Families and higher earners will make the biggest savings under the new Prime Minister’s low-tax promises and freeze on energy bills.
However, experts have warned that Liz Truss can do little to spare millions of households from a significant rise in their biggest outgoing – their mortgage. Interest rates are still forecast to soar into next year, despite her cap on gas and electricity bills going some way to tame inflation.
Ms Truss has made no secret of her plans to give money back to workers with tax cuts. Middle and higher earners will pocket the biggest savings if she delivers on her pledge to reverse the 1.25 percentage point rise in National Insurance introduced by the former chancellor and cut income tax.
She is reportedly mulling boosting the higher-rate income tax threshold to £80,000 from £50,270 currently, something that Boris Johnson, her predecessor, promised to do in 2019. If she does this, these two policies would save anyone who earns more than £60,000 a year thousands of pounds, according to analysis by tax firm Blick Rothenberg.
Someone with an annual salary of £50,000 would save £468 in tax, while someone who earns £30,000 would receive a tax break of just £218. Those on £20,000 would save less than £100, although they already pay a smaller share of tax.
Lower earners will benefit from one of Ms Truss’s most generous mooted tax giveaways – an extension to the marriage allowance. In July she announced plans to allow couples to transfer their entire personal tax allowance, which is the amount a person can earn before they start to pay income tax and currently stands at £12,570.
The marriage allowance is currently capped at a transfer of £1,260 for basic-rate taxpayers. The plan is intended as a tax break for parents who give up work to care for children and, if it goes ahead, would benefit lower-rate taxpayers in single-income households with a four-figure tax saving.
Someone who earns £50,000 would save £2,730 from the NI and income tax cuts and increased marriage allowance. A single-income household on £30,000 would save £2,480. However, while households would benefit from immediate savings, Nimesh Shah, of Blick Rothenberg, warned that future generations could be left out of pocket to fund the tax breaks.
He added: “If they are funded through national debt, which is already huge, it will create a time bomb in the form of higher taxes in 20 years’ time.”
The Prime Minister promised tax cuts “from day one”, but Mr Shah said any changes to allowances and thresholds were likely to take effect from April 2023, and added that reversing the NI rise halfway through a tax year would be “administratively complex”.
This week Ms Truss announced that the energy price cap would be frozen at £2,500 for two years. The emergency intervention is expected to save the average billpayer £1,000 a year. Without the freeze the average price cap would have risen to £3,549 in October and was forecast to jump again to surpass £4,586 in January, according to analysts Cornwall Insight.
Despite significant household savings on the horizon in the form of tax breaks and lower-than-expected utility bills, analysts have warned that not enough has been done to avoid inflation remaining in double figures next year.
Energy prices played a large role in pushing inflation to 10.1pc in July. Had the price cap risen to £3,549 in October as initially planned, inflation would have surged to 14pc, according to the Centre for Economics & Business Research.
With the cap now frozen at £2,500, this forecast has been reduced to 11.3pc, a drop of 2.7 percentage points. Had the energy price cap risen again to £4,266 in January as forecast, inflation would have surged to 14.9pc, according to the CEBR, but the predicted rate has now fallen to 10.4pc instead.
Kay Neufeld from the consultancy said: “Inflation will still be very high, but the changes in energy forecasts mean it will be somewhat less scary than previously predicted.”
Before this week’s price cap announcement, the CEBR had predicted that the Bank of England’s official interest rate would reach 3.5pc in 2023, up from 1.75pc today. Mr Neufeld said: “The Bank Rate might now be 0.25 or 0.5 percentage points lower next year, but a slowdown in inflation will not be enough to stop further interest rate rises.”
He added: “It’s safe to say that any potential recession will be milder and shorter than without the energy price intervention.”
Even if the Bank Rate rose to 3pc next year, instead of 3.5pc as initially predicted, it would still be 1.25 percentage points higher than the current rate. If the same increase is passed on to mortgage borrowers, those who remortgage next year will pay thousands of pounds more in interest than if they had locked in today.