How will the Spring Budget affect your personal finances? ii experts give their views

With the Spring Budget due on 15 March, interactive investor experts share their views on what it could deliver.

With the Spring Budget less than a week away (15 March 2023), interactive investor spokespeople give their view on the measures that could feature in the fiscal event.

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Budget surplus conundrum

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “While public finances aren’t in the best of shape following colossal spend on Covid and latterly cost-of-living support measures, they are a lot better than forecast.

“The government borrowed £117 billion in the financial year to January 2023, £7 billion more than in the same period of the previous year, but £30 billion (on a like-for-like basis) less than the OBR forecast in November 2022.

“The unexpected budget surplus is both a blessing and a curse for the government. It broadens the government’s options when it comes to decisions concerning taxation and spending - but it won’t stem public sector calls around pay rises amid the cost-of-living squeeze on finances.”

“The legitimate argument that the cash could be used to help pay off public debt amid rising interest rates might also spark lively debate.”

Addressing tight labour market

Alice Guy, Head of Pensions and Savings at interactive investor, says: “Boosting workforce participation among the growing economically inactivity cohort is a key challenge for the government. In this context, the chancellor has several options to make it easier and more attractive for older workers to stay in the workplace.

“The lifetime allowance is becoming increasingly difficult to justify and is incompatible with the government’s aim to support older workers. Many doctors are leaving the profession before retirement age, partly to avoid triggering a 55% tax charge once their pension entitlement reaches a level of around £53,000 (the level defined benefit pensions can reach before breaching the allowance).

“The lifetime allowance has more than halved in real terms since its introduction in 2011. It means that a 55% tax penalty, originally intended for the super-rich, is catching out hard-working doctors, senior teachers and civil servants and encouraging them to leave the workplace. It also has a chilling effect on pension saving, even among those with smaller pots, as many investors worry they could face heavy tax charges in the future if their investments perform well.

“Likewise, the current money purchase annual allowance rules are long due an overhaul as they penalise older workers who want to return to the workplace after withdrawing taxable income from their pension. Their total pension contributions are capped at £4,000 each year.

“Raising the money purchase allowance from its current level of £4,000 to £10,000 would allow older workers who have retired and withdrawn taxable income from their pension pot more flexibility if they return to the workplace. The current paltry cap means they could miss out on employers’ contributions and find it much harder to save enough for retirement.

Myron Jobson says: “Reasons for not working vary according to age – with long-term illness, caring responsibilities, and lack of suitable opportunities among the key factors. The chancellor could choose to strengthen and better promote various employment and re-skilling programmes. There have also been whispers that the government is considering letting people continue claiming sickness and disability benefits if they find work, and is mulling over reforms to childcare - the costs of which are a barrier to many people.”

Stage pension age changes and pension tax

Alice Guy says: “It’s a question of when not if, when it comes to speeding up raising the state pension age to 68.

“Raising the state pension age earlier than planned in the Budget will be an extremely tempting option for Hunt, as it’s a relatively easy way to reduce the governments’ pension bill and balance the books.

“The chancellor is likely to have advanced sight of the state second periodic review of the State Pension age, led by Baroness Neville-Rolfe, which is due to come out by May this year. The review is widely expected to raise the state pension age to 68 as early as 2034, with a knock-on effect on the private pension age. The private pension age will be tied to the state pension age from 2028 and will be 10 years earlier than the state pension age from that point.

“We are unlikely to see widespread reform to the pension tax relief system as this would require a period of consultation. Pension tax relief is a key pillar of the UK pension system – although the state pension is relatively small in the UK, it’s supplemented by a well-funded private pension system, supported by generous tax relief.”

Energy bills

Myron Jobson says: “Lower-than-expected spending on energy support schemes thanks to falling wholesale gas prices and the milder winter as well as stronger tax receipts have given the government wiggle room to extend the Energy Price Guarantee at current levels, limiting the typical household bill to £2,500 a year. This is likely to go through, considering reports that energy firms have already been asked to prepare for the extension.

“Low-income households are particularly exposed to hikes in energy bills as they spend a higher proportion of their budget on essentials. Our research found that the poorest 10% of households face spending 26% of their budget on energy bills from April if the EPG rises to £3,000 for a typical household, or up to 37% of their budget if they have a big household or live in a larger home. This is up from the current levels of 16% for poorer households in an average-sized house and 25% for low-income households in a larger home.

“Any measures to help support consumers through the cost-of-living storm is welcome. But the fact remains that individuals will have to do most of the heavy lifting to fortify their finances.”

Reprieve on fiscal drag?

Myron Jobson says: “The latest bumper tax haul, up £65 billion year-on-year between April 2022 and January 2023 at £660 billion, shows that the deep freeze to tax thresholds and allowances until 2028 is a money spinner for the government. The government hasn’t given any indication that it intends to tinker with what has proved to be a lucrative formula.

“It is certainly one way for the government to replenish the public kitty following big spending on Covid and cost-of-living support measures, but the heightened tax burden comes at a time when many can least afford it. Our research shows that a worker on £30,000 could pay an additional £1,919 in tax between the current tax year to the end of the 2027-28 tax year if income tax thresholds remained unchanged, rising to £4,280 for someone earning £50,000.

“The freezing of tax thresholds and allowances in tandem with wage inflation have pushed a large number of workers into higher tax brackets. This means we’ll all be paying more and more tax each year, as tax thresholds remain the same until 2028, while our pay and everything else around us goes up with inflation.”

High-Income Child Benefit charge

Myron Jobson says: “With little room in the public finances for tax giveaways, the government could use the budget to address anomalies and inconsistencies in the current tax legislation. Many parent hoping that the rules around the High-Income Child Benefit charge will be one of these. The tax charge is widely seen as unfair because the £50,000 threshold has not changed since 2013 and applies if just one parent earns over £50,000 but not if both parents earn just below the threshold. But the rules may prove too expensive to address for the cost-cutting government.”

Interactive investor wishlist

Abolition of stamp duty charge on investment trusts

Currently, investors trading in UK-domiciled investment trusts have to pay 0.5% stamp duty to the government on every buy they place. In contrast, people investing in funds or exchange-traded products pay no stamp duty.

This is an unfair tax, which unfairly penalises investment trust investors. It is also a double tax, because shares purchased as an asset within an investment trust portfolio have stamp duty paid on them by the fund manager. Interactive investor has made representations to the government accordingly.

Richard Wilson, CEO, interactive investor, says: “Funds and investment trusts play an equally vital role in helping people build long-term financial resilience. We wouldn’t dream of treating them differently – we charge the same for both.

 “It’s time for the government to level the playing field and recognise that, like funds, investment trusts are a thriving part of the collective investment universe. They have been powering ISA and pension portfolios for generations. 

“Our customers paid out an average of £102 each last year in stamp duty on investment trusts. Over the past three years, they have collectively paid out £30 million. That’s money that should have stayed in their pockets.

“At a time when the government is increasingly focussed on value for money, and when Consumer Duty will put value for money under the spotlight more than ever, it’s time the government practiced what it preached and treat investment trust investors fairly.”

interactive investor has not made government representations on stamp duty more broadly because it has focused on parity between investment trusts and funds. However, ii does think that a conversation about stamp duty more broadly on UK share purchases is warranted. Overall, the average amount paid per ii customer last year overall in stamp duty on UK listed shares (investment trusts and shares combined) was £261.06.

Richard Wilson says: “Stamp duty on UK shares is a curious policy position as the UK grapples to maintain its competitiveness as a place to list. The UK has a proud history of retail share ownership, but it needs to be nurtured, protected and encouraged, from a financial resilience perspective and for share of voice at AGMs.

“We also need to stop creating loopholes for financial services companies, often operating and regulated in the UK but overseas owned. One example of this would be the operating models employed by firms involved in spread-betting and CFDs, where it can be unclear whether such services offer an underlying equity dealing service or contracts for difference (CFD) service (or a combination of both). In combination with active marketing campaigns, those customers could find themselves caught in a rather opaque relationship, inadvertently investing into complex derivative products. They might feel pleased they have avoided stamp duty, unaware that they have just invested with a casino, not an investment company.”

ISA simplification

Interactive investor believes that simplification of the ISA framework is necessary. Various governments have stretched the ISA brand too far, which results in what is likely to be a confusing picture for savers.

Alice Guy says: “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.

“We ask the government to consider simplifying the choices of ISA available. There is no consumer benefit to having multiple ISAs. We recommend consolidating the existing ISA choices to Equity ISAs, Junior ISAs and Cash ISAs.”