite widespread calls to delay or cancel the rate rise in light of huge cost increases already being shouldered by households.

Mr Sunak increased the “threshold” at which workers start paying National Insurance contributions – which climbed to £12,570 today – in a bid to shield lower earners, but almost all workers have been left worse off amid rampant inflation.

Mr Shah said: “Abolishing the increase for anyone earning below £50,000 would really help appease those on middle and lower incomes. It would be an easy win for Mr Zahawi’s first year as Chancellor.”

Increase personal allowances

The tax burden is at its highest in 70 years and the Treasury’s five-year freeze to tax-free allowances and thresholds is largely to blame.

In March of this year Mr Sunak froze tax thresholds until 2026 – including the personal allowance, basic rate threshold, capital gains tax allowance and inheritance tax threshold – before inflation sky-rocketed.

The unpopular move has been branded a “stealth tax” and reversing the freeze could provide the new Chancellor with a quick win to turn the tide with a financially squeezed electorate.

Fuel and food

Mr Sunak cut fuel duty by 5p a litre in March in a bid to help motorists, but the relief has since been dwarfed by record-high petrol prices. Calls have been made for the duty to be cut further to avoid a summer of chaos on the roads.

Mr Shah said: “The advantage of Mr Zahawi introducing another fuel cut is that it could be done overnight, he wouldn’t have to wait until the start of another fiscal year like the other tax changes.”

Soaring bills at supermarket checkouts could also be on the agenda of a snap Budget, added Mr Etherington.

He said: “The new Chancellor could face calls to cut the cost of VAT on goods and services, but the concern with such a cut is it could encourage more spending at a time of rising inflation.

“Also those looking for savings in their weekly shop may be disappointed by a VAT cut as it isn’t due on goods like meat, fish, fruit and vegetables. If the Government wanted to provide real support to taxpayers on their weekly groceries then a food subsidy may be something to explore.”

Corporation tax

Mr Zahawi has heavily hinted at reversing the planned increase in corporation tax, which is set to rise from 19pc to 25pc next year.

Mr Sunak had been resisting pressure by Downing Street to scrap the rise, but his successor has already paved the way for a u-turn.

Speaking this morning Mr Zahawi said: “I want to be one of the most competitive countries in the world for investment.”

He said corporation tax was the “one tax [investors] can compare globally”, adding: “I want to make sure we’re as competitive as we can be while maintaining fiscal discipline.”

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