The new chancellor, Jeremy Hunt, is getting ready to make “tough decisions” on taxes and spending to close the nation’s £50 billion fiscal gap. He will present his first Autumn Statement next week.
The “medium-term fiscal plan” that was intended to be released on October 31 has been replaced with Hunt’s Autumn Statement, which will be made public on Thursday, November 17.
The chancellor is now generally anticipated to change his Autumn Statement into a “Frozen Statement,” with a range of tax allowances frozen as part of a covert tax raid, rather than releasing a spooky Budget on Halloween.
This means that millions more people will be forced into higher tax bands as a result of a toxic combination of inflation, investment gains, and wage and housing market growth; some may even begin paying some taxes for the first time. The Frozen Statement may affect workers, investors, pension savers, and even bereaved families.
After the instability caused by Kwasi Kwarteng’s mini-Budget in September, Hunt earlier stated that “decisions of eye-watering difficulty” would have to be made in order to lower government debt and calm the markets. The Treasury has also issued a warning that “everyone” will be required to make more tax contributions in the years to come.
Hunt warned again that there would be more bad news as the Bank of England increased interest rates to 3%, the highest increase in decades. He declared: “The only approach to achieve lower mortgage rates, more jobs, and long-term growth is sound money and a healthy economy. In order to get there, though, we will have to make challenging choices regarding taxes and expenditures.
What will the Autumn Statement announce?
The Office for Budget Responsibility (OBR) estimate, together with other measures like spending cutbacks and tax increases, will be made public by the chancellor. It will include a medium-term economic growth strategy as well as specific proposals to close the “fiscal black hole,” which is expected to cost at least £50 billion. On October 31, Hunt was scheduled to present a shorter version of this; but, as the prime ministerial revolving door turned once more—Liz Truss out, Rishi Sunak in—it was decided to postpone it and turn it into a full Autumn Statement.
Industry experts agree with the Treasury’s warning about difficult choices.
The chief executive of Blick Rothenberg, Nimesh Shah, says he doesn’t anticipate any “giveaways,” adding that the tone under Jeremy Hunt is significantly different from that of Kwarteng in that the government is concentrated on maintaining tax receipts and reducing spending in order to lower the debt burden.
In fact, Hunt axed programs intended to aid households coping with the ongoing cost of living problem just days after being appointed chancellor. He reduced the Energy Price Guarantee, abandoned promises to reduce the basic income tax rate by one penny, and undid the dividend tax cut of 1.25%.
The threshold for inheritance tax may be frozen.
According to https://moneyweek.com/personal-finance/tax/inheritance-tax/605498/inheritance-tax-warning-autumn-statement, there are rumors that the chancellor would extend a freeze on the inheritance tax (IHT) threshold until April 2028.
The threshold was originally frozen at £325,000 until April 2026 when Rishi Sunak served as chancellor, and Hunt is anticipated to extend the freeze for a another two years.
If this were to happen, the tax-free allowance would have not increased in accordance with inflation for almost two decades, starting in 2009. It would have climbed to £537,129 (CPI) or £464,643 if it had been increased to reflect rising prices (RPI).
Because more people’s estates will be brought into the IHT net as a result of fixing the threshold, experts predict that the Treasury will gain an additional £1 billion.
The secret tax rise, according to James Green, investment director at financial advisor deVere Group (https://www.devere-group.com), “will soon start putting a harsh pressure on bereaved families.”
IHT is clearly no longer solely for the really rich, as it was originally intended, he continues. More and more middle-class families are being impacted, whose primary asset is their property.
Pension tax incentives may be reduced or possibly frozen.
Hunt will probably carry on this pattern of tory governments fiddling with pensions to raise money next week.
The pension lifetime allowance will remain unchanged for a further two years, or until 2027, according to the Telegraph. The term “lifetime allowance” refers to the maximum amount that retirees may contribute to their pension pots during their lifetimes without incurring a penalty when it comes time to withdraw the funds.
It is currently worth £1,073,100. Savings beyond that threshold are taxed at 55% if withdrawn all at once or at 25% plus your marginal income tax rate if done gradually.
According to experts, a further two million pension savings would be affected by the prolonged freeze. The resultant impact is that some workers, particularly those employed by the NHS and other public-sector organizations, would simply cease contributing to their pensions in order to avoid the tax and retire earlier, which will worsen labor shortages in such fields.
In order to increase revenue, Sean McCann, chartered financial advisor at the insurance company NFU Mutual, thinks Hunt may also consider reducing the pension annual allowance. Compared to changing pension tax relief, this would be simpler.
According to him, cutting the yearly pension contribution limit from £40,000 to £30,000 or even £20,000 to match the annual ISA amount would result in significant financial savings for the government. The populace, however, is not saving enough for retirement, so the government must proceed with caution.
What about the triple lock for the state pension?
The triple lock is the promise that, each year, the state pension will rise in line with the highest of inflation, wages, or 2.5%. There are concerns that the triple lock may be permanently eliminated or that the present one-year suspension may be extended beyond April 2023.
A major Conservative manifesto commitment that Truss and Kwarteng had made in recent months is the triple lock.
Sunak and Hunt, a new power couple, have not, however, provided such a guarantee. In a statement made last month, Hunt said: “Every decision we make will be filtered through the lens of what matters most to the most vulnerable. I’m extremely conscious of how many vulnerable seniors there are and the necessity of the triple lock.
Sunak has likewise shown little devotion to the policy after taking office as PM.
Sunak, on the other hand, is reportedly hesitant to revoke the vow because retirees are unable to increase their salaries in any other way. Hunt’s ability to raise billions through a Frozen Statement may indicate that the triple lock is still in place.
In April, pensioners earned a 3.1% yearly raise. If the triple lock is reinstated as intended in April 2023, they may experience a payout increase of 10.1% as a result of skyrocketing inflation.
The financial platform AJ Bell estimates that pensioners would lose up to £442 if Hunt elected to abandon the triple lock and raise state pensions by wage growth instead (5.5%) next year.
There will likely be some contentious negotiations about the triple lock between No. 10 and the Treasury, according to Tom Selby, head of retirement policy at AJ Bell. He observes that “what we have here is a true struggle between politics and maintaining the sustainability of the public budget.”
Benefit augmentations will be revealed
When Hunt makes his Autumn Statement, we should learn what is happening with benefit hikes.
Every April, benefit payouts typically increase. Truss was anticipated to make a final decision this month after previously refusing to commit to raising payments in line with inflation.
The government could easily gain money by curbing benefit increases, but Sunak is reportedly likely to remain with an inflation-linked hike to maintain its reputation as a “fair and compassionate” leader.
Income tax thresholds can be frozen for more time.
Although income tax thresholds are currently set to remain frozen until 2026, Hunt might announce an extension, perhaps all the way to 2028.
Millions of people would be forced into the income tax system for the first time or into higher tax brackets as a result of this sneaky tax.
There are other ways the government can earn money, according to McCann of the NFU. “It’s unlikely we’ll see an increase in the rates of income tax or VAT, as that would go against one of the core promises of the 2019 manifesto,” she said to MoneyWeek.
If Jeremy Hunt freezes the income tax thresholds, as earnings rise over the following six years, many more people will be forced into the 40% and 45% tax brackets.
Those who find themselves subject to higher tax rates should think about increasing their pension contributions to lower their taxable income, he continues.
Extension of the income tax band freeze, according to experts, is “highly likely” and could help the government save £5 billion annually.
National Insurance may be changed once more.
On November 6, the administration repealed a 1.25 percentage-point rise in National Insurance Contributions (NICs) that Sunak had enacted as chancellor.
Hunt might be persuaded to reconsider NICs as a source of funding to close the budgetary gap, though. Because many people don’t understand it, changing NICs rather than income tax may be more popular with voters and prevent unfavorable press about an increase in income tax.
According to Shah at Blick Rothenberg, Hunt may reduce the 1.25% reversal such that it only applies to basic-rate taxpayers (those making less than £50,271 annually) starting in April of next year. As a result, those making more will pay National Insurance at 3.25% (rather than 2%).
The chancellor may go much further, he continues, and “apply National Insurance to rental revenues and capital gains.”
Allowances for capital gains taxes may be reduced or frozen.
McCann suggests that the chancellor consider capital gains tax if he wants to go after people with the biggest shoulders. Although the Office of Tax Simplification (OTS) has previously suggested harmonizing the rates with income tax, CGT is now assessed at rates of 10% and 20%, plus an additional 8% if the gain is from residential property.
“Aligning CGT with income tax may be seen as deterring business, so raising the rates to 20% and 30% and keeping the 8% surcharge on residential real estate would be a compromise that would still generate more money for the Treasury. This action would assist gather additional money from the tiny group of taxpayers who make the highest gains, who account for the majority of CGT.
There are rumors that the CGT annual exemption, which is presently worth £12,300, will be frozen as part of the Frozen Statement rather than being increased to account for inflation (as well as increases in home prices and investment growth), as is customary each year.
However, McCann worries that the chancellor might be more forceful by reducing the allowance rather than freezing it.
He writes: “The chancellor might lower the yearly CGT exemption of £12,300 in order to broaden the tax base. According to the most recent data, 323,000 people are thought to pay CGT, but the OTS predicts that doubling that number would result from cutting the annual exemption to £5,000
If a stricter CGT regime is indeed unveiled the following week, it will support the use of ISAs and pensions since their profits are tax-free. Couples who are married or in civil partnerships can transfer assets to one another in order to take advantage of both sets of CGT allowances and to transfer a potential gain to the partner who is in the lower tax bracket.
Public spending may be reduced.
Hunt will look for ways to cut costs wherever he can, from reducing planned expenditures (the HS2 train project, for example, will be considered) to reducing daily department spending. Sunak has pledged to exclusively safeguard one sector of spending, the NHS, which might result in significant budget cuts for other departments including welfare, education, and defense.
Under-inflation pay agreements for public sector employees including teachers, civil servants, police, and social workers may also result from the budgetary crunch.