With the Spring Budget only a week away, AJ Bell’s experts highlight the things to look out for in Chancellor Jeremy Hunt’s statement next Wednesday.
- Childcare – possible extension to free hours and/or addressing low uptake of Tax Free Childcare
Laura Suter, head of personal finance, comments:
“Childcare is rapidly becoming one of the biggest topics of the Budget – and there’s no doubt it will become a key issue in the run-up to the next General Election. Barely a day goes by without another headline about how the UK’s childcare system is the most unaffordable in the developed world, or how more women are dropping out of the workplace because they can’t afford the spiralling costs. But fixing the issue is not only a vote winner, it helps to solve the UK’s productivity problem too if more parents return to the workforce.
“The government has mooted extending the ‘free’ hours of childcare to one and two-year-olds, but this comes at a huge expected cost, with some estimates putting it at £10 billion. The other issue is that the ‘free’ hours are anything but, with the government paying such a low fee to nurseries for these hours that parents have to foot the bill for top-ups and extras so nurseries can keep afloat. An alternative is to boost the Tax-Free Childcare support, which currently gives up to £2,000 a year per child towards nursery costs. The government could increase this figure and vastly improve awareness of the failing scheme, where uptake has been 75% lower than expected at launch.
“The no-cost option, which might look very attractive to the government, is changing the ratios of adults to children at nurseries and childminders, allowing fewer staff to look after the same number of children. Despite many nurseries saying this isn’t workable and won’t reduce costs, the fact it will cost the government absolutely zilch makes it a contender.”
- Cost of living – EPG extension becomes cheaper thanks to falling wholesale prices
Laura Suter says:
“It’s a no brainer for Jeremy Hunt to extend the Energy Price Guarantee for another few months, until energy prices fall further. The plan to make the Energy Price Guarantee less generous in April at the same time as the government stops the monthly rebate we’ve all been getting off our bills would have landed the average household with an extra £900 on their annual fuel bills in one swipe.
“It is expected to cost the government around £3 billion but falling wholesale energy prices mean that so far the Energy Price Guarantee hasn’t cost the government as much as expected, providing it with some wiggle room to extend support now.
“While the move will protect average households from an extra £500 on their annual bills, energy bills will still cost us all more. The £400 off bills the government has been dishing out this winter, to the tune of around £66 a month, will still end in April. At the same time, the Cost of Living support payments for those on certain benefits is less generous this year than it was last year – which all adds up to bigger bills.
“Some campaigners argue that the universal energy support should be ditched and more money offered to those on the lowest incomes. If Jeremy Hunt opted to scrap the universal Energy Price Guarantee and boost the cost of living support, far more help per household could be offered to the poorest in society who are struggling the most with their bills. But it doesn’t have the broad, vote-winning appeal, of extending energy support for all.”
- Child benefit – raise £50,000 earnings threshold for ‘high income’ child benefit charge
Laura Suter says:
“One area of the tax system that is ripe for overhaul is the awfully named Child Benefit High Income Charge, which has been stuck at £50,000 since it was launched in 2013. With wages rising, inflation rampant and childcare costs soaring it feels particularly unfair that a single-income family where one person earns £60,000 wouldn’t be entitled to any child benefit, while a couple who both earn £50,000 would get the full benefit.
“The government has two options: it could scrap the threshold altogether, meaning everyone would be entitled to child benefit regardless of income, or it could raise the threshold to a higher rate. The first option is radical and feels more like the playbook of Liz Truss’ government rather than Rishi Sunak. But raising the threshold to reflect rising wages is less extreme and means that families with two children would get a boost of £2,075 a year.”
*Child Benefit High Income Charge explained: If either half of a couple earns over £50,099, you’ll lose some of the child benefit on a sliding scale until one of you earns £60,000 – at which point you’re not eligible for any child benefit. You re-pay the benefit at a rate of 1% of the benefit amount for every £100 you earn over that £50,000 threshold. It means if you earn £55,000, you lose 50% of the benefit – because you’re £5,000 over the limit, and at a rate of 1% per £100, that equals 50%. The exact amount of money you lose depends on how many children you’re claiming for.
- Accelerated state pension age hike?
Tom Selby, head of retirement policy, comments:
“The long-awaited state pension age review feels like the elephant in the room as we approach the Budget in just over a week’s time. The current plan is to increase the state pension age to 67 by 2028 and then again to 68 by 2046.
“However, reports surfaced earlier this year suggesting the government could accelerate the proposed rise to age 68 to some point in the 2030s. This would represent a colossal political gamble, for the obvious reason that generally there aren’t many votes to be won by telling millions of people they are going to receive their state pension later than they thought.
“The most recent data adds more fuel to this potential fire, with average life expectancy in the UK dropping and projections of future longevity improvements scaled back. While it is difficult to be definitive about the cause of this shift after decades of near continuous life expectancy rises, the pandemic will inevitably have been a significant factor.
“From the Treasury’s perspective, bringing forward the planned increase in the state pension age to 68 could be a huge money spinner, likely raising tens of billions in revenue – funds that are desperately needed in the wake of Covid-19 and the costly energy support package. The big question is whether No.10 agrees this Exchequer boost is worth the inevitable pain at the ballot box.
“For savers, the uncertainty is another reminder that while the state pension provides a valuable foundation upon which to build your retirement plans, both how much you receive and when you receive it remains at the whim of politicians.
“This is one of the reasons it is vital you build your own retirement pot, taking advantage of the retirement savings incentives on offer, any employer contributions available and tax-free investment growth.”
Who could an accelerated rise to age 68 affect?
The impact of an accelerated state pension age increase to 68 would depend on the timing of that rise.
If the increase to 68 is brought forward by seven years to 2037-39 – a proposal previously set out by the government in 2017 – this could mean:
- Anyone born on or before 5 April 1970 would have a state pension age of 67
- Anyone born from 6 April 1970 – 5 April 1971 would have a state pension age between 67 and 68
- Anyone born from 6 April 1971 onwards would have a state pension age of 68
If the increase to 68 is brought forward to 2035-37, this could mean:
- Anyone born on or before 5 April 1968 would have a state pension age of 67
- Anyone born from 6 April 1968 to 5 April 1969 would have a state pension age between 67 and 68
- Anyone born from 6 April 1969 onwards would have a state pension age of 68
If the government goes for the nuclear option and the increase to 68 is brought forward to 2033-35, this could mean:
- Anyone born on or before 5 April 1966 would have a state pension age of 67
- Anyone born from 6 April 1966 to 5 April 1967 would have a state pension age between 67 and 68
- Anyone born from 6 April 1967 onwards would have a state pension age of 68
- Minimum pension access age increase
Tom Selby says:
“An accelerated rise in the state pension age to 68 could also mean the minimum private pension access age or ‘normal minimum pension age’ (NMPA) could increase sooner. The NMPA is due to rise to 57 in 2028 and is then expected to remain 10 years away from the state pension age.
“The process the government will follow for increasing the NMPA is far from clear, however. The rise from 55 to 57 has been accompanied by a complicated ‘protection’ regime which means, depending on the wording of your pension contract, you may be able to retain a minimum access age of 55.
“This will create huge unwelcome complexity in an already overly complex pension system. We can only hope that the next NMPA increase is undertaken in a way which keeps unnecessary complications – not to mention administration costs – to a minimum.”
- Tax relief tinkering?
Tom Selby says:
“It’s been suspiciously quiet on the pension tax relief front in the run-up to this Budget. Usually at this stage we’d have had at least one story suggesting the Treasury is weighing up proposals to scrap higher-rate pension tax relief or further restrict the availability of tax-free cash – or both.
“The biggest impediment to either reform is likely to be raw politics. Scrapping higher-rate relief would be deeply unpopular, particularly with traditional Conservative voters, while tax-free cash is one of the few parts of the private pension system most people genuinely understand and value. Either measure would inevitably result in unwelcome headlines about a ‘pension tax raid’.
“There are also practical challenges which would be difficult to overcome. Scrapping higher-rate relief would be particularly complicated for defined benefit (DB) schemes, with members affected presumably being hit with a tax charge as a result. Any move to further limit tax-free cash, as well as being a potential vote loser, would need to address the question of how rights already built up under the existing system are protected.
“There are alternative options which might be marginally less controversial. For example, the Institute for Fiscal Studies (IFS) has called for IHT and income tax to be applied to pensions on death. While this would inevitably result in some negative headlines around the application of a ‘pension death tax’, the rules – which mean pensions can in certain circumstances be inherited completely tax-free – are undoubtedly generous.
“Once again, if the government went down this road there would again be a big question over how those who have contributed to pensions on the basis of the existing death benefits regime are protected.“
- Annual allowance adjustments?
Tom Selby says:
“Pressure is growing on the Chancellor to address specific issues in the tax system which risk putting people off returning to work. The most obvious of these is the money purchase annual allowance (MPAA), which punishes those who have flexibly accessed taxable income from their retirement pot with a £36,000 reduction in their annual allowance, from £40,000 to just £4,000. Triggering the MPAA also means you lose the ability to carry forward unused annual allowances from the three previous tax years.
“AJ Bell wrote to the Treasury in November last year calling for an urgent review of the MPAA, while a joint-industry letter backing an immediate rise in the MPAA to £10,000 landed on the doorstep of Number 11 Downing Street last week. If the government is serious about tackling labour market shortages and getting over 50s back to work, addressing this pension tax penalty feels like a no-brainer.
“The Chancellor is also facing ongoing calls to ease the pressure on the NHS, with pension tax rules which have pushed thousands of senior doctors to retire early at the heart of the controversy. Some reports have suggested increases to the lifetime and annual pension allowances, which currently sit at just over £1 million and £40,000 respectively, are being considered.
“It may be that short-term adjustments are deemed necessary to deal with the immediate challenges engulfing the health service. Over the longer-term, policymakers should consider scrapping the lifetime allowance for defined contribution (DC) pensions altogether as part of a radical simplification of the system.”
Potential tax charge if MPAA remains at £4,000
|Total pension contribution||Excess||Annual allowance charge (basic-rate taxpayer)||Annual allowance charge (higher-rate taxpayer)|
Tom Selby says:
“The next stage of the UK’s flagship automatic enrolment reforms remains up in the air. There is consensus that minimum auto-enrolment contributions, currently set at 8% of earnings between £6,240 and £50,270, are too low and will need to be increased soon. However, going too far, too fast would risk causing a damaging spike in opt-outs, particularly with millions of Brits battling against sky-high inflation.
“Late last week, pensions minister Laura Trott confirmed the government’s backing for reforms contained in a Private Members Bill put forward by fellow Conservative MP Jonathan Gullis, which proposed ditching the £6,240 lower earnings band and reducing the minimum age for auto-enrolment from 22 to 18.
“It’s worth remembering these were reforms first put forward by an independent review in 2017. Guy Opperman, Trott’s predecessor as pensions minister, previously committed to introducing the changes by the less-than-specific date of the ‘mid-2020s’.
“The Chancellor could use his Budget speech to set out a roadmap for implementing the 2017 review changes. This would be welcome and provide a platform for serious debate over how to boost pension savings levels further in the future and tackle chronic undersaving among those not covered by auto-enrolment, including the self-employed.”
Annual contribution – current system (£30,000 earnings)
|Earnings||Qualifying earnings||Personal contribution||Employer contribution||Tax relief||Total contribution|
Annual contribution – with lower earnings band removed (£30,000 earnings)
|Earnings||Qualifying earnings||Personal contribution||Employer contribution||Tax relief||Total contribution|
- OBR report and inflation
Laith Khalaf, head of investment analysis, comments:
“Chancellor Jeremy Hunt is about to receive a windfall to the tune of around £30 billion in the coming fiscal year, according to estimates from the Institute for Fiscal Studies. That is the sum by which government finances have improved since the last OBR report in November. That doesn’t mean the Treasury isn’t still borrowing eye-watering sums of money, or that in the medium-term economic forecasts might still put the Exchequer under pressure. But in the immediate future, the Chancellor has a bit of breathing room compared to forecasts set out in November.
“That has come about for a few reasons. Energy prices have fallen and there has also been a fall in interest rate expectations since November, reducing the Treasury’s anticipated borrowing costs. The OBR’s November forecasts were also made in the wake of Kwasi Kwarteng’s mini-Budget, which sent government borrowing costs spiralling.
“The government is set to benefit from tax revenues coming in above forecasts as well. January’s self-assessment tax receipts came in at £21.9 billion, the highest figure since records began in 1999. Before we get too carried away though, it’s worth reflecting on the fact that January 2023’s self-assessment taxes largely relate to activity in the 2021/22 tax year, when the economy was bouncing back from lockdowns and before the invasion of Ukraine sent energy prices soaring.
“The big question is of course what the Chancellor intends to do with this boost to the Exchequer’s coffers. Freezing fuel duty again seems pretty much inevitable to prevent motorists facing an eye-popping rise in their transport costs, which could jam the wheels of the economy. An extension of the energy price guarantee is potentially on the cards seeing as this is currently set to be scaled back from April, though this prolongs the period of time government finances are a hostage to the fortunes of the energy market.
“Sweeping tax cuts seem very unlikely, but all eyes will be focused on any small gratification that may emerge from Mr Hunt’s red box. Public sector pay negotiations are another thorny issue, although government argues rising pay for could be inflationary, which is important since the PM has now staked the government’s credibility on halving inflation.”
Danni Hewson, head of financial analysis at AJ Bell, comments:
“The debate about whether changing Corporation Tax makes any difference at all to the amount UK businesses will invest has rumbled on for years. But what is clear is that even with the lowest level of Corporation Tax in the G7 Britain’s record is pretty woeful and there’s a fundamental question to be answered. If UK PLC didn’t splash out when interest rates were at record lows, why would they do so now that borrowing has become so much more expensive?
“There is an argument to be made that adding additional pressure onto UK businesses now, while many are still clawing their way back from a pandemic pummelling and others are struggling with increased costs and supressed consumer spend, makes little sense. And for some businesses, in particular energy giants, the implementation of a windfall tax has already pushed businesses to alter investment plans.
“Corporation Tax is a complicated and controversial beast but what most businesses would agree on is that better incentives are needed to help them to grow. Incentives that don’t require businesses to hire a team of people just to push the paperwork through the system.
“Growth is something the government says it is striving to achieve, but it’s faced criticism from business leaders that it doesn’t have a clear long-term strategy in place. Without one, businesses won’t have the confidence to take risks because they aren’t sure the reward will ultimately be there for the taking.
“Stability, clarity and practicability are needed but so is fiscal responsibility. After the upset from the not-so-mini-Budget last autumn, the Chancellor will be acutely aware of his responsibilities. Help those who need help and create stability without strangling the growth so badly needed for economic prosperity.”