Speculation’s been mounting ahead of next week’s Spring Budget. What can we expect when Jeremy Hunt stands up in the House of Commons next Wednesday to deliver his first Budget?
Despite many Conservative MPs clamouring for tax cuts, this appears unlikely. The message coming out of the Treasury is that Mr Hunt’s determined to stick to his fiscal guns by reducing borrowing, raising taxes and limiting spending, with the reaction of the markets to his predecessor Kwasi Kwateng’s Growth Plan clearly still weighing heavily on his mind.
When added to Mr Hunt’s view that the “best tax cut right now is a cut in inflation” it’s highly likely that measures first announced by the then Chancellor Rishi Sunak in 2021 to freeze many tax band thresholds and allowances will be confirmed. Courtiers recently covered these so-called stealth taxes and how fiscal drag is set to garner billions more for the Treasury’s coffers.
Other previously announced tax measures we can expect to see confirmed are the reduction in the Capital Gains Tax personal allowance, from £12,300 to £6,000 from April 6, and the halving of the dividend allowance to £1,000.
It’s likely that these measures will be confirmed, despite the public finances being in a healthier position than previously forecast, with £30bn more fiscal headroom, including a £5.4bn surplus in January alone.
If tax cuts are off the table at least for now, what else might be included?
With a shortage of workers holding back the economy and contributing to the UK’s dismal record on productivity, Mr Hunt has given some clues that he wants to make it more attractive for older people to return to the workforce. One option might be to raise the pension lifetime allowance (LTA) for pension contributions from its current level of £1,073,100. This is the level above which additional contributions normally attract a tax charge. Freezing the LTA rather than raising it in line with CPI inflation can lead to people paying significantly more in tax.
Giving credence to the idea that this could be in the Budget, were remarks made by the Chancellor in a speech at Bloomberg in January when he said, “I say: ‘Britain needs you’ and we will look at the conditions necessary to make work worth your while……”
It’s argued that freezing the Pension LTA is putting off older people, especially high earners on final salary pension schemes such as medics in the NHS, from working or returning to work.
For consistency, the Chancellor might announce a similar uplift in the annual allowance, which is currently £40,000.
Money Purchase Annual Allowance
In the same vein, there could be changes to the Money Purchase Annual Allowance (MPAA). Currently, as soon as someone flexibly accesses their private pension, which they can from the age of 55, the amount they can save tax-free into their pension pot is limited to £4,000 per annum.
Those in favour of raising the MPAA say that by limiting the amount people can save into their pensions, this not only reduces their retirement income but disincentivises them from returning to work. The counter-argument against raising the MPAA is that people who’ve accessed their pension have already benefitted from tax relief and they shouldn’t be able to benefit a second time.
There have been calls from within the financial services sector for the Chancellor to raise the MPAA from its current level of £4,000 to £10,000. Although an improvement, this would still not be especially generous, as this was the MPAA’s original level when it was first introduced in 2016/17.
How effective raising the Pension LTA and the MPAA would be in persuading older people back into work is open to question. New research by Phoenix Insights, part of FTSE 100 savings and retirement business Phoenix Group, found that of the 900,000 people aged 50-64, who have left the UK workforce since the start of the pandemic, those that opted for early retirement who make up just over half, have average wealth of almost £1.25m. This suggests that despite the rising cost of living, increasing these allowances might not be sufficient on its own to get them off the golf course and back into the office. Against that, recent Labour Force Survey data suggested a possible reversal in this trend.
Any measures to incentivise work must be seen in the context of a rise in the age at which people are allowed to make withdrawals from their private pension, which is set to increase from 55 to 57 in April 2028. There is also speculation that rises in the state pension age could be brought in earlier than previously planned.
Other possible measures
Another measure being mooted as a possibility is the removal of the effective 62% tax rate on earnings between £100,000 and £125,000, an anomaly brought about by the gradual removal of the personal allowance.
Support for domestic energy bills look certain to feature. With the government’s Energy Price Guarantee, which caps energy costs for households due to increase from £2,500 to £3,000 on 1 April, it’s widely expected that as result of savings to the Treasury of approximately £11bn from falling gas prices, existing levels of support for households will continue for three months beyond the original April deadline. If this turns out to be the case, it’ll be a welcome bit of good news in what’s expected to be an uncompromising Budget, from a Chancellor who seems determined to put rebuilding the country’s finances and restoring its reputation for competent economic management at the top of his priorities.
Watch out for our coverage next week. As usual, there’ll be an immediate response followed by more detailed information and analysis.