Next week’s Spring Statement is only meant to be an economic update, not a full-blown Budget. But with a cost-of-living crisis hitting the headlines and people across the country struggling to pay soaring bills for energy, food or petrol, it seems impossible that Chancellor Rishi Sunak will ignore all that and not offer any help to the UK public.
The Government has already announced some handouts, but that was before the Ukraine crisis pushed energy costs even higher and left households looking down the barrel of another estimated £1,000 on their annual energy bills later this year, on top of the existing £700 hike coming next month.
“At a time when some households are having to make tricky decisions between paying for heating or food, it looks particularly poorly timed for the Government to be launching a new tax hike, in the form of a rise to National Insurance, or freezing income tax rates and so taking more out of people’s pay packets by stealth. At the same time, hospitality businesses will see an increase to their VAT back to 20% after the emergency lower rate during the pandemic and many businesses will face rising staff costs thanks to a minimum wage increase,” said Laura Suter, head of personal finance at AJ Bell.
What can the Chancellor do to help?
Help with energy bills:
“When the energy price cap changes in October average household energy bills are now predicted to rise to £3,000. The current Russia/Ukraine crisis has pushed energy costs higher and they could go above that. The current help from the Government to soften the blow of rising energy bills only covers about half of the existing increase that we’re due to see in April. At that point the average household energy bill will rise by £700. But if we do see energy bill costs rise another £1,000 on that, you’ve got £1,700 of increases in 2022 and just £350 of support.
“One option that might appeal to the Government is to extend the £200 energy bill loan scheme. This is a no-cost move over the longer term, as everyone will pay back the money over the next five years. The Government could also decide to defer when the repayments begin, as they are due to start from April at a rate of £40 a year. Now it looks like higher energy costs are here for longer, it doesn’t look very wise to have the repayments starting so soon, when people will still be battling higher bills.
“The Government could also extend the £150 council tax rebate and increase the amount. However, as this is an actual giveaway, not a loan, this is a big cost to the Government. It has also been criticised as an untargeted handout, with lots of people receiving it who aren’t actually struggling with bills at the moment.
“Another option, which Labour is calling for, is another extension to the Warm Home Discount scheme, which gives some low-income families £150 towards their energy bills. The Chancellor could increase the amount or expand the reach of the scheme. Labour is also calling for a windfall tax on oil and gas companies, with the money being redirected towards those who need it most. However, this is a politically fraught move that the Government has dodged so far.”
Delay the NI hike and dividend tax increase:
“The planned 1.25 percentage point increase in the National Insurance rate and dividend tax rate could be halted for a year. The move is intended to raise money for health and social care. Because there wasn’t time to set up an entirely new Health and Social Care Levy before the tax rise came in, it’s being temporarily added to National Insurance rates for this year only, meaning there is room for the Government to U-turn on the move and implement it fully as a new levy from 2023.
“MPs have passed a motion in the Commons to cancel the raise, but so far it’s being ignored by Prime Minister Boris Johnson. The Government broke a manifesto pledge when it announced the move, leading to negative headlines across the board, which makes it potentially harder for them to now U-turn.”
Triple lock inflation linking:
“Pensioners relying on the state pension are going to be hit hard in the current cost of living crisis as they are getting a below-inflation increase in their pension payments of 3.1%, but are a group that spend more of their money on things like energy bills and food, which are seeing large price raises.
“The Government ditched the triple lock this year as the wage inflation figure was so high, but it could revise the inflation figure it uses for the state pension uplift, to better reflect the current inflationary environment. Interestingly, the latest inflation figures are released on the same morning as the Spring Statement, raising questions about whether an alternative measure of inflation will be generated to base any state pension increase on.
“Currently the 3.1% increase in the new state pension will take weekly payments to £185.17, while the basic state pension will rise to £141.87. If they instead rose by 7% pensioners on the new state pension would see an extra £364 a year, while those on the basic state pension would get £279 a year more.”
Unfreeze the income tax bands:
“From April the personal tax-free allowance will be frozen at £12,570, and the higher rate income tax threshold will be frozen at £50,270, rather than increasing in line with inflation as usual. The Treasury forecast this will cost taxpayers £1.6 billion in the next tax year, and so clearly there is room to scrap or delay the freeze and save people money. The freeze will cost someone on £30,000 a year an extra £1,101 in tax by 2026/27 when the freeze is due to end, and someone on £50,000 will face an extra £5,282in tax.
“However, a cynical person might point out that the frozen allowances are a stealth tax and so not well understood by many people. This means that unfreezing allowances might not create the kind of ‘tax giveaway’ headlines that the Government would be looking for from any handout announcement.”
Lifetime ISA exit penalty:
“The Government reduced the Lifetime ISA exit fee to 20% during the Covid pandemic, to reflect the fact that lots of people would have to withdraw their money due to losing their job or seeing their income fall. This sets a precedent and shows that it’s easy for the Government to implement a reduction.
“With the cost of living soaring and wages failing to keep up, it’s inevitable that some people will reluctantly have to dip into their Lifetime ISA savings just to pay their bills and meet the rising cost of food, petrol and energy bills. The Government could reduce the exit fee to 20%, so it just reclaims the Government bonus. It will give people a bit of breathing room to dip into their savings and not face the punitive exit fee for doing so.”
“The Government could take the same approach with the Money Purchase Annual Allowance (MPAA). At the moment, anyone who accesses taxable income from their pension is hit with the MPAA, lowering their annual allowance from £40,000 to just £4,000. In tough times it is likely more people will turn to their retirement pot to cover a shortfall and in these circumstances it feels unfair to handicap their ability to rebuild their retirement savings once the cost of living crisis has lifted. Scrapping the MPAA would make it easier for millions of people to use their savings to keep afloat during the crisis.”
More green Gilts:
“The Government has already raised £16bn through its Green Gilt issuance, and considering the latest one was 12 times oversubscribed, there’s clearly still appetite to buy more of these green Government bonds. The money raised is used for projects like zero-emissions buses, offshore wind and schemes to decarbonise homes and buildings. The recent energy crisis has focused attention on the need for renewable infrastructure investment, so it makes sense that the Government would raise more cash for this cause.”
“The VAT rate for hospitality businesses was slashed to 5% during Covid, it has since risen to 12.5% and will rise again to 20% from April. This last increase could be delayed, to keep those businesses at the 12.5% rate and help them while they struggle with rising bills, meaning either higher prices for customers or lower profits. More broadly, the Lib Dems are also calling for the VAT rate to be cut from 20% to 17.5% for a year, which they say will save families £600 a year on average.”
Where will the money come from?
If the Chancellor is going to hand out any giveaways he’s going to have to try to balance the books. So what areas might he target to raise some more cash?
Capital Gains Tax:
“Increasing ‘wealth taxes’ could be a popular move. Capital gains tax generated £10.6bn last year, and this is rising as property and investment prices climb. There has previously been speculation that the current capital gains tax rates of 10% and 20% (or 18% and 28% for property) will be scrapped and instead everyone will pay income tax rates on their gains. This move was mooted by the Office for Tax Simplification in a previous review. The stipulation from the OTS was that investors should get some sort of inflationary relief, so they are only taxed on above-inflation gains. Clearly any relief would reduce the tax-take for the Government, so that may be quietly ignored in any final rules.
“In a less radical move, the Government could cut the tax-free allowance from its current £12,300. The allowance has already been frozen until 2026, but Rishi Sunak could go one step further and cut the allowance. Chopping it in half, to £6,000, would generate £480m, while cutting it to £2,500 would give an £835m boost to Government coffers, according to OTS predictions.”
“Massive reform has already happened to dividend tax rates, with them set to increase in April anyway. But that doesn’t mean more tweaks are off the table. In a further squeeze on investors and some self-employed, the Government could cut the current £2,000 dividend tax-free allowance and drag more people into the new tax rates.
“At the current allowance the Government says 60% of people with dividend income outside an ISA or pension are within the current tax-free limit, which has to look like a fairly juicy percentage to reduce. The Government has form on this, having already cut the rate from £5,000 to £2,000 in 2019, so a cut to £1,000 or even £500 wouldn’t be impossible.”
“Pretty much every major spending event over the past decade has been preceded by rumour and speculation about the future of higher-rate pension tax relief. However, removing higher-rate relief would be a direct attack on middle Britain. It is also far from clear how a flat rate of pension tax relief would be applied to defined benefit (DB) schemes, where contributions come from pre-tax ‘net pay’. Any solution would inevitably see members of public sector DB schemes landed with significant tax bills as well.
“While strained public finances demand the Chancellor reviews all areas of public spending, a dramatic pension tax relief raid would come with huge practical challenges and political risks. There are however, easier ways for the Chancellor to reduce the cost of pension tax relief.”
Annual or lifetime allowance cut:
“If the Treasury is looking to save money on pension tax relief, the annual allowance is the simplest lever to pull. The annual allowance is currently set at £40,000, while savers can also ‘carry forward’ up to three years of unused allowances. Lowering this to £30,000 or even £20,000 – in line with the ISA allowance – would raise revenue for the Exchequer while only affecting those who make very large pension contributions. The lifetime allowance could also potentially be reduced, although given it has already been frozen for the rest of this Parliament at just over £1 million this seems unlikely.
Restrict pension tax-free cash:
“Another rumour that often does the rounds is that the Treasury is planning to either remove or restrict the ability of savers to take a quarter of their retirement pot tax-free. While the Treasury has seriously explored radical tax relief reform, it is telling that tax-free cash has never been looked at in the same way.
“This is likely in part because any move to cap or abolish tax-free cash altogether would be extremely unpopular, and in part because it would almost certainly involve creating a protection regime, so pension contributions already made continue to benefit from their existing tax-free cash entitlement. This would deliver an unwelcome double for the Chancellor of unpopularity and complexity. What’s more, any savings to the Exchequer would potentially take years to materialise.”
“If the Chancellor wants to raise money from wealthier people, he could turn his attention to taxes paid on death. Pensions can currently be passed on tax-free on death if the person dies before age 75, and at your recipient’s marginal rate of income tax if you die after age 75. Applying a tax to inherited pensions would clearly raise much-needed cash for the Treasury, although how much would depend on whether a protection regime was introduced for existing funds or not. If it wasn’t, those who have paid into pension on the basis of the death benefits on offer would understandably feel angry at the rug being pulled from under them.
“Inheritance tax is the other lever the Treasury could pull, either by increasing the current 40% rate or lowering the amount that can be inherited tax-free. Both measures would inevitably lead to ‘death tax’ headlines, however – not something politicians generally welcome.”