As the cost of living crisis continues, predictions suggest the chancellor is expected to focus on alleviating the pain for the most vulnerable in the spring statement tomorrow (March 23).
In 2017, chancellor Phillip Hammond moved the Budget from the spring to the autumn to give time for announced taxation changes to be put into law and absorbed by accountants and the tax authorities before the end of the tax year.
Unlike the Autumn Budget, the spring statement is only meant to be an economic update, introducing broad policy changes and smaller spending pledges, as well as present the latest data and forecasts on the economy and public finances.
However, many have high hopes set for what the chancellor could do in the statement this time round.
Laura Suter, head of personal finance at AJ Bell said the government has already announced some handouts, but that was before the Ukraine crisis pushed energy costs even higher.
“At a time when some households are having to make tricky decisions between paying for heating or food, it looks particularly poorly timed for the government to be launching a new tax hike, in the form of a rise to National Insurance, or freezing income tax rates and so taking more out of people’s pay packets by stealth,” she said.
“At the same time, hospitality businesses will see an increase to their VAT back to 20 per cent after the emergency lower rate during the pandemic and many businesses will face rising staff costs thanks to a minimum wage increase.”
So what changes could be in his sights to help the UK public?
Tax hikes
Industry commentators have argued that while we are likely to see some aid from Sunak in the statement tomorrow, there could possibly be some tax hikes to make that money back.
In his April 2021 Budget, Sunak introduced a raft of freezes to tax allowances and thresholds rather than increasing these in line with inflation. This included income tax thresholds and bands as well as wealth tax exemptions and the pensions lifetime allowance.
Steven Cameron, pensions director at Aegon, said: “While in the past such ‘stealth tax’ measures have often gone unnoticed, in the current climate of rampant inflation, they will have a major adverse impact on an increasing number of people. For example, many more people will become higher rate taxpayers.
“The chancellor could not have foreseen the events which have led to inflation rising sharply and may wish to revisit this approach in his spring statement, perhaps by increasing allowances or committing to end the freeze before the planned five-year term.”
However, in order to raise this capital, some tax hikes could be likely. Suter said increasing ‘wealth taxes’ could be a popular move.
“Capital gains tax generated £10.6bn last year, and this is rising as property and investment prices climb. There has previously been speculation that the current capital gains tax rates of 10 per cent and 20 per cent (or 18 per cent and 28 per cent for property) will be scrapped and instead everyone will pay income tax rates on their gains.
“This move was mooted by the Office for Tax Simplification in a previous review. The stipulation from the OTS was that investors should get some sort of inflationary relief, so they are only taxed on above-inflation gains. Clearly any relief would reduce the tax-take for the government, so that may be quietly ignored in any final rules.”
In a less radical move, Suter said the government could cut the tax-free allowance from its current £12,300.
“The allowance has already been frozen until 2026, but Rishi Sunak could go one step further and cut the allowance. Chopping it in half, to £6,000, would generate £480mn, while cutting it to £2,500 would give an £835mn boost to government coffers, according to OTS predictions.”
Meanwhile, Andy Butcher, branch principal & chartered financial planner at Raymond James, said corporation tax is scheduled to increase by 6 per cent next year, but the conservative party will consciously be looking for tax cuts prior to the 2024 election, or after a leadership change, to restore their lead in the polls.
“Although Wednesday’s statement may be coming too soon for such a move, it is likely that in upcoming announcements they will roll back the increase by a few percentage points,” he said.
“This reduction would be sold as a tax cut, even if it in fact represented a tax rise from 19 per cent.”
Energy bills and petrol prices
The government has already come under mounting pressure to do something about the escalating cost of energy.
The chancellor announced some targeted support to help ease household finances, such as the £200 energy rebate initiative.
However, Myron Jobson, senior personal finance campaigner at Interactive Investor, said this rebate is not going to cut it for many low-income households facing the stark choice of eating or heating their home.
“The rebate and clawback arrangement means that UK consumers will be stuck with higher energy bills for a longer period of time,” he said.
“It can also lead to some bizarre outcomes. People who lived together but moved out to live in separate accommodation would go from sharing the £40 a month repayment requirement under one dwelling to having to each foot the cost entirely in their respective accommodation.”
He argued that the government might need to go back to the drawing board and offer a solution or solutions that offer instant relief for those struggling with energy bills.
“The chancellor could also consider scrapping environmental levies on domestic fuel bills to support Britons amid rising energy bills," he said.
Additionally, Suter said another option that might appeal to the government is to extend the £200 energy bill loan scheme.
“This is a no-cost move over the longer term, as everyone will pay back the money over the next five years. The government could also decide to defer when the repayments begin, as they are due to start from April at a rate of £40 a year.
“Now it looks like higher energy costs are here for longer, it doesn’t look very wise to have the repayments starting so soon, when people will still be battling higher bills.”
Interactive Investor also said that the price of fuel is an escalating problem that needs to be addressed and the chancellor could intervene by reducing fuel duty which is currently levied at a flat rate of 57.95p per litre for both petrol and diesel.
Likewise Adrian Lowery, personal finance expert at investing platform Bestinvest, agreed as he said it is more likely we will see a boost to the sort of measures already announced, or to universal credit, which are aimed at helping lower income households.
"Could the energy “loan” be turned into a grant? Could the council tax rebate be increased?" Lowry asked.
"One thing seems very probable: a cut to fuel duty to relieve the pain of soaring petrol and diesel prices. Overall, however, whether the UK’s economy and households need more serious fiscal assistance will be determined by what is currently a big unknown: how war in Ukraine progresses."
Pensions
Pensions is another topic that always seems to crop up and Cameron said the chancellor could offer some additional support for state pensioners.
“After the government temporarily removed the earnings component of the state pension triple lock, state pensioners are due to receive an increase of 3.1 per cent in April, based on the rate of inflation last September,” he said.
However, given the current level of inflation is 5.5 per cent, there is a difference in the figures.
“Setting the inflation component in September when the state pension is not increased until April has meant the pension uprating hasn’t allowed for significant rises since September,” he said.
“While these should be reflected in the April 2023 increase, many state pensioners will be left struggling.
“We’ll be on the lookout for any temporary targeted support the Chancellor may grant. We’d welcome the Chancellor committing to a reinstatement of the earnings component in the triple lock from next April.”
Many of the Budgets over the past decade have been preceded by rumour and speculation about the future of higher-rate pension tax relief.
Reducing pension tax relief would be a short-term boost for the coffers for the government, but it could also create problems further down the economy by disincentivising saving, according to some commentators.
Suter argued that removing higher-rate relief would be a direct attack on middle Britain.
“It is also far from clear how a flat rate of pension tax relief would be applied to defined benefit (DB) schemes, where contributions come from pre-tax ‘net pay’,” she said.
“Any solution would inevitably see members of public sector DB schemes landed with significant tax bills as well.
“While strained public finances demand the chancellor reviews all areas of public spending, a dramatic pension tax relief raid would come with huge practical challenges and political risks. There are, however, easier ways for the chancellor to reduce the cost of pension tax relief.”
Meanwhile, Butcher added that many individuals are already reluctant to pay into their pension because they are incorrectly nervous about losing the funds on death, and reducing pension tax relief may encourage even less people to save through their pensions.
“Considering the country’s ageing demographic and accompanying social security burden, encouraging people to have lower savings in retirement will only increase the burden on the state.
“It’s important to remember that paying into a pension fund does not avoid tax, it merely defers it until pension funds are withdrawn, and so it would be wise for the government to defer some tax revenue in preparation for this mounting challenge.”
National insurance
Last year, the government announced plans to place a 1.25 percentage point increase on National Insurance contributions alongside a 1.25 per cent dividend tax, in order to pay for a £86,000 cap on the cost of social care.
The plans were dubbed a 'health and social care levy', in light of the Conservative's election pledge to not hike NI.
While advisers have called for a delay to the hike, industry commentators have largely argued that it is unlikely we will see any changes in this space.
Shaun Moore, financial planning expert at Quilter, said: “Given the considerable increase in energy bills, the sky-high fuel prices and eyewatering inflation numbers, many have called for the national insurance rate hike to be delayed or scrapped all-together.
“But a U-turn from the government at the spring statement is very unlikely. This is because national insurance is paid by everyone under state pension age, so scrapping the hike would be a saving to everyone regardless of income level.”
He argued that in fact, higher earners would benefit more from the hike being delayed, in pounds and pence terms and it therefore seems likely the government would opt instead for a more targeted fiscal measure, that would have a greater impact on lower-earners and those more vulnerable to energy price hikes.
Likewise, Lowery said: “With the National Insurance hike, which will become the health and social care levy, being part of the government’s long-term funding plans, it seems unlikely that it will be postponed – and both Sunak and the prime minister have insisted it will go ahead, to the chagrin of many Tory backbenchers.”
However, Butcher argued otherwise.
He said: “This is a deceptively large tax rise which will disproportionately impact lower earners, equating to a hike of more than 10 per cent in real terms, not the 1.25 per cent advertised.
“Rumour has it Sunak is looking to soften the blow by increasing tax bands to remove an estimated 150,000 people from income tax altogether. This attempt to ease the burden of the cost of living crisis for the most financially vulnerable will likely be supplemented by other alleviating measures expected to be unveiled on Wednesday, such as energy bill rebates and fuel duty cuts.”
Dividend allowance
New changes to dividend taxation are already due to come into effect from April 6 2022, including a higher rate of taxation and a higher dividend trust rate.
However Suter said it doesn’t mean further tweaks are off the table.
“In a further squeeze on investors and some self-employed, the government could cut the current £2,000 dividend tax-free allowance and drag more people into the new tax rates.
“At the current allowance the government says 60 per cent of people with dividend income outside an ISA or pension are within the current tax-free limit, which has to look like a fairly juicy percentage to reduce. The government has form on this, having already cut the rate from £5,000 to £2,000 in 2019, so a cut to £1,000 or even £500 wouldn’t be impossible.”
Annual or lifetime allowance cut
The freezing of the pensions lifetime allowance at £1,073,100 until 2025/26 was one of a range of stealth taxes announced in the 2021 Spring Budget.
Cameron said: “By not increasing this in line with inflation, it is reducing the amount people can save in pensions in ‘real’ terms without facing an additional tax charge.
“The lifetime allowance was designed to limit the amount of pensions tax relief for the wealthy, but now it increasingly impacts many not so wealthy people, particularly those with valuable defined benefit pensions.”
Cameron argued that any more individuals could face an unexpected tax penalty as a result.
“We’d welcome Rishi revisiting this decision in light of current rocketing inflation, ideally by unfreezing the limit earlier than planned and returning to inflation-based increases.”
Meanwhile, Suter added that if the Treasury is looking to save money on pension tax relief, the annual allowance is the simplest lever to pull.
“The annual allowance is currently set at £40,000, while savers can also ‘carry forward’ up to three years of unused allowances. Lowering this to £30,000 or even £20,000 - in line with the ISA allowance – would raise revenue for the Exchequer while only affecting those who make very large pension contributions.
“The lifetime allowance could also potentially be reduced, although given it has already been frozen for the rest of this Parliament at just over £1mn this seems unlikely.”
Death taxes
If the chancellor wants to raise money from wealthier people, he could turn his attention to taxes paid on death, according to AJ Bell.
Currently, pensions can currently be passed on tax-free on death if the person dies before age 75, and at your recipient’s marginal rate of income tax if you die after age 75.
Suter explained that applying a tax to inherited pensions would clearly raise much-needed cash for the Treasury, although how much would depend on whether a protection regime was introduced for existing funds or not.
“If it wasn’t, those who have paid into pension on the basis of the death benefits on offer would understandably feel angry at the rug being pulled from under them,” she said.
“Inheritance tax is the other lever the Treasury could pull, either by increasing the current 40 per cent rate or lowering the amount that can be inherited tax-free. Both measures would inevitably lead to ‘death tax’ headlines, however – not something politicians generally welcome.”
sonia.rach@ft.com
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