There’s a risk that this short-term gain will come at the expense of longer-term pain for the economy, making the Bank of England’s task of bringing down inflation that bit trickier. Policymakers are approaching the hard yards of shifting stubborn inflation thanks to higher demand for goods and delays due to Red Sea disruption
The UK is still having to borrow vast sums to meet its current budgetary commitments, and tax cuts will make this harder. It’s no surprise that the Chancellor has been warned by the Institute for Fiscal Studies that if he wants to reduce the debt burden, tax rises or spending cuts will return in the future. Pledges of investment in infrastructure will necessitate extra borrowing but do have a greater chance of boosting economic growth over the longer-term, rather than a sweet rush of personal tax cuts.
The final fiscal event before a general election is always going to be packed with treats to woo voters. We’ve seen speculation about potential tax cuts to help keep us sweet, from inheritance tax to income tax and stamp duty. However, while tax cuts might hit the sweet spot for some voters, beyond the initial heady rush, there could be long term consequences, and some of the suggestions so far could end up eating away at our finances. Meanwhile, there are other far more satisfying tweaks the Chancellor has room to make, which could sustain better financial resilience both now and in the future.”
7 things we want from the budget
1. LISA reform
“The Lifetime ISA can change people’s lives – helping them into the property ladder and to save for the retirement they want. But it’s not perfect, and some tweaks could make a world of difference.
The 25% penalty for accessing money for purposes other than buying a first home or for retirement not only removes the effect of the government bonus, it also takes a chunk of people’s hard-earned saving. Reducing the early access penalty to 20% means people will not lose any of their own savings should they need to access their money early. This could particularly help groups saving for retirement such as the self-employed who may have variable income and need to access their money.
We believe the LISA could be made even more attractive if people were able to open one up until the age of 55. Recent analysis from the HL Savings and Resilience Barometer has shown this would help 70% of the self-employed who missed out on the LISA because they were too old when it launched.
In addition, the £450,000 limit on the value of property bought with a LISA has not been reviewed since LISAs launched. Rapid house price growth means this limit should be increased to help people, particularly in the South-East, who will struggle to find a property they can use their LISA to buy.
2. Lifetime Pension
We welcomed the announcement on Lifetime Pensions in the Autumn Statement. Allowing people to choose which pension they want their contributions paid to throughout their working life will help drive engagement and deal with the proliferation of small pension pots which causes real harm – especially when people lose track of money. The development of a Lifetime Pension model has the potential to transform the industry and we urge the Chancellor to continue to support it.
3. Auto-enrolment extension
The Auto-enrolment Extension Bill received Royal Assent in September, but we’ve yet to see further progress. These are important reforms that would enable many more people to start saving for retirement, but its timing needs to be carefully planned, particularly as we emerge from a cost-of-living crisis which has stretched many people’s finances to the limit.
Findings from the HL Savings and Resilience Barometer showed that introducing these reforms too early would impact people’s overall financial resilience by eroding the money they have to spend today. Those on lower incomes would be particularly hard hit. We believe government should press ahead with a timetable for the implementation for these reforms, but they need to be planned far enough in advance that we’re no longer dealing with the fallout from the cost-of-living crisis.
4. Money Purchase Annual Allowance
The MPAA is there to prevent people over the age of 55 sacrificing salary for pensions and then immediately withdrawing it, with 25% tax free and no National Insurance. The basis is sound, but its impact is extremely limiting on those trying to rebuild a pension.
The MPAA should be replaced with anti-recycling rules, which would mean that where a pension had been flexibly accessed, HMRC would treat contributions paid with the intent to recycle as an annual allowance excess and be taxed accordingly.”
5. Advice/guidance boundary
“Personalising how we talk to people, based on their behaviours and financial position, helps them engage with money, and make better financial decisions. It’s just the sort of outcome intended by the FCA’s Consumer Duty rules.
There have been some really positive steps from the Government and FCA, who have prioritised their review of the advice/ guidance boundary. We want to see that momentum maintained, to help transform how we communicate with people, and how they, in turn, manage their money.
6. A considered approach to income tax changes
Among all the potential tax changes being floated, there is no suggestion of an early end to the freezing of tax thresholds, which will continue to do untold damages to our finances, and cost taxpayers far more than was originally envisaged when the freeze was introduced. The freeze on income tax and NI thresholds will keep pushing more people into paying tax on their income and more into paying higher rates of tax. Cutting the rate of tax while keeping thresholds frozen is counter-intuitive, so it’s important that the government considers income tax in the round.
If there is a cut to income tax, there should be a transitional period of at least a year in which tax relief on savings and investment products remain at their previous level to make it easier for people to plan for. This becomes increasingly vital while complexity in the UK tax system grows – not least from the divergence between income tax rates in Scotland and the rest of the UK.
7. Streamlining the ISA range
Over the years an array of ISAs has emerged, and while choice is positive, we need a balance between offering choice, and providing so many options that it becomes difficult to select the right one for your needs. There are three products that can be rolled into existing ISAs while maintaining this balance: Child Trust Funds into Junior ISAs; Help to Buy ISAs into the Lifetime ISA; and Innovative Finance ISAs into Stocks and Shares ISAs.
3 things we don’t want to see
1. Higher dividend and capital gains tax bills
The allowances for both are set to be halved in April. The dividend tax allowance was £5,000 when it was introduced in 2016 – and from April will now be a lowly £500. Meanwhile the capital gains tax will be slashed again to £3,000. It hasn’t been this low for more than 40 years.
Halting plans to cut the allowances for dividend tax and capital gains tax again would relieve pressure on both investors and entrepreneurs. Given the government’s growth agenda, and drive to encourage investment into UK companies, halting the planned threshold cuts could help promote this agenda and help the London Stock Exchange retain its lustre.
2. A sweetener to inheritance tax without a proper review of allowances
A cut in the rate has been floated, which would be popular among the growing number of people whose estates are set to breach the allowances. However, it’s not a progressive tax cut, and while it would improve the transfer of wealth to younger generations at the time of death, it would do nothing to encourage people to support their families with gifts during their lifetimes, when they may need it most.
Any changes to inheritance tax need to include a review of allowances. The gifting allowances have been in place for so long that they have lost an awful lot of their potency, making it more difficult for people to make lifetime gifts at the times when it can deliver the biggest benefit to their loved ones. There is also real scope for simplification by abolishing the £175,000 nil rate residency band and raising the IHT threshold to £500,000, which would make things far easier, without a particular distortion of behaviour or revenue."
3. Beware the British ISA
“One worrying proposal, is the idea of an additional ISA allowance specifically for investment in British companies. This would add unnecessary complexity, might actually fail to attract the investment it hopes for, and could end up adding risk for investors.
It might not boost British investment at all. Those who already max out their £20,000 ISA allowance could simply hive off all existing UK holdings to the British ISA, and use the extra wiggle room to invest more overseas in their usual ISA. However, if it does persuade people to invest more in the UK, it could unnecessarily concentrate portfolios, raising risks, especially if there was more volatility in the London markets.
A sensible alternative is to boost the overall ISA investment allowance. Just to keep pace with inflation since the £20,000 allowance was introduced, it would need to rise to more than £25,000. This would boost capital for listed firms, without limiting the potential for diversification, and without adding another layer of rules. There is already a home bias in ISA investments. Around 1 million of HL’s 1.8 million clients trade on London markets, accounting for 80% of trades in the last year.”
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