Why the U-turn on tax cuts?
The chancellor’s stark about-face on tax cuts is believed to have been made possible by several developments which have buoyed the UK’s economic outlook. Inflation has eased to 4.6%, borrowing costs have been lower than expected, and tax receipts are swelling.
Laura Trott, chief secretary for the Treasury, said on Tuesday: “The economy is in a very different place to where we were a year ago and we can now focus on going for growth, pushing up the growth rate of the economy and cutting taxes for individuals.”
This year’s Autumn Statement had been billed as a path to lower taxes, with extra financial support for low-to-middle earners a key target for the government. So, did the event live up to its billing?
Let’s examine what the chancellor has announced and explain how it might affect you.
But first, here’s a quick round up of the economic outlook.
Inflation and growth
According to Hunt, the Office for Budget Responsibility (OBR) forecasts that inflation will fall to 2.8% by the end of 2024, and to 2% during 2025.
In terms of Gross Domestic Product (GDP) the OBR has downgraded its forecasts from earlier this year. It expects the UK economy to grow 0.7% in 2024 and 1.4% in 2025 – a marked fall from March’s predictions which were 1.8% and 2.5% for 2024 and 2025, respectively.
Triple lock ‘honoured in full’
No Autumn Statement would be complete without speculation around the state pension triple lock. Hunt kept his promise to maintain the triple lock, which will be welcomed by many – not least those approaching or already in retirement.
The state pension is set to rise 8.5% from April in line with average wage increases. The government was reportedly mulling a lower increase of 7.8%, which stripped out one-off bonus payments to civil servants and NHS staff but has honoured the triple lock in its absolute form.
This means that from April, the basic state pension will rise by £13.30 a week to £169.50 (£8,814 a year), while the full new state pension will hike £17.35 a week to £221.20 (£11,502 a year).
Boost to workers and low earners
Hunt announced several reforms that will prop up workers’ pay packets. This will come as welcome news for many, helping to reduce the strains faced as costs remain high.
First, the main rate of employee Class 1 National Insurance (NI) will drop from 12% to 10% from January 6, with 27 million workers set to benefit. According to government calculations, someone on the average UK salary of £25,000 will save £450 a year. While this last-minute decision won’t be a “cure-all” for the pressure on households’ finances, it will put some more in people’s pockets each month. Bringing this into effect in January rather than April will be particularly welcome.
Second, Hunt shook up the tax system for self-employed workers, abolishing Class 2 NICs and reducing Class 4 NICs from 9% to 8%.
Class 2 NICs are a fixed weekly amount paid by sole traders and partnerships. The current rate is £3.45 per week for 2023-24. Scrapping them could save self-employed workers £190 from next year.
Class 4 NICs are paid on profits between £12,570 and £50,270 – on anything above you pay 2%. As a result of the one percentage point reduction, sole traders and partnerships could save up to £377 a year. The changes to Class 2 and Class 4 NICs will take effect from April.
And third, yesterday it was revealed that the national living wage will rise from £10.42 an hour to £11.44 an hour from next year, a mammoth 9.8% uptick, with the policy extended to 21-year-olds for the first time. Nearly three million workers are expected to benefit from this measure, worth up to £1,800 for those working full-time.
The NI changes will no doubt raise questions and there is often hidden complexity with such a change. These are uncertain and constantly changing times, and one of the big advantages of speaking to a financial adviser is that, on top of expert practical advice, they’re able to help you understand what new announcements, like tax alterations, might mean for your personal finances.
Meanwhile, benefits and Universal Credit will rise by 6.7% from next year, a £470 boost for 5.5 million households, according to the chancellor.
With millions of people still in recovery mode from the enduring cost-of-living crisis, any measures that relieve the strain and could have a positive impact on the ability of people to save for the future, can only be seen as a good thing.
One key takeaway is the continuing importance of making the money you have work as hard as it can for you. That means making best possible use of current reliefs and allowances to be as tax efficient as you can.
Pension ‘pot for life’
The workplace pension landscape could be set for a major overhaul. Hunt announced the government will consult to allow workers a “pension pot for life”. In short, this means instead of being forced to join your company scheme to enjoy employer contributions, you can select a provider of your choice, and this pot can follow you throughout your career.
Under the current auto-enrolment system, every time you switch companies you enrol on to a new pension scheme. The problem here is that given workers typically change jobs several times during their working lives, they will inevitably accumulate multiple pension pots. Not only can this result in an administrative headache, but it can also increase the risk of pensions being lost, misplaced, or neglected.
We welcome the consultation on giving employees the legal right to choose where their employer pension contributions should be paid and the increased control this could give savers over their finances.
Major ISA reforms
The chancellor made no mention of ISAs in his speech, but some key reforms were included in the written document.
Several changes to the ISA landscape have been put forward over the past few months, but only some have made the cut. From April, you will be allowed to invest in more than one type of ISA in any given tax year – a major development. As things stand, you can only invest in one of each.
Meanwhile, the government intends to permit the facility to hold fractional shares in any ISA wrapper – good news for stock traders.
Elsewhere, Innovative Finance ISA providers will be allowed to include long-term asset funds, and open-ended property funds with extended notice periods, from April 2024.
The mooted extra £5,000 allowance to invest solely in UK shares was a notable absentee, meaning the current annual limit of £20,000 remains. The government also opted against launching a “Super ISA”, which aimed to merge the Stocks and Shares and Cash versions into a single wrapper.
IHT and income tax on back-burner?
Notable absences from the Chancellor’s ‘statement for growth’ today are anything about changes to income tax or altering inheritance tax (IHT). But these could be placed on the back-burner as a pre-election crowd-pleaser.
Pre-Budget leaks suggested the government was eyeing up cuts here. And on Friday 17 November reports surfaced that the government was eyeing up IHT reforms, including plans to slash the 40% headline rate to either 30% or 20% and overhaul the tax-free thresholds. The government, however, has left the existing system unchanged - for now at least. There’s every chance these may feature at next year’s Spring Budget, as the Tory government launches a final bid to retain power with an election expected to be called shortly after.
IHT is no longer “the wealth tax” it once was. Rising asset values, coupled with frozen allowances and hugely complex rules, has increasingly put people at risk of being hit with an unexpected, and potentially considerable, tax bill after the death of a loved one.
Despite that, the allowances remain frozen, the rate has not been changed and the complexity remains. The risk is still there. People understandably want to pass on as much as they can to loved ones and understanding the rules around inheritance tax can help you reduce, or even get rid of, that tax bill. Whether that’s using gift allowances which allow an individual to pass on money to loved ones, establishing a trust or making use of business relief, the ‘right’ way depends entirely on your individual circumstances.
We’re here to support you
If you have any concerns about what the changes could mean for your personal finances, we’d encourage you to get expert guidance, either through free online services or paid-for advice. If you already have an abrdn financial planner, get in touch with them. Or find out more about how our financial planning services could help you.