Written by Jenny Holt, Managing Director for Customer Savings and Investments at Standard Life, part of Phoenix Group
Significant changes to income tax system unveiled
The Chancellor’s decision to scrap the additional rate of tax for those earning over £150,000 and to reduce the basic rate of tax to 19p in the pound were arguably the biggest surprises today. Treasury documents highlight that there will be a transition period for pension tax relief and schemes will be able to claim 20% relief rather than 19% for one year after the introduction of the new tax rate.
Alongside cuts to National Insurance, these changes will mean people keep more of their earnings as the Chancellor looks to encourage growth. The benefits will be felt far more by higher earners than those on lower incomes where the increases will be modest.
Energy cap takes some of the pressure off household budgets
The Chancellor has inherited a hugely challenging set of economic circumstances with energy costs and the related issue of inflation a major concern for households. Today the scale of the support being made available through the £2,500 price cap was reiterated and while this will still mean an increase to peoples’ bills, the worst effects of price rises are being reduced.
Recent research we conducted suggested 49% had expected to be able to save less over the next few months and the price cap will hopefully help more people to balance the books. The reality is that prices will still rise and many people will face difficult decisions regarding their savings.
These challenges are particularly relevant as we approach the ten year anniversary of auto-enrolment next month. An important feature of the scheme is re-enrolment which will mean employees are re-enrolled every three years, restarting peoples’ saving journey.
Triple lock not mentioned but recent commitments make it a significant cost
Throughout the leadership race Liz Truss committed to reintroducing the state pension triple lock which was downgraded to a double lock this year. The rationale for this year’s downgrade was that distortions to earnings during the pandemic would have given pensioners a bumper increase at a time when many people of working age had seen their earnings reduce during the pandemic.
The commitment to the state pension triple lock means pensioners can expect an increase of around 10% next year, with September’s inflation figure set to determine the increase in payments. If this comes to pass, we’ll see the new state pension valued at more than £10,000 a year for the first time.
The state pension currently costs the government around £100bn a year, so a 10% increase will be equivalent to around £10bn making it a sizeable commitment.”
No movement on the lifetime allowance
While the Chancellor has been quick to reverse many of his predecessor’s policies, one change where we’ve seen no movement is in relation to the pensions lifetime allowance which is currently frozen until 2026. In a high inflation environment, the real value of what people can save in their pension is falling and the Health Secretary yesterday set out measures designed to help retain higher earning NHS employees facing this challenge. If current rates of inflation continue, the current freeze is likely to come under more pressure.