The Chancellor of the Exchequer faces a daunting task in his first day on the job, as he inherits a British economy facing four-decade high inflation and slumping growth.
Nadhim Zahawi was handed the job late on Tuesday after the shock resignation of Rishi Sunak and early signs point to a change of direction under HM Treasury’s new management.
Zahawi has already indicated a return to Tory manifesto pledges to slash taxes, with his predecessor having hiked taxes more than any Chancellor in almost 30 years in efforts to boost Britain’s battered coffers.
Chancellor Nadhim Zahawi is faced with a daunting task as inflation soars and the cost-of-living crisis bites
There had been well-publicised friction between Prime Minister Boris Johnson and his neighbour in 11 Downing Street under its previous occupant.
While that friction was partly political it was most evident in tax policy, with No.10 keen to fuel economic growth via cuts while the Chancellor was adamant of a disciplined approach to fiscal policy.
In signs that the Treasury’s position could change, Zahawi has already hinted at a rethink on personal and corporate taxes.
He told Times Radio this morning: ‘Nothing’s off the table. I will look at everything. When boards invest, companies invest, they invest for the long term and they do compare corporation tax rates.’
Tax partner at Evelyn Partners Julia Rosenbloom said it was ‘quite possible’ that Zahwai could hold an emergency or early budget ‘to help him stamp his mark as Chancellor’ and chart ‘a different direction in tax policy’.
She added: ‘The Government has been under pressure for some time to help families with the cost-of-living crisis so this is something Zahawi is likely to address in the next Budget, whenever that is held.
‘However, we don’t know what, if any changes, the new Chancellor will make to taxes in general, such as IHT, so the need for families to take a close look at their tax planning and take professional advice has never been more important.’
Nimesh Shah, chief executive of tax and advisory firm Blick Rothenberg, added: ‘I expect an emergency budget before the summer recess to make a series of tax announcements
‘Rishi Sunak had already confirmed a 1 per cent cut to the basic rate of income tax to 19 per cent in April 2024. I believe the new Chancellor will bring forward the cut to April 2023 and increase it to 2 per cent.
‘He may introduce an additional 5p reduction in fuel duty. Rishi Sunak had cut fuel duty in his Spring Statement, but that benefit has disappeared through increases in fuel costs. A further cut to help families with their fuel costs would be an immediate win.
‘He should Increase allowances and thresholds in line with inflation. The stealth move by Rishi Sunak in March 2021 to freeze all tax allowances until April 2026 and projected to raise £21billion was desperately flawed.
‘Given rising inflation and the cost-of-living crisis, the new Chancellor would get a win over his predecessor by reversing this move and restoring the allowances to rise at the appropriate level.
‘The planned increase to Corporation Tax should be cancelled. This was another Rishi Sunak pre-announcement, to increase Corporation Tax to 25 per cent from 1 April 2023.
‘It was expected that the former Chancellor would not have gone ahead with the full increase and it’s more than likely now that Nadhim Zahawi will step into to peg back the increase to 22 per cent.
‘A temporary reduction in VAT to 17.5 per cent or even 15 per cent – would be much welcomed by the public.
‘But at a time of rising living costs would the cost to the Government would be eye-watering and the economists will be rightly concerned the fiscal stimulus will only make inflation worse.’
Rachael Griffin, tax and financial planning expert at Quilter, suggested that a ‘relatively simple and crowd-pleasing policy’ Zahawi could go for is amending the threshold at which the high-income child benefit charge comes into effect, thereby ‘removing basic rate taxpayers from getting caught by the charge during the cost-of-living crisis’.
What do we know about Zahawi’s business record?
Iraq-born Zahawi’s business career most notably includes co-founding YouGov, where he served as chief executive until 2010.
He is understood to have earned himself £5.7million when it floated.
He also served as a part-time chief strategy officer for oil and gas exploration firm Keystone Petroleum, which reportedly paid him £1.3million.
According to the Register of Members Interests, Zahawi holds at least £70,000 worth of BT shares.
The register also shows Zahawi receives ‘at least’ £10,000 a year in rental income from a 31-acre property in Warwickshire, and a house in London.
In addition, he has a residential property in Dubai worth ‘at least’ £100,000.
He is said to have a property empire worth around £100million.
She added: ‘Child benefit is not means tested and if one earner in a family makes more than £50,000 a year, they must pay back 1 per cent of the child benefit they receive for every £100 over the threshold.
‘However, a basic rate taxpayer can earn £50,270 before falling into the higher rate band, meaning basic rate taxpayers are currently in scope for a tax charge aimed at higher earners.
‘Given the cost-of-living crisis is hitting lower and middle-income households, the government could provide some quick relief by simply pegging the HICB threshold to the higher rate income tax threshold.
‘The UK tax system is already complicated at the best of times.
‘Failing to have the HICB charge aligned with income tax bands just makes things even more complex and will catch a lot of people unaware.’
But the Chancellor also faces an inflationary environment in which CPI is expected to exceed 10 per cent by year-end, while there are growing fears of an impending recession as GDP growth grinds to a halt.
Zahawi told Sky News: ‘We have just come out of the equivalent of a world war. We have to rebuild the economy and return to growth.
‘The important thing is to get inflation under control, be fiscally responsible.’
Given these two key goals, one obvious question Zahawi may face is how he will instigate tax cuts without exacerbating inflation further.
Laura Suter, head of personal finance at AJ Bell, said: ‘Zahawi takes the dubious honour of being Boris Johnson’s third Chancellor in as many years and top of his to-do list is the monumental task of solving the country’s current cost of living crisis.
‘With inflation tipped to hit 11 per cent later this year, average energy bills due to rise by a whopping £900 in October and petrol prices hovering near the £2 a litre mark the problems are mounting up for the British public – and in turn the new Chancellor.
‘Rishi Sunak cited next week’s economic update as one source of friction with Prime Minister Boris Johnson, which means Mr Zahawi clearly has a challenge ahead if he wants to implement his own plans rather than just do Mr Johnson’s bidding.’