Tom Selby, director of public policy at AJ Bell, looks at the personal finance challenges facing new chancellor John Healey as he balances spending priorities with pressure on the public finances.
“Just over a month after quitting as defence secretary in a row over funding, John Healey takes charge of the very department he was at loggerheads with. He will now be forced to view that and many other fiscal problems through a different lens, namely ensuring the nation’s finances remain on a firm footing while trying to find cash to pay for the priorities of the new prime minister.
“Extra defence spending, potentially raising the personal allowance and solving social care won’t come cheap, and with Andy Burnham saying he’ll stick to Labour’s manifesto – including the commitment not to raise income tax, National Insurance or VAT – there is an immediate question of where the financial pain will be felt to meet that ambitious agenda.
“When it comes to personal finance policy, the focus must be on restoring certainty, simplicity and confidence for savers, investors and those planning for retirement. Recent Budgets have been dominated by speculation over potential pension tax raids, ISA reform and changes to salary sacrifice. That uncertainty is damaging in and of itself, often encouraging people to make rushed decisions that may not be in their best long-term interests.
“Reeves recognised that markets don’t like uncertainty and was able to offer bond vigilantes a modicum of reassurance about government spending plans by sticking to her self-imposed fiscal rules. But she failed to recognise that uncertainty is the enemy of ordinary Brits too, who struggle to make plans for the future with confidence if they don’t have certainty the goalposts won’t be moved.”
Personal finance priorities for the new chancellor:
- End damaging speculation on pension tax-free cash.
“The new chancellor’s number one objective should be to end the circus of Budget speculation we have seen in recent years, particularly in relation to pensions tax-free cash. This speculation has already had real world consequences, with billions of pounds of retirement cash withdrawn based on fear, rather than people’s long-term goals. Without clarity from the new administration this will happen again, irreversibly harming people’s long-term plans, undermining efforts to harness pension money to drive growth in the UK and ultimately damaging trust in pensions.
“The chancellor should make an early, unequivocal commitment not to cut or further restrict pension tax-free cash or other tax reliefs at the earliest possible opportunity. This would be popular, provide much-needed certainty for savers and wouldn’t cost a penny. Without it, the same rumour and speculation will inevitably begin again as their first Budget comes into view.”
- A chance to reconsider pragmatic alternatives to bringing pensions into IHT.
“The new chancellor should urgently revisit plans to bring pensions into IHT, which could still be amended, or paused, sparing pension savers and their families from the pain that will follow on from this ill-conceived policy.
“While a full U-turn feels unlikely at this stage, there are still significant issues with the planned policy in its current form. Most obviously, adding often complex pension arrangements to a complicated IHT framework will exacerbate the probate delays many already experience.
“It isn’t too late to address some of those problems and implement a more sensible tax charge which achieves the government’s intended aim of bringing pension assets in line with the wider estate on death, but does so in a much simpler way that avoids creating undue difficulties for grieving families.”
- Too late for an ISA reset?
“ISAs have been successful because they are easy to understand, flexible and tax-free – all of which is set to be undermined by Healey’s predecessor’s disastrous approach to reform. Cutting the Cash ISA allowance to £12,000 for under 65s and creating a load of ‘anti circumvention’ measures, including a charge on cash held in Stocks and Shares ISAs, appears to have been a Reeves pet project that had little support from retail investors. Changes to Lifetime ISAs are also in the works but, as with ISA reform, have not been properly thought through.
“Rather than pushing ahead with this dodgy agenda, Healey has an opportunity to rip it up and start again, going back to Labour’s pre-election commitment to simplify ISAs as part of a drive to boost long-term investing.”
- Reconsider the proposed £2,000 cap on salary sacrifice.
“Salary sacrifice is widely used by employers and employees to support pension saving, but the rules will change in a few years’ time. From April 2029, the National Insurance savings will be capped at £2,000 of contributions through salary sacrifice a year.
“While it is still unclear how employers may react to the changes the move will mean many working people will see less in their pay packets. The biggest impact is expected to cluster around the £45,000 to £50,000 earnings band as the lower 2% NI rate kicks in for those earning above £50,270.
“This risks weakening a valuable savings incentive at the same time policymakers are worried about inadequate retirement provision. This change has been rushed onto the legislation books despite being years off implementation, so there is still ample time for Healey to take a second look. If the government proceeds, it should publish a clear assessment of the likely behavioural impact on pension contributions.”
- Fix the income tax system and the £100,000 cliff edge.
“Britain’s broken tax system is in need of repair in numerous areas, but some of the most glaring issues exist in the income tax system. While politicians understandably focus on lower and middle-income households over higher earners, it simply doesn’t make sense to have punitive rates of taxation that mean people are incentivised to work less.
“The tapering away of the personal allowance creates an extremely high marginal tax rate for people earning over £100,000 up to the additional rate threshold, damaging work incentives and making the tax system harder to understand – it is absurd that marginal tax rates are at their highest on that chunk of earnings over £100,000 and then drop down again on earnings above £125,140.
“To make matters worse, for parents with children the loss of childcare support entitlement, which is almost entirely withdrawn as soon as taxable earnings hit £100,000, means you can lose thousands of pounds in additional support. This leaves parents in this position worse off if a pay rise takes one of them over the ‘cliff edge’ in the system.
“The chancellor should look to fix this to boost aspiration, reduce complexity and remove a distortion that can discourage people from taking on extra work or responsibility.
“Reports also suggest the new prime minister, Andy Burnham, is concerned about the impact of the income tax threshold freeze. The policy, first begun under Rishi Sunak under the guise of paying for emergency measures deployed during the Covid crisis, has since morphed into a planned decade-long freeze on tax thresholds costing billions. It is one of the big drivers behind the ballooning income tax bill, with the UK’s income tax bill rising a staggering £120 billion since the freeze began.
“Increasing the personal allowance would help everyone by handing taxpayers across the spectrum the same tax saving. But for the lowest earners the financial boost will be larger as a proportion of their total income, meaning it would make a big financial difference to those with the least financial strength.”
- Review auto-enrolment and pensions adequacy.
“Auto-enrolment has been a success in getting more people saving, but it has not solved all the pension problems we face. The second Pension Commission’s recent interim report laid bare the ugly truth that many Brits, especially women, the self-employed and low earners, are unlikely to achieve the retirement outcomes that they may want.
“We now await the Commission’s final recommendations due early next year. Whilst the solution may not be as simple as upping pension contributions for everyone, the answer will no doubt partly lie in encouraging some individuals and employers to save more for their retirement. Such demands can’t be made overnight; both individuals and employers need time to adapt to new contribution levels.
“The Treasury now needs to work with DWP to set out a roadmap for improving adequacy, including the future of contribution rates, and how changes can be phased in affordably. They also need to finally tackle how to encourage the self-employed to save more for retirement, rather than leaving them on the ‘too-difficult-to-solve’ pile.”
- Clarify the future of the triple lock.
“The triple lock remains politically sensitive and hugely symbolic as a sign of the government’s support for pensioners. The new chancellor will be acutely aware that Rachel Reeves sowed the first seeds of her own demise when she announced plans to scrap the winter fuel payment and will be wary of making a similar mistake when it comes to the state pension.
“But the policy of ratchetting up the state pension through the triple lock has serious long-term fiscal implications. The chancellor should be honest about the trade-offs and set out a sustainable policy for the state pension that gives pensioners certainty while recognising pressure on the public finances.
“A sensible approach would be to set out a clear goal for the triple lock – most likely the full state pension reaching a set proportion of median earnings – before reverting to an earnings link. If Andy Burnham takes the approach of his predecessors and continues to stubbornly stick to the triple lock, he will entrench the risk of future state pension age rises having to go faster and further.”
