Do the mini-Budget tax cuts favour the rich?

30 September 2022
What was claimed

The tax cuts announced in the mini-Budget on 23 September favour people “right across the income scale”.

Our verdict

Income tax-payers across the income scale will benefit to some extent, but people with higher incomes will benefit much more.

It is absolutely the case that the changes you have made, that the tax cuts you will bring in, favour overwhelmingly people at the very top

They favour people right across the income scale.

The choices you’ve made in this mini-Budget [are] going to benefit far greater those who are very, very well off. If you make a million, you’re going to benefit £55,000 a year from the tax cuts. On £20,000, like a teaching assistant or a nurse, £157. A couple of people have said to me, here in Nottingham, this is like a reverse Robin Hood.

That simply isn’t true.

Following last week’s mini-Budget, the Prime Minister Liz Truss and the chancellor Kwasi Kwarteng have challenged the claim that the government’s package of tax cuts favoured the richest. Asked about this on the BBC’s Sunday with Laura Kuennsberg programme, Mr Kwarteng replied that they “favour people right across the income scale”.

The tax cuts and changes to National Insurance announced on 23 September will benefit income tax-payers across the income scale to some extent. However, people with higher incomes will benefit much more.

While some claimed the chancellor’s comments were a “denial of plain fact”, ultimately, whether Mr Kwarteng was correct depends on whether you accept his use of the word “favour” to describe a benefit to many people, albeit unevenly divided.

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What was in the mini-Budget?

In a statement to Parliament on 23 September, the Chancellor announced a number of tax and policy changes as part of the Growth Plan 2022. (While the changes generally apply across most of the UK, not all do in every devolved nation—for example, income tax works differently in Scotland. We’ve focused for the rest of this fact check on the changes in England.)

Among other measures, Mr Kwarteng pledged to cut the basic rate of income tax (normally paid on income between £12,570 and £50,270) from 20% to 19%, and to abolish the additional rate of income tax, which means that income over £150,000 will be taxed at 40% instead of 45%. He also reversed a recent rise in the rate of National Insurance, payable on income above £12,570, which will return to 12% from 13.25%. The mini-Budget also included a number of other significant announcements, such as further details of the Energy Price Guarantee. For more details, see BBC News’s summary of the changes.

Who will gain from the mini-Budget’s tax changes?

In general, the changes to tax and National Insurance outlined in the mini-Budget will benefit those who earn enough to pay income tax across the income scale. For example, in England an employee who earns more than £12,570 a year will pay less tax. But people earning over £150,000 will see by far the biggest savings.

The Institute for Fiscal Studies (IFS) estimates that about 600,000 people (or 1.1% of all adults) earn more than £150,000 a year.

According to the Resolution Foundation, the tax cuts in the mini-Budget (including a cut to dividend tax, which had previously been raised alongside National Insurance) mean that next year someone earning £200,000 will gain £5,220 a year (equivalent to 2.6% of their pre-tax earnings) and someone earning £1 million would be £55,220 (5.5%) better off. Meanwhile, those on £20,000 will gain just £157 (0.8%).

These are the same figures quoted by BBC Radio Nottingham to Ms Truss.

Mr Kwarteng also announced some other tax changes not related to income tax or National Insurance, including a reduction in the liability for stamp duty and the cancellation of a planned rise in the rate of corporation tax. These will affect some people’s household finances as well.

What about the bigger picture?

Measuring the impact of the government’s tax changes is complex, and depends on which specific changes you look at, and over what time period.

Following the mini-Budget, the IFS released analysis, in which it said “the combined impact in 2025-26 of all reforms to income tax and [National Insurance] introduced over the course of the current parliament, announced before and after this mini-Budget”, would mean that “only those with incomes over at least £155,000 will be net beneficiaries”.

Separate analysis by the Resolution Foundation came to the same conclusion.

This is largely because the government announced last year that the thresholds at which people start to pay basic and higher-rate income tax and National Insurance would be frozen until the end of the 2025/26 tax year. The mini-Budget left this plan unchanged.

Freezing the thresholds in this way means that as people’s incomes rise, often in response to inflation, a larger proportion of the money they earn becomes liable for tax at higher rates. In effect this means that their overall tax rate goes up.

Before the mini-Budget, income tax-payers were therefore generally on course to pay more as a result of the changes in this Parliament. After the mini-Budget, people with incomes over £155,000 are on course to pay less—while others are still on course to pay more, albeit not as much more.

However this way of looking at things only considers tax. As Ms Truss pointed out when interviewed, there were other policies in the mini-Budget that may also have an effect on household finances, such as the Energy Price Guarantee, which provides a substantial benefit for most people in the country.

Nor does any of this account for the other indirect effects that the mini-Budget may have on people’s finances, which are impossible to forecast confidently at this stage.

Image courtesy of UK Government

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