3 key stats on taxes and the state pension to know ahead of the Autumn Statement

State Pension triple lock

Source and assumptions: interactive investor, based on PLSA Retirement Living Standards pre-tax income for minimum retirement, uprated for CPI inflation from April 2022 to Sep 23 and April 24. April 2024 inflation based on Bank of England forecast in August monetary policy committee notes.

Alice Guy, Head of Pensions and Savings, interactive investor, says: “Although April’s expected state pension increase is expected to be higher than current inflation levels, pensioners will still have a £3,261 income gap between the state pension income and the income needed for a basic retirement. By next April, single pensioners are expected to need around £14,762 for a minimum standard of living in retirement, based on the PLSA Retirement Living Standards, adjusted for inflation to September 2023. 

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“A significant minority of pensioners have no workplace or private pension income and rely solely on the state pension in retirement. In addition, many older pensioners who retired before 2016 are struggling on an even lower income, with the basic state pension expected to rise to only £8,812 in April 2024. For them, an 8.5% increase would come as a welcome relief and could make a big difference to their living standards.”

Inheritance tax

Growth in IHT liability from 31 March 2009 to 30 September 2023 

Source: interactive investor. Based on growth in the price of the average property as recorded by the Office for National Statistics from 31 March 2009 to 30 September 2023. Assumes growth on a £50,000 investment portfolio that mirrored the return of the MSCI World (450%) and growth on £20,000 in cash savings, using the one-month LIBOR rate (34.9%) as a proxy, over the same period. Assuming only £325,000 nil rate band available.

The average UK property has risen by 88% from £154,452 to £291,000 according to ONS figures.

Myron Jobson says: “Inheritance tax has quickly shifted away from being a tax on the wealthy, as originally intended, to one paid by more modest estates thanks to runaway house prices and solid investment returns over the long term.

“IHT thresholds have remain unchanged since 2009. If uprated with inflation, the IHT nil rate band of £325,000 would have risen to almost £496,000. Residential property makes up the largest share of most estates and average house prices have risen by 88%% between March 2009 and end of September 2023. While a forecasted dip in property prices could limit growth in the government’s IHT takings, the OBR expects IHT to raise £7.2 billion in the 2023-24 tax year rising to a massive £8.4 billion by 2027-28. Adding growth on investments and cash savings to the mix would push many beyond the nil-rate band.”

Alice Guy says: “The frozen inheritance tax threshold is the ultimate example of fiscal drag, with the threshold frozen for a staggering 14 years since 2009. This means that a tax, original intended for the very wealthy is catching more and more ordinary homeowners in the net.

“You can reduce IHT liability by making use of gifting allowances, trusts and pensions (which are normally free from IHT). It is worth consulting a qualified adviser to work out the value of your estate and how much tax you might be likely to owe.”

Fiscal drag

Assumptions: inflation based on actual CPI figures for March 2021 and Bank of England August forecast for Q1 2024 and Q1 2025, then assumed to be 2%.

Alice Guy says: “Our calculations show that low and middle earners are due to pay an extra £889 in tax by the 2027-28 tax year, when the deep freeze in tax thresholds is set to come to an end, rising to £1,967 for higher earners. These tax rises are a painful increase at a time when many families are also struggling with increasing mortgage and living costs.”

“Increasing wages have gifted the taxman bumper tax receipts in the past year. This means Jeremy Hunt might some rabbits available to him to pull out of the hat when it comes to making tax cuts. One of the tax changes that could make the biggest difference to the most people is to review the policy of frozen tax thresholds and consider increasing them in line with inflation.”

Myron Jobson says: “Whispers of potential tax cuts have been given more grounding over the weekend, with the chancellor seemingly not ruling out cutting income tax as part of measures to bolster the UK economy - even though the inflation crisis is barely in the rear-view mirror. An income tax cut could take many forms, including adjusting tax brackets, lowering the tax rates across different income brackets and introducing or expanding tax credits.

“Increasing income tax thresholds can potentially reduce fiscal drag by preventing taxpayers from moving into higher tax brackets as their income rises – thus allowing them to keep more of their income. But there are no guarantees that a tax cut would come to fruition, as the government still have a long way to go to replenish the Treasury’s kitty following the government’s colossal spend on Covid-19 and latterly cost-of-living support measures.”