Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, and Susannah Streeter, senior investment and markets analyst, comment on what might be in the Budget, and what they would like to see:
Sarah Coles:
“We’re still at the rumour and speculation stage, so none of the changes being discussed are nailed on. We shouldn’t be surprised that Treasury officials are preparing a huge range of options for ministers to consider – it’s what they do at this point. There are always bound to be leaks and kites flown to assess the reaction, or to build concerns so that whatever is eventually announced doesn’t feel like quite such a blow.”
Susannah Streeter:
‘’In this current climate, the government appears to be putting itself under considerable pressure to act fast. However, tax and spending questions are riddled with the law of unintended consequences and it will be crucial that the repercussions of changes are properly thought through.’’
The bigger picture
Susannah Streeter
“Rishi Sunak and Jeremy Hunt are on a seesaw, attempting to achieve a balance between raising taxes and cutting spending, but are likely to tip the economy further into recession if they swing too far down into austerity measures.
After the market mayhem which ensued after the disastrous Trussenomics mini-budget, the Prime Minister and the Chancellor are clearly fearful of sparking another bond market tantrum. From their perspective the reversal of planned tax cuts isn’t deemed to be enough to satisfy investors, which is why they are expected to try and trim tens of billions off government departmental budgets.
While it’s clear that the UK government still has a slightly higher disciplinary bar to scale, due to the chaos which ensued in September, the risk is that ministers go too far and too fast in slashing spending. Already the outlook for the economy is ominous, with the longest recession since the 1920s forecast by the Bank of England, and further cuts to public expenditure will only exacerbate the pain.
Borrowing to invest in crucial infrastructure projects would not provoke the same ire in the bond markets as the unfunded tax cuts did, given that they would have produced a sugar rush short term boost to growth, rather than the long-term increase in productivity which is so desperately needed. As the cost of living crisis bites, cutting spending on benefits or pensions and limiting public sector pay, could worsen the recession as people find real incomes deteriorating further. High inflation is expected to linger until the middle of next year before falling sharply. While Liz Truss tried to hand out lollipops to wealthier members of society in the vain hope the sweetness would spread wider, Rishi Sunak risks chopping away at the core nutrients the economy needs to help it recover and grow.”
Three potential changes and their implications
1. A rise in CGT or dividend tax
Susannah Streeter:
“There is concern that entrepreneurs will be penalised with the increase in capital gains and dividend tax mooted, but there is also recognition that asset owners have benefited from a huge upswing in values over recent years, while wage earners have seen their incomes stagnate. Targeted tax breaks should be part and parcel of this new regime, to reward companies investing in productivity upgrades, through re-skilling or automation.
Tinkering with the capital gains tax threshold (currently £12,300) or aligning CGT rates to income tax would only penalise a minority of taxpayers, but it could reap significant sums for the Treasury which is why these measures are being discussed. It would mean investors who hold money in funds or shares outside a pension or an ISA would face a hike on any gains. It would cause a particular headache for anyone who organises their holdings to make income within tax wrappers like ISAs and capital gains outside them. At the moment, this protects their investments from the higher rate of tax, but a hike in CGT could reverse this benefit. It may mean some investors will try to hang onto investments for life, rather than pay CGT and instead pass on assets in a will.
It can actually mean the government receives less in tax because investors hoard assets. The Treasury could try to circumvent this by announcing higher CGT further down the line, in the hope it encourages people to bring sales forward, but after an initial bump they’d still be left with the same problem.
For investors, the threat of this potential rise is a reminder of the value of ISAs in protecting you from ever having to consider CGT or dividend tax, so anyone who hasn’t exploited their ISA allowance to protect these investments may be inspired to do so.
An even bigger shock could be reserved for buy-to-let investors who can’t benefit from tax wrappers, or from realising their stock market investment gains year by year, to take advantage of allowances. If CGT is aligned with interest rates and they sell up, they could be faced with a hefty bill in just one hit, which may discourage them from selling, causing parts of the housing market to potentially seize up. With house prices already facing a significant correction, if even more potential sellers try and avoid selling at what they perceive as a loss, fresh paralysis will add further uncertainty to a highly sensitive market.
For business owners who pay themselves in dividends, this is yet another blow at a time when they’re wrestling with existential threats to their businesses – from runaway energy bills to rising prices and wage bills.”
2. The triple lock and benefits uprating
Sarah Coles:
“The debate as to whether these will be uprated with inflation, or face far lower increases alongside wages continues to rage. For anyone who receives a state pension this is a major concern, especially if they have based spending decisions on having this extra income in April.
However, for those who are utterly reliant on the state pension or any other benefits, it would be a terrible blow. The HL Savings and Resilience Barometer looks at how much cash people will have at the end of the month next summer, assuming the usual uprating, and for those on the lowest incomes the picture is bleak. Among the bottom five deciles – so the lowest-paid half of the country – fewer than one in 100 people will have enough cash left at the end of the month to be considered resilient. Without essential uprating of pensions and benefits, millions of people would face an even more impossible challenge in making ends meet.”
3. Pensions tax relief
Sarah Coles:
“We wouldn’t want to see any dramatic changes of policy overnight, so if the government wanted to change pensions tax relief we would want it to be part of a broad consultation that instead of myopically considering potential rates of relief, looks at the much broader and more pressing question of how to use government support to properly incentivise people to save for retirement.
If it did head down the road of a flat rate of relief, particularly if it was at 20%, it would make it more likely that the lifetime ISA would become a key retirement income tool for more people. If you’re currently aged 18-39, the debate may persuade you to open a LISA, and at least fund it with the bare minimum, so that if future changes make it more attractive for you than a pension, you have the option to keep paying in up to the age of 50 – even if you’re 40 or over when any new rules to pensions tax are announced.
There has also been speculation that the freezing of the Lifetime Allowance could be extended again. This acts as a stealth tax on sensible savers, and risks putting people off saving what they need for the retirement they want.”
Six changes Hargreaves Lansdown want to see
Sarah Coles:
“Life is tough enough for those on low incomes, and according to the Savings & Resilience Barometer it’s going to get even worse as runaway prices transition into recession. The fact that the Energy Price Guarantee only lasts until April means there will be some horrendous price hikes at that stage. The government has promised additional help for those who need it most, but unless it extends to anyone on a below-average income, millions of people could fall into real hardship.
- LISA support for those whose circumstances change
We’d like to see a permanent cut to the penalty for the Lifetime ISA. Right now, if you need to take the money out of a LISA for any reason other than to buy a first property worth £450,000 or less, or for retirement, you lose not just the government bonus but a chunk of your own money too. It seems unfair to penalise anyone for trying to do the right thing, but it’s particularly inequitable to do it to people facing hardship or victims of circumstances beyond their control. For self-employed people facing a financial crisis or for buyers forced out of being able to use a LISA by rising prices, we want to see the penalty reduced to 20% – so you only lose the government bonus.
3. An end to stealth taxes
Freezing the tax thresholds progressively makes us all worse off, and while it feels like an easy way to increase the tax take without alarming people or making changes that feel more tangible, there’s a real risk that over time it distorts the tax picture. The percentage of taxpayers paying either higher or additional rate tax has risen from 6.5% in 1990 to 18% today. It’s up from 14.5% in the past three years alone. The Treasury should make a decision about the right level of taxation for each individual, rather than relying on fiscal drag to make the decision that over 6 million people ought to be paying more than the basic rate of tax.
4. Full review of pensions
Any changes need to be part of a root and branch review, assessing the best possible ways to incentivise people to save for retirement. Part of that needs to address the question as to whether it really makes sense not just to restrict the amount of money that people can pay into their pension each year, but also to cap how much they can build up over a lifetime. The current system of both annual and lifetime allowances makes little sense, and ends up penalising successful investment strategies as well as those who have been committed to contributions.
The review should also look at details like the money purchase annual allowance. Under current rules if you have already accessed your defined contribution pension, you can’t contribute more than £4,000 a year. It means that when hardship forces people to dip into their pension, there’s far less opportunity to rebuild. The money purchase annual allowance was introduced to stop ‘recycling’, where people access their pension and then re-invest contributions for another round of tax relief, but the same thing could be achieved with anti-recycling rules, which only kick in when someone has accessed their pension with the express intent to recycle the cash.
5. Advance notice of any tax changes
If the government wants to make major tax changes, it’s essential that there is enough notice to enable people to manage the change sensibly – particularly when it comes to things like capital gains tax. If the change is rushed through there’s a risk it forces people to hoard assets they may otherwise sell. A decent amount of notice enables people who have worked hard to do the right thing to take action ahead of change if they want to. They shouldn’t be forced to rush into asset sales at a time that’s not right for them.
6. Reunite 18-year-olds with Child Trust funds
On the cusp of recession, it feels particularly unfair that over half a million CTFs may be lying forgotten and unclaimed. In the first seven months of accounts maturing, 55% of them remained untouched, with anaverage of £2,100 each in them. The government needs to take steps to reunite people with their lost cash. It’s difficult for them to target those with forgotten accounts, but it’s very easy for them to know who has had an account by their age. There should be nudges built into every contact with this cohort, from when they receive their NI number to when they start work, to let them know there’s free money with their name on it – and directing them to the Government Gateway to track it down.”
