Rishi Sunak has slashed fuel duty by 5p and scrapped national insurance payments for the poorest workers as he responded to calls to tackle the cost of living crisis.
The chancellor said he was taking the emergency measures “to help people now” as they brace themselves for soaring bills from next month.
And in a major surprise, he announced that the basic rate of income tax will be cut from 20p to 19p in the pound by the next election.
The statement came just hours after it was revealed that inflation reached 6.2 per cent in February, the highest it has been for 30 years, amid predictions it could his 10 per cent by the autumn.
That was the latest evidence of the cash squeeze facing household budgets in the months ahead, as interest rates, fuel costs and tax bills all rise
In a boost for the chancellor, it emerged yesterday that higher-than-expected tax receipts had left him with an extra £30bn to spend.
The cut to fuel duty, which kicks in at 6pm tonight and is due to last until next March, means the cost of filling up the average car will fall by around £2.
Sunak said: “Today I can announce that for only the second time in 20 years, fuel duty will be cut. Not by 1, not even by 2, but by 5 pence per litre.
“The biggest cut to all fuel duty rates – ever. And while some have called for the cut to last until August, I have decided it will be in place until March next year – a full 12 months.
“Together with the freeze, it’s a tax cut this year for hard-working families and businesses worth over £5bn. And it will take effect from 6pm tonight.”
The chancellor rejected calls for the planned 1.25 percentage point increase in national insurance payments will go ahead on April 1 as planned, despite calls from Tory MPs and the Labour party for it to be scrapped.
However, he announced that the salary threshold at which workers start making national insurance contributions (NICs) will increase by £3,000 to £12,570, bringing it into line with the income tax threshold.
Sunak said that worked out as a £6 billion tax cut for 30 million people across the UK, and was “the biggest single personal tax cut in a decade”.
Explaining the move, Sunak said: “Our current plan is to increase the NICs threshold this year by £300. I’m not going to do that. I’m going to increase it by the full £3,000 - delivering our promise to fully equalise the NICs and income tax thresholds.
“And not incrementally over many years, but in one go, this year. From this July, people will be able to earn £12,570 a year without paying a single penny of income tax or national insurance.
“That’s a £6bn personal tax cut for 30 million people across the United Kingdom. A tax cut for employees worth over £330 a year. The largest increase in a basic rate threshold – ever. And the largest single personal tax cut in a decade.”
Announcing the first income tax cut in 16 years, Sunak said it was “a tax cut for workers, for pensioners, for savers - a £5bn tax cut for over 30 million people”.
“Before the end of this Parliament, in 2024, for the first time in sixteen years, the basic rate of income tax will be cut from 20 to 19 pence in the pound - a tax cut for workers, for pensioners, for savers.
“A £5bn tax cut for over 30 million people. Let me be clear with the House: it is fully costed and fully paid for in the plans announced today.”
Today’s moves came less than two months after Sunak unveiled a £9bn package aimed at reducing council tax and energy bills.
Properties in council tax bands A to D will receive a £150 rebate on their bills from April, a move which the Chancellor said will benefit around 80 per cent of homes in England.
In addition, every household will see their electricity and gas cut by £200, with the money clawed back by energy firms over the course of the next four years.
Elsewhere in his statement, Sunak announced that homeowners having materials like solar panels, heat pumps, or insulation installed will no longer pay any VAT.
The chancellor said the strength of the UK economy meant the government was able to support the people of Ukraine as they fight Russia’s invasion.
He said: “We will confront this challenge to our values not just in the arms and resources we send to Ukraine but in strengthening our economy here at home.
“So when I talk about security, yes – I mean responding to the war in Ukraine.
“But I also mean the security of a faster growing economy. The security of more resilient public finances. And security for working families as we help with the cost of living.”
However, he also warned that the economic sanctions imposed on Vladimir Putin’s regime “are not cost free for us at home”.
He said that meant the Office for Budget Responsibility was downgrading its growth forecast for the UK economy to 3.8 per cent this year, 1.8 per cent in 2023, and to 2.1 per cent, 1.8 per cent and 1.7 per cent in the following three years.
The chancellor added: “We can deliver for the British people today and into the future… Because unlike the party opposite… We actually have a plan. A plan that reforms and improves public services. A plan to level up across the United Kingdom. A plan that helps families with the cost of living.
“And yes, a tax plan that cuts taxes on working families by over £330, cuts taxes on fuel by 5p per litre, cuts taxes on business, and yes, for the first time in a long time, cuts income tax.
“Mr Speaker, let me end by simply saying this: my tax plan delivers the biggest net cut to personal taxes in over a quarter of a century.”