Taxes and pensions could be in the firing line this week when chancellor Jeremy Hunt delivers his second Autumn Statement on Wednesday.
The outlook for the UK market has improved since the spring Budget, when growth was expected to hit -0.2%. But the 0.5% figure achieved so far in 2023 shows an economy that AJ Bell head of investment analysis Laith Khalaf described as “hardly purring”.
“The big question remains what the government decides to do with any windfall it gets from the economy dodging recession this year, in particular whether any tax cuts are on the cards. The chancellor may well opt to keep some powder dry for a pre-election splurge in the Budget next March,” he said.
“That might make political sense, but it would be a gamble. Macro-economic currents are capricious, and by the time the Budget rolls around, the chancellor’s scope for largesse might be scratched out by a few pen strokes from the bean counters at the Office for Budget Responsibility (OBR).”
A number of issues could be on the cards. Below, Trustnet collated the most-discussed changes investors are likely to see on Wednesday.
With the upcoming elections in mind, the Conservatives might offer tax cuts to sway voters. Quilter’s tax and financial planning expert Shaun Moore expects changes both to income tax and national insurance contributions.
On income tax, at present people can earn £12,570 tax-free. The 20% tax band ranges from £12,571 to £50,270, the higher rate from £50,271 to £125,140 and the additional rate for anything above this.
The net difference between the tax-free band and higher-rate band is £37,700. If this were to be increased to £40,000, for example, middle earners may end up as much as £460 better off – a “significant boon”, he said.
A 1% decrease to the basic rate meanwhile would save people in this bracket up to £377 annually. A similar 1% cut in national insurance contributions would increase the take-home pay for employees by similar amounts.
However, Moore warns that these measures might be “a publicity stunt” with a “minimal” real-world impact.
The discontent with inheritance tax (IHT) among the approximately 4% of UK families that pay the 40% tax on assets above £325,000 prompted the government to discuss how to reduce it.
Speculations around the size of the reduction ranged from lowering the rate to 30% or even halving it to 20%, as well as raising the threshold from £325,000 to £500,000. However, the proposal was met with harsh criticism and the government is expected to U-turn.
Rudy Khaitan, managing partner at Senior Capital, said equity release – a way of releasing cash from your home without having to move – was a better option to immediately help asset-rich but cash-poor pensioners.
“By unlocking the value tied up in their properties, UK pensioners can access a substantial source of income without waiting for the inheritance process,” he said. “In contrast, modifications to the IHT do not directly address the pressing financial concerns of pensioners themselves.”
Individual Savings Accounts (ISAs) might be subject to a new set of rules from next year. The main changes could be introduced to allow people to pay money into more than one ISA of each type in a tax year, which would make it easier for investors to try out different providers and shop around for the best deals when they become available, explained AJ Bell head of retirement policy Tom Selby.
This would be “a helpful change” to pave the way for more radical reform of the ISA system.
“It is ridiculous investors are currently faced with a choice of six types of ISA when deciding where to invest for the future, with different rules and allowances further clouding the picture,” he said.
“Simplifying ISAs by creating a ‘One ISA’ would make switching far easier, with customers able to hold cash, investments, or both in their account, and move between providers freely.”
Lifetime ISAs (LISAs) allow people below 39 to invest to buy their first home worth up to £450,000 or for their retirement. Proposed changes include increasing the property limit, which hasn’t moved since 2017, and reviewing the penalties for unauthorised redemptions.
During the pandemic the government reduced the withdrawal charge on Lifetime ISAs from 25% down to 20% to allow people to access their savings penalty-free if they found their finances squeezed during the crisis, explained AJ Bell head of personal finance Laura Suter.
“Disappointingly, this was restored to 25%, rather than changed permanently,” she said. “It feels impossible that the government doesn’t view the current cost-of-living crisis in the same way. Reducing the exit fee would be a low-cost move for the government that would help first-time buyers who saved into their Lifetime ISA in good faith but, due to soaring inflation, now need to dip into their savings.”
Another potential idea has been to introduce a tax-free allowance for UK-based investments – something welcomed by Ben Russon, co-head of UK Equities at Martin Currie, as long as it doesn’t impact the current framework.
“This type of investment vehicle could help end the downward spiral of investment volumes and lower valuations in the UK stock market. However, it would seem more appropriate to provide an additional allowance on top of what is already available rather than seeking to redirect or diminish the freedom of choice under the existing structure,” he said.