Truss under pressure to U-turn on energy bills stance as she enters No. 10

The most pressing challenge facing the new prime minister is the cost of living crisis, with further rises in energy bills looming just around the corner.

We have heard plenty from Liz Truss about where she is going to spend money during this election campaign, with pledges – some specific and others woolly - ranging from scrapping the National Insurance rise to cancelling a planned increase in Corporation Tax and cutting VAT. However, the new Prime Minister has been relatively quiet on how all these promises will be paid for.

Truss’ package of measures are anticipated to cost more than £30 billion, according to the Institute for Fiscal Studies, although there is some uncertainty around this given the former Foreign Secretary has been studiously non-specific with some of her proposals.

The big question now is whether Truss will stick to her plan not to offer additional direct targeted help to the poorest households ahead of the energy price cap surging from £1,971 to over £3,359 for a typical household in October.

She clearly felt that tax cuts would appeal more to Conservative Party members, but in reality they will do little for those on the lowest incomes who most need support. Given a general election is only a couple of years away, it would be no surprise to see a screeching U-turn now she has the keys to No.10.

Corporation Tax

Corporation tax has been a clear dividing line in the Tory leadership contest, with Liz Truss threatening to rip up proposals for a planned increase.

The effects of corporation tax policy are not quite as clear cut as VAT and income tax, which have the potential to provide an adrenaline shot directly to the heart of the UK consumer economy.

In theory, shareholders stand to be the most direct beneficiaries of lower rates of corporation tax, as it allows for more after-tax profits to be distributed. But on the day Rishi Sunak announced a rise in corporation tax from 19% to 25%, the FTSE 100 rose by 1%, suggesting that as far as the market is concerned, corporation tax policy doesn’t really move the dial.

Likewise, while taxation will certainly be a factor in where companies invest, it sits alongside other important factors such as input costs, transport links, legal structures, workforce skills, and the proximity of necessary resources and customers. The result is that multinationals might choose to spend the benefits of lower UK corporation tax overseas when taking into account all the factors which inform an investment decision.

It’s also important to note that even allowing for a rise in UK corporation tax to 25%, this would still be the lowest rate in the G7, according to IFS analysis.

One thing that is more certain is the cost of ditching the rise in corporation tax. It was set to swell the public purse by £17 billion, though team Truss would argue that this loss would be offset by boosting investment in the economy in the longer term.

National Insurance

Liz Truss may scrap the social care National Insurance levy as soon as she enters office.

The levy was introduced in April this year with the stated aim of funding proposed reforms to the UK’s creaking social care system.

In 2022/23 the Government simply added 1.25% to the National Insurance rate on workers’ pay, with the plan then to separate the levy out on payslips from April next year.

The impact of cutting those rates back again depends on the income you earn. Someone earning £30,000 a year would pay £18.15 less NI per month – a helping hand but one that is dwarfed by energy price hikes.

The move also calls into question how the planned social care reforms, which include a cap on lifetime costs, will be funded. While the idea of a hypothecated tax is of course a nonsense in reality – all tax and NI goes into the same pot – at some point the government will need to explain how social care reforms will be funded if the levy is scrapped.

Source: AJ Bell analysis

Triple lock

The triple-lock, a manifesto commitment, is supposed to guarantee the state pension rises by the highest of average earnings, inflation and 2.5%.

However, when average earnings in the three months to July 2021 – the figure usually used for the triple-lock the following year – surged past 8% this was deemed too expensive by then Chancellor Rishi Sunak. The earnings element was suspended for a year and state pensions instead increased by just 3.1%, in line with the September 2021 inflation figure. That decision saves the Exchequer around £5 billion a year, every year.

Liz Truss has pledged not to go down this path again as Prime Minister. Assuming she sticks to her guns and the triple-lock remains in place, retirees could receive a huge boost to their incomes next year. September’s inflation figure will be the one to look out for, with the Bank of England predicting a peak at 13% at some point later this year.

If it were to hit 13% for September, the basic state pension would rise by £18.45 to £160.30 per week (£8,335.60 per year) in April 2023, while the new state pension would increase by £24.10 to £209.25 per week (£10,881 per year).

This could cost the Treasury well in excess of £10 billion – a huge price to pay for the keys to Number 10. What’s more, this isn’t a one-off cost – it would fall on the Exchequer every year.

Marriage allowance

During the campaign Liz Truss dangled the carrot of a tax break for married couples. Explaining exactly how that tax perk will operate would demonstrate she may be able to deliver on those campaign promises and hand some households a financial boost.

Her rumoured plan involves extending the marriage allowance, which benefits couples where one doesn’t work, or earns very little, and the other is a basic-rate taxpayer. Currently the allowance means that someone not using their tax-free personal allowance can transfer some of it to their partner, but the suggestion is that this could be extended so the entire £12,570 allowance could be transferred, saving couples up to £2,514 a year.

Despite the potential financial boost for some households during the cost of living crisis, many will see this as an odd move at a time where increasingly both parents work, and rather than encouraging economic growth and boosting productivity by getting more parents in the workforce, it instead gives a tax break for those who stay at home. Extending it to those in other caring roles, such as people looking after elderly parents, helps to dodge claims of an inverse tax on the childless, but regardless it feels like a policy more suited to the 1950s than modern day Britain.

Remember that the value of investments can change, and you could lose money as well as make it. How you're taxed will depend on your circumstances, and tax rules can change.

These articles are for information purposes only and are not a personal recommendation or advice.