UK tightens tax rules and predicts recession in 2023

British Chancellor Jeremy Hunt said on Thursday the government would increase a tax on oil and gas companies and extend it to power generation companies as it seeks to raise money to plug a huge hole in public finances.

Hunt said the rate would be raised from 25% to 35%. It would also apply to electricity generators with a 45% rate applied from January 1st.

Soaring oil and gas prices after Russia’s invasion of Ukraine sent household energy bills to record levels, triggering Britain’s worst cost of living crisis in generations.

Currently, the cost of producing electricity from gas-fired power plants is often the benchmark for pricing wholesale electricity, which helps determine how much people pay for their energy.

This means that renewable energy generators such as wind or solar and nuclear power plants can benefit from high wholesale prices.

Freezing income tax deductions

The minister also announced that he would freeze income tax deductions until 2028 and that he was lowering the threshold above which the top rate of 45% income tax is paid to £125,140 ($148,053) from £150,000.

“Even after that, we will still have the most generous set of tax-free subsidies of any G7 country,” Hunt told parliament in a speech on public finances, aimed at restoring market confidence in government finances after the 50 days of Liz Truss in power.

Truss’s government had said it would abolish the top income tax rate, but backtracked amid the financial turmoil triggered by its plans. She was forced to step down last month and was replaced by Rishi Sunak as prime minister.

Recession in 2023

The UK economy is expected to shrink by 1.4% in 2023, the finance minister said, citing the latest projections from the Office of Budgetary Responsibility (OBR).

The OBR’s previous expectation, published in March, was for growth of 1.8%.

Since then, the British economy has been under pressure due to an inflation rate now above 11%, a slowdown in the global economy and political and financial volatility caused by Liz Truss’s brief tenure as Prime Minister.

The Gross Domestic Product projected by the OBR will grow 1.3% in 2024 and 2.6% in 2025, Hunt said, compared with previous office forecasts of 2.1% and 1.8% respectively.