Emergency statement on the mini-budget: what it means for personal finances

interactive investor experts comments on the new chancellor’s plans to reverse almost all the tax cuts announced by his predecessor Kwasi Kwarteng in the mini-budget.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The sheer number of U-turns is dizzying for people who have seen their financial position fluctuate greatly without doing anything. Planning your finances beyond next month is hard enough, let alone for the long term.

“It may be back to square one when it comes to policies, but many people are in a more financially precarious position than they were before the mini-budget. The reining-in of the Energy Price Guarantee will come as a kick in the teeth for those who made decisions relating to their energy tariff based on the scheme being locked in for two years. A key criticism of the scheme was that it was expensive and poorly targeted. The challenge for the government will be to ensure that the revised scheme is means-tested and benefits those who need it most.

“While the 1.25% increase to National Insurance contributions remains in the bin, the 1p cut to the basic rate of income tax has been put on hold indefinitely. Combined with freezes to various tax-free allowances and thresholds and rampant inflation, this is set to dent millions of pay packets in the coming years. Known as ‘fiscal drag’, this is the ultimate stealth tax, leaving less money in our pockets and making it harder to build wealth.

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“The Stamp Duty cuts have also survived the cull. The benefit of the new regime still only kicks in on purchases of homes valued at £400,000. Buyers would save £5,000 on Stamp Duty, rising to £6,250 for homes valued at £500,000. But for the many buyers, the turmoil in the money market, which mortgages prices are tied too, stoked by the mini-budget announcements has exacerbated the affordability squeeze.

“Mortgage rates remain between one and two percentage points above pre-mini-budget levels. While markets have responded well to the latest economic update, those seeking to remortgage and those seeking a home loan shouldn’t hold their breath for an immediate reprieve in mortgage rates. Lenders could still choose to play it safe and keep mortgages rates elevated. Things could go from bad to worse if the Bank of England ups its base rates as expected.

“For income investors, dividend tax will increase after all, which is going to hurt anyone with investments outside ISAs and pensions at a time when many people will be cherishing dividends even more, to help plug the cost-of-living crisis.

“Meanwhile, recipients of Universal Credit remain in limbo over whether their benefit payments will be uprated in line with inflation. Uncertainty of benefit payment is likely to be a headache for the nation’s most vulnerable stressed about stretching their budget to cover the cost of everyday essentials amid rampant inflation.

“For those who can, it remains important to take steps today to bolster financial resilience now to give you some peace of mind in the coming months. A good rule of thumb is to have three months’ worth of salary stashed away to ensure you can stay financially afloat in a disaster if at all possible, but this is easier said than done.”

Victoria Scholar, Head of Investment, interactive investor, says: “The markets are responding positively to the new chancellor’s plans to reverse almost all the tax cuts announced by his predecessor Kwasi Kwarteng in the mini budget. Jeremy Hunt’s focus on reassuring the markets and reinstating confidence appears to have worked with gilt yields trading lower and sterling pushing higher. The FTSE 100 is staging gains, inching higher as Trussonomics is unwound with the reversal of the biggest tax cuts in 50 years. Although we heard about Hunt’s tax plans, the market will have to wait until 31 October to learn about where he plans to cut government spending in order to plug the multi-billion pound shortfall that remains.

“The retreat in yields and sterling’s appreciation should help to settle the mortgage market and offset some of the UK’s imported inflationary pressures, possibly leading to a need for less aggressive interest rate increases from the Bank of England at its next monetary policy committee meeting at the start of November.”