Government fiscal events have stirred up plenty of controversy in the past 12 months or so.
Last year we had Kwasi Kwarteng’s ill-fated mini-budget which contained £45 billion in unfunded tax cuts. The resulting market turmoil saw both him and Liz Truss relieved of their duties, with the bulk of Kwarteng’s proposals reversed just weeks later by his replacement as chancellor, Jeremy Hunt.
And in March, Hunt’s decision to scrap the lifetime allowance (the amount you can build up into your pension without being hit with heavy tax penalties) at the Spring Budget took everyone by surprise, although most would agree it was a welcome one.
The next fiscal event, the 2023 Autumn Statement, will take place on 22 November. While this is seven weeks away and will likely lack the drama of those mentioned above, speculation about what the chancellor might have in store is already gathering pace.
According to reports, reforms to individual savings accounts (ISA) and inheritance tax (IHT) are on Hunt’s radar, with the short-term futures of the state pension triple lock and the national living wage also to be decided.
It’s still early days, but what do we know so far? And how might the rumoured changes affect you?
Tax cuts ‘virtually impossible’…for now
Despite growing calls from Tory backbenchers to slash taxes, and with a general election expected in 2024, both Hunt and prime minster Rishi Sunak have remained staunch that this is off the table - for the time being at least.
Hunt said that chopping taxes is “virtually impossible” right now given the headwinds facing the UK economy. The chancellor stressed the focus is to rein in stubborn inflation, which at 6.7% is more than three times the Bank of England’s 2% target.
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In a speech at the Conservative Party conference in Manchester earlier this week, Hunt said he will strive to “chart a path to a lower tax economy”, offering some optimism that looser fiscal policy might be down the track.
“If we are prepared to walk this difficult path it is possible to bring down taxes, and we won’t hesitate to do that. But we can’t say when it will be possible,” he added.
National living wage boost
While many of the chancellor’s measures are still undecided (or shrouded in secrecy) Hunt has verbally committed to at least one policy, and it’s a positive one for low earners.
Hunt said he will increase the national living wage - the lowest amount workers aged 23 or over can be paid by law - from £10.42 to £11 an hour.
If the chancellor keeps his word, around two million people would benefit, providing a timely boost to low-income workers seeking to protect their finances from the rising cost of living.
Triple lock set to stay
No Autumn Statement would be complete without speculation about the state pension triple lock. The policy was introduced in 2010 by the Conservative-Liberal Democrat coalition government and was designed to ensure the state pension keeps up with inflation and wage increases.
In the 13 years since it was launched, the policy has been the subject of increased division and scrutiny. As you may recall, the government suspended the earnings element of the triple lock during the 2022-23 tax year, with the pandemic artificially skewing wage rises.
However, Rishi Sunak has publicly committed to maintaining the triple lock for the 2024-25 tax year, and there’s little to suggest his stance will change between now and 22 November.
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And earlier this week Hunt echoed the PM’s pledge, telling the Centre for Policy Studies event: “I think that we have to be very careful not to break manifesto promises. Sometimes, it does happen.”
Keeping the triple lock would be good news for retirees, particularly those on the lowest incomes. A recent study by us here at interactive investor found that some 28% of over 55-year-olds are totally reliant on the state pension.
The triple lock guarantees the state pension will rise every year by the higher of inflation, wage increases, or 2.5%. Although inflation is still high, it’s average earnings that appear be the highest metric this time around, with an 8.5% boost on the cards. This would propel the full state pension to over £11,500 a year.
ISA shake-up in the works?
According to reports, Hunt is looking to shake up the ISA landscape to incentivise people to start saving.
HM Treasury recently commented that it is “receptive to ideas of how we can make ISAs more attractive to encourage people to develop a savings habit and to invest in a way that works for them”.
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This is something we can all get on board with. Earlier this year, interactive investor reiterated its campaign for a simplified ISA regime, so we’re pleased the government is contemplating reform.
Back in April, interactive investor’s Head of Pensions and Savings, Alice Guy, said: “The more investment wrappers placed in front of potential savers, the fewer of them will actually benefit from saving and investing for their future. For example, a 30-year-old self-employed basic rate taxpayer who wishes to save for the future and may not yet know exactly what those future savings will be used for, must decide between five different ISA wrappers, from straightforward equity and cash ISAs, through to Help to Buy, Lifetime and Innovative Finance ISAs, before they even decide the specific investment they want to put in their savings arrangement.”
So, what shape could the new landscape take?
One suggestion is to merge the Stocks and Shares and Cash versions, although how this can be achieved is unclear. There are some practical obstacles to overcome. Not all ISA providers offer both Stocks and Shares and Cash versions for starters.
Another mooted change is to boost the current annual allowance from £20,000 to £25,000, but with a catch. Investors would have to stick the additional £5,000 in UK shares, in keeping with the government’s aim to encourage investment into British businesses.
While a beefier ISA allowance would, of course, be welcome, those with the financial muscle to maximise their allowance every year, which is a generous £40,000 for couples, are in the minority. That said, the ISA limit has been frozen at £20,000 since 2017-18, so one may argue that an uptick, whatever form it takes, is long overdue.
IHT – reform or scrap?
According to reports that surfaced last week, Sunak is considering a cut to IHT before the general election, with its eventual abolition also in the pipeline.
Any policy that seeks to reduce IHT bills will clearly get the thumbs up from voters. No taxes are popular, but negative sentiment for IHT runs particularly deep, even though less than 4% of estates pay the tax.
However, as IHT currently pockets the government around £7 billion a year - with receipts on a sharp upwards trajectory due to frozen tax-free thresholds and soaring property prices - the hole created by its removal would need to be plugged elsewhere.
And not everyone stands to benefit from IHT being scrapped – many small-to-medium-sized businesses may suffer.
That’s because provided shares in the AIM market are held for two years and the company is deemed qualifying, investors can swerve IHT under business relief rules. Although this is not the only reason people invest in these companies, it is a common one, and so funding in this area could fall off a cliff if IHT were to be abolished.
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Still, I think most will agree that the current IHT regime needs reform - some of the rules are hideously complicated. So, what might the government change?
Cutting the headline rate from 40% to 25% is one option that has been put forward, which would reduce the average IHT bill from £214,000 to £133,750, a sizeable saving. However, this wouldn’t make the current landscape any less complicated.
Another possible reform is to simply increase the tax-free thresholds. At present, the first £325,000 of an estate (the nil rate band) escapes IHT, with anything above taxed at 40%. If you own your home, you can get an extra £175,000 due to the residence nil rate band, lifting the tax-free allowance for married couples to £1 million.
But how the residence nil rate band works is far from straightforward. First, it reduces by £1 for every £2 an estate exceeds £2 million. And second, you must leave your home to direct descendants such as children and grandchildren.
Removing the residence nil rate band and increasing the nil rate band to £500,000 would not only make things simpler but arguably fairer too, as anyone without children could also pass on £500,000 free of tax.
Will next year’s election play a part?
The forthcoming election may well factor into Hunt’s thinking, but promising tax cuts isn’t what the Autumn Statement is typically about. It’s more an opportunity for the government to provide an update on its plans for the economy based on the latest forecasts from the Office for Budget Responsibility (OBR).
That said, pre-election fiscal events can be fertile ground to get voters onside. David Cameron’s pledge in October 2014 to raise the personal allowance to £12,500 and the 40% tax bracket to £50,000 is a case in point. The Conservative Party called an election the following May and secured a further term in power.
But as the chancellor continues to stress, there are more immediate priorities right now, most notably the enduring cost-of-living crisis. Still, this year’s Autumn Statement presents an opportunity to lay the foundations for some crowd-pleasers at next year’s Spring Budget, the final fiscal event before we all hit the polls.
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