New ‘leaks’ have emerged ahead of the Chancellor of the Exchequer’s watershed fiscal statement on Wednesday, with reports now suggesting that, alongside tax incentives to encourage business investment, ‘everything is on the table’ including a possible income tax cut of some description.
As the Government and an ascendant Labour opposition gear up for an election year, the Chancellor has spent a good deal of 2023 stressing that tax cuts are ‘virtually impossible’, due to budgetary constraints and inflationary risks – despite calls from many in his party to take steps to relieve a tax burden that has risen to the highest levels in 70 years.
However, Evelyn Partners’ Head of Tax Sian Steele notes that the narrative has changed over recent weeks and days as the prognosis on the public finances has improved and the latest ONS data has shown inflation retreating to 4.6%:
“The Office for Budget Responsibility presented the Chancellor on Friday evening with finalised public finance forecasts, and the speculation is that the fiscal headroom might have expanded to as much as £25billion. Unconfirmed reports have suggested that an income tax or national insurance cut could now be on the table, and Mr Hunt said nothing in interviews over the weekend to rule out that possibility.”
“One effect of such a big-ticket move on direct taxation of income could be that more targeted moves like a reduction in inheritance tax for instance might be shunted into the sidings until the Spring Budget or the Conservatives’ election manifesto.”
“To announce cuts to a wealth tax as well as income taxes would be something of a handbrake turn from the Chancellor, and – to mix metaphors – the hat is probably not big enough for such a large rabbit. Mr Hunt’s newly bullish emphasis on growth as well as inflation does suggest both households and businesses can expect some tangible tax reductions on Wednesday.”
Income tax and national insurance
Steele says: “The prospect of cuts to taxes on income gatecrashed the Autumn Statement discourse at the weekend, as media reports of a possible move on income tax or national insurance were accompanied by Mr Hunt’s public pronouncement that ‘everything is on the table’ and a fresh emphasis on growth.”
“Prime Minister Sunak did nothing to dampen speculation today when he spoke about the need to move into a ‘tax-cutting phase’.”
“The most likely runner seems to be a cut to the basic rate of income tax as that accords with a statement made by the PM last year that he wants to lower the rate to 16% by the end of the next parliament. But it’s also thought a cut to national insurance might be favoured as being cheaper, and less inflationary, with a possible emphasis on the self-employed to back up the focus on business and growth.”
“Hunt could also give a boost to higher earners by raising the higher-rate threshold – where earners begin paying 40% marginal rate tax – from £50,270, where it has stood since a negligible increase in April 2021 and is currently due to remain until 2028.”
“The fiscal drag effect of the higher-rate threshold failing to keep pace with wage inflation has been very pronounced: at 5.6million in 2023/24, the number of higher rate taxpayers has increased by 40.7% since 2020/21. The freeze until 2028 will draw at least 2.1million more earners into paying higher rate tax at 40%, and is earning billions for the Treasury.”
The tax-raising effects of frozen thresholds have perhaps still not been fully appreciated by the public. The long-term suppression of the personal allowance and the higher rate threshold will by the time it plays out be equivalent to a 3.5p hike in the headline tax rates for middle-earners, according to one estimate.
The highest earners meanwhile have seen the additional rate threshold fall to £125,140, and thanks to the tapered withdrawal of the personal allowance above £100,000 are subject to a marginal tax rate of 60% in the zone between those two income points.
If the Chancellor is looking towards general taxation for cuts this could take the wind out of the sails for any move on inheritance tax, for the moment at least.
Most people can currently leave an estate up to the value of £325,000 without paying inheritance tax, which is typically levied at the headline rate of 40%. That nil-rate band has been frozen since April 2009 and would now stand at £489,700 had it risen with inflation. An estate may also benefit from an extra £175,000 residential nil-rate band allowance (also frozen since 2020/21) if the main residential property is passed on to direct descendants, i.e. children or grandchildren. However, the RNRB is tapered down for estates worth more than £2million.”
Steele says: “Most speculation has centered around a cut to the rate, possibly a halving from 40% to 20%, which seems counter-intuitive as this would benefit only those estates already set to pay IHT, and the biggest estates the most. So it would be open to accusations of a giveaway to the wealthiest families.”
“Taking more modest estates out of the remit of IHT would require instead raising the threshold, and it has also been suggested that the main NRB could be increased to £500,000, probably alongside the abolition of the £175,000 RNRB. This would be a simplification and benefit those without direct descendants who don’t qualify for the RNRB. If the RNRB was kept in addition to a raised NRB this would take even more smaller estates out of IHT liability.”
“There is no doubt that IHT is very unpopular, and whatever the arguments around equity, it can feel like a penalty on prudence and on saving for one’s family.”
“Although relatively few estates pay IHT, more modest households are being drawn into its reach every year thanks to the 14-year deep freeze of the NRB as property and other asset prices have risen – a trend that is likely to continue if all is left unaltered. It is also arguable that, at 40%, the headline rate for those estates that do pay the tax is quite high.”
“A move on IHT, perhaps more probable now in the Spring Budget, would doubtless generate some positive publicity, please many Tory backbenchers and possibly win back some wavering voters – all at relatively little expense to the Treasury, with total IHT receipts for 2022/23 coming to about £7.1billion.”
“The nuclear option of abolishing IHT was reported at one point as under consideration in Government, but that seems only likely as a manifesto promise.”
Stamp duty land tax
Stamp duty land tax is charged at 5% between £250,001 and £925,000, starts at £425,000 for first-time buyers, and rises to 12% for properties exceeding £1.5million. It raises £14-15billion a year for the Treasury, compared to just £3.68 billion in 2000/01.
Steele says: “SDLT has in recent history been one of a number of fiscal drag cash cows for the Treasury, with receipts growing substantially year on year as UK property prices soared over the long term. The perception that it has become a rather effective ‘stealth tax’ has made it quite unpopular among both potential and actual homebuyers.”
“But it has also come under increasing criticism for congesting some parts of the property market, as a disincentive towards downsizing for older homeowners, and even damaging UK business by restricting labour mobility. A dearth of family homes on the market is making it less possible and more expensive for younger buyers looking at in-demand areas to move into larger properties.”
“Many retirees, instead of downsizing, resort to equity release and lifetime mortgages but such loans can become unexpectedly expensive and burdensome, and in some cases leave a nasty surprise for the beneficiaries of an estate.”
“The notion that SDLT acts as a drag on moving at this and other rungs on the property ladder has propelled it into Autumn Statement speculation. SDLT reliefs and holidays – such as the raising of the threshold to £500,000 for all buyers during the Covid crisis in 2020/21 – are relatively easily implemented, although they do cause angst for those caught on the wrong side of deadlines.”
“However, the latest speculation is that Hunt will scrap a planned reduction in the stamp duty land tax threshold that was due in 2025.”
It has also been reported that Hunt could link stamp duty land tax relief or rebates for first-time buyers to green home improvements made post-purchase, and it’s thought he will extend the Help to Buy mortgage guarantee scheme to help more first-time buyers borrow with a 5% deposit. The scheme was extended for 12 months to finish in December 2023, but may continue for another year.
There has been some noise in recent years that a more radical approach of stamp duty land tax being borne on disposal rather than acquisition of a property could both incentivise downsizing and boost new buyers entering the market, but this will be too long in the implementation to give the incumbent Government the pre-election boost it seeks. Even a consultation would be a (welcome) surprise.
State pension triple lock
The ever-contentious system by which the state pension is guaranteed to rise by whichever is highest of 2.5%, average earnings growth or consumer prices inflation, has landed the Treasury – and the Government – in increasingly warm water.
This year’s bumper 10.1% state pension hike added £11 billion to spending on the state pension in 2023–24, according to the IFS, and the 8.5% hike now pencilled in for April means it will cost the Treasury £2billion more in 2024/25 than the OBR forecast at the Spring Budget.
Steele says: “Since average earnings growth for the May to July quarter came in so high, at 8.5% including bonuses, there has been speculation that the Government would adjust down the prescribed rise for April to the excluding-bonuses rate of 7.8%, to save some money for the Treasury.”
“While this would inevitably lead to accusations of ‘watering down’ the triple lock, it is arguably quite a sensible alteration. The surprise is more that successive governments have allowed bonuses to be included in the calculation, as they are volatile and something that only a small proportion of the working population benefit from – and this year’s figure was particularly distorted by a one-off NHS deal.”
“This would have been an obvious and relatively uncontroversial reform to the triple lock had the authorities implemented it even just earlier this year, when it was already clear that costs to the Treasury from state pension increases were escalating rapidly. But now the dialogue over the triple lock has become charged by election politics, any reduction in the current slated increase will doubtless be a matter of controversy.”
Pensions Lifetime Allowance abolition
The surprise scrapping of the pensions Lifetime Allowance in the Spring Budget was widely welcomed as removing a tax trap that penalised savers for amassing large pots, which could fall foul of the threshold through investment growth as well as contributions.
Despite this headline-grabbing move, the highest earners still face significant restrictions on building up their pension due to the tapered annual allowance which limits contributions to their pot to as little as £10k per annum – and which means the lifting of the LTA ceiling will have done little to help them provide for their retirement.
While legislation to clarify the rules and officially abolish the LTA is due before the start of the next tax year, it seems time is running out to settle some important grey areas.
Steele says: “There could be an acknowledgement that some important aspects of this transformation in the taxation of pension savings need clarifying. A major complication is the consultation on applying income tax to an inherited pension if the saver dies before age 75 and the pot is taken as income as opposed to a lump sum.”
“This is causing a lot of uncertainty and such a ‘death tax’ could distort how beneficiaries use inherited pots, and might undo a lot of the much-needed simplification of pensions taxation that the abolition of the LTA promised.”