There are likely to be few tax giveaways in the Spring Budget, even with an expected windfall of £30-40billion after recent expected improvements in the public finances.
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Particularly as a downgraded medium-term economic outlook from the OBR will put a dent in the public finances for future years.
It’s also unlikely that the Chancellor will deliver any significant tax increases, with the tax burden set to surge after measures announced in the Autumn Statement.
Gary Smith, Financial Planning Partner at wealth manager Evelyn Partners, says: “Jeremy Hunt has shackled himself a bit with the dogmatic fiscal stance he adopted in the Autumn Statement – and he also fears that an expansionary Budget would keep inflation higher for longer.
“While the Autumn Statement seems to have stolen the tax thunder of the Spring Budget this time around, some targeted measures aimed at supporting household finances and getting the economically inactive back to seeking work look fairly certain.”
Pension allowances raised
Smith says: “There have been some fairly confident media reports that Hunt will raise the annual and lifetime pension allowances, which stand at £40,000 and £1.073million respectively, in an effort to encourage older professionals to stay in or return to work. These are caps on how much someone can contribute into their pension while still benefitting from tax relief – although in the case of the LTA, investment growth is included so someone with a defined contribution pot who has made wise investment decisions can be penalised with a tax charge if their sum grows beyond the limit.
“The LTA has created a well-documented disincentive in the public sector where, especially in the NHS, rules around defined benefit pensions mean that many professionals retire early or are reluctant to return to work. But the LTA is becoming a greater issue for those with defined contribution pension schemes who have saved diligently over a long period, and this will only escalate at current rates of inflation.
“The LTA is too low, given that it stood at £1.8million just 10 years ago and that since then inflation means incomes and savings have soared. The figure Hunt is considering has not been leaked but the annual allowance is said to be going up to £60,000, which is welcome – although the LTA must go up in accordance, otherwise it could mean that more savers hit the LTA.
“Hunt is also said to be raising the money purchase annual allowance to £10,000, in his effort to get some older workers who have taken early retirement back into work. The MPAA is triggered when a saver accesses their pension flexibly, as many early retirees do, and means that the annual amount they can save into a pension while benefitting from tax relief drops from £40,000 to £4,000, putting a big restriction on rebuilding pension pots.
“Triggering the MPAA also wipes out your three years of unused carry-forward allowances. Whether or not it encourages older economically inactive cohorts back to work, we would welcome a boost to the limit as it is an obscure tax trap that catches out a lot of otherwise financially astute savers.
“There is a chance, however, that Hunt could look to temper this apparent generosity to those who save a lot into their pensions by targetting some other benefit of pensions, like the favourable treatment of defined contribution pots under inheritance tax rules.”
Pension tax relief escapes again?
Smith says: “There has been relatively little speculation this year over the vulnerability of pension tax reliefs, and indeed it looks very unlikely that Hunt would raise allowances with one hand and cut tax relief with the other. It would also be politically risky for Hunt to target the tax benefits of private pensions after the significant tax crunch announced at the Autumn Statement, and on top of the likely acceleration of state pension age increases.
“If pensions tax relief escapes the Treasury’s grasp again, it will be despite the best efforts of a couple of recent think-tank reports which have urged the Chancellor to hack away at tax relief on contributions or reverse pension freedoms – by for instance cancelling the 25% tax-free lump sum – or both. With the tax burden growing beyond the highest levels since the second world war, this seems a bit masochistic.
“As pensions are one of the few shelters that hard-pressed families can take from rising income tax and National Insurance contributions, it might well be that a revenue-hungry Treasury will try to persuade the Chancellor to chase down money going into pensions. But with recent data from the DWP itself indicating chronic underfunding of private pensions and a possible retirement living standards crisis, the Chancellor would do well to resist.
“The pension system isn’t perfect but it’s far from unfit for purpose, and tinkering with reliefs and pension rules will only shake people’s faith in the system and discourage private saving.”
State and private pension access
Smith says: “The great debate over state pension age rumbles on, and we might get some sort of resolution if Hunt announces when the increase to 68 will be brought forward to from the current 2046. It seems likely it will be at least seven years to 2037-39, with many observers betting that it will come even nearer. Whatever the decision it will be a key factor affecting retirement plans for certain cohorts – and one that will only be complicated further if Hunt is tempted to put back the private pension access age too.
“This was another idea flown up the think-tank flagpole this year – and the Chancellor could at some point decide that this is an effective way to discourage people from retiring ‘too early’. The rise from 55 to 57 which will arrive in 2028 is already complicating the pension system and people’s retirement plans. With longevity projections being downgraded as life expectancies have stalled, it would be a retrograde step to further age-limit access to private pension savings.”
Energy bills, fuel duty and childcare
Smith says: “It seems nailed-on that Hunt will extend the Energy Price Guarantee, particularly with falling wholesale gas prices making the scheme cheaper for the Treasury. Not only would allowing energy bills to spike be deeply unpopular given the fiscal leeway that has emerged, it would give a ratchet-up to inflation.
“Likewise retaining the 5p fuel duty cut and maintaining the freeze look odds-on, not just because again it would be politically damaging not to, but also because soaring transport costs could raise inflation and drag on a flagging economy.
“The issue of childcare has garnered increasing attention in the run-up to this Budget and it now seems quite certain that Hunt will take steps here, with an extension of free hours, improvements to the tax-free support scheme, and on the supply-side changing the rules around children-to-adult ratios at nurseries. Apart from being a popular way to support household finances, it would also fit with Hunt’s drive to get ‘economically inactive’ parents back into the workforce.”