23 October 2023
Hunt has a relatively unenviable Autumn Statement approaching in which he must tread a tightrope between boosting Tory popularity and not fuelling inflation.
As the Institute for Fiscal Studies (IFS) recently suggested in the unveiling of its Green Budget: “an ill-timed fiscal loosening – such as an unfunded package of pre-election tax cuts – might give a short-term economic sugar rush, but could prove unsustainable and ultimately mean a protracted recession as interest rates rise even further to bring inflation back under control.”
Furthermore, the general consensus is that any moves to bring forward plans to unfreeze the various personal tax allowances and thresholds would impact the huge £52 billion a year tax increase that they bring, plunging the UK further into the red.
This leaves Hunt with his hands tied but there are some policies he could opt to tweak which would not only be crowd pleasing but could help simplify the saving and retirement landscape in the UK.
Quilter experts below detail their views on what Hunt should tackle in his Autumn Statement:
SHAUN MOORE, TAX AND FINANCIAL PLANNING EXPERT, QUILTER
1. Simplify the ISA regime
"A fairly easy and uncostly measure would be to simplify the Individual Savings Accounts (ISAs) regime. However, reports in the Times over the weekend point to the government doing the opposite of this and potentially adding yet another ISA to roster.
"The primary purpose of ISAs is their ability to encourage savings among the masses. The existing framework and plethora of different types of ISAs presents a challenge to many potential savers who end up being turned off from the whole process completely.
"Simplifying ISAs and amalgamating the cash and stocks and share ISA within a single ISA would help to reduce complexity. By offering a unified product for both cash and stock savings, the reformed ISA could nudge individuals towards exploring investment opportunities, without being deterred by the risk that some find intimidating associated with stocks and shares. Fear of investing is often based on inexperience or perhaps an isolated experience. However, it is always important to invest for the long term so more needs to be done to show savers that stocks and shares investments are more suitable for longer term savings objectives whilst cash is better suited to shorter term objectives.
"However, a proposal to merge these ISAs could demystify the concept of investing and possibly lead to higher retail participation in the stock market. At the least it might prove sensible to remove the one ISA of each type per tax year’ rule. This would help people that might have some propensity to invest put some of their money to work in the stock market rather than just fleeing to the perceived safety of cash. A merged ISA would also help give savers more flexibility and encourage savers make more efficient use of their £20,000 ISA allowance. At the heart of all these tweaks is the need to increase public awareness and make saving simple and accessible.
"It would also be sensible to rename the Lifetime ISA as a clean-up of the ISA brand. For example, it would be much better understood by people as a simple First Home Account, perhaps losing the retirement element. Past endeavours, like the introduction of the green ISA, have not been successful, highlighting that adding more variants of ISAs tends to dilute the brand rather than strengthen it. Raising the property cap so that the product is useful throughout the country would also be sensible as particularly in the south east property price inflation has put a huge amount of properties over the cap.
"However, the rumours surrounding the introduction of an additional allowance specifically for investing in British equities would further complicate the ISA landscape. Without knowing any detail questions arise around the mechanics of this allowance—what happens at the point of divestment and the implications of investing in other areas after the initial investment. There are already existing challenges round non-qualifying investments in the ISA regime introducing even more will add more complexity. The new allowance could inadvertently introduce more questions and confusion rather than promoting a culture of saving and investing."
2. Raise the high-income child benefit cap to £65,000
"The cost of living in the UK has risen drastically since the introduction of the high-income Child Benefit cap in 2013. This cap has been waiting for a decade for a refresh and now, absurdly, catches some basic-rate taxpayers, as well as failing to take into account the impact of inflation over this period.
"What £50,000 could buy in the past is not the same as what it can buy today. In fact, £50,000 in today’s terms would be £66,660 according to the Bank of England. This threshold therefore needs to be adjusted to £65,000 at the very least, as a matter of urgency, to acknowledge the increasing costs families face and ensure that the benefit better reflects contemporary financial realities.
"Another big criticism of the current static threshold is it can act as a disincentive for individuals to earn more if they are close to the £50,000 threshold. By raising the threshold it would reduce this ‘benefit trap’ and encourage individuals to advance in their careers without the fear of losing essential financial support.
"Similarly, the modern family unit has evolved, with more dual-income households and increasing childcare costs. Raising the threshold would recognise these changing dynamics and provide additional support to families who might be just above the current threshold but still facing significant financial pressures. It would also help to abate the perverse issue where two parents earning just under the high-income threshold suffer no charge yet have a household income of around £100,000 yet a single parent earning £60,000 would lose all their benefit.
"Raising the threshold would also end the ridiculous situation where a basic rate taxpayer earning just over £50,000 but below the higher rate threshold of £50,270 suffers a high-income tax charge.
"At a time when the government’s coffers are running low the budgetary implications of this change are naturally going to be a concern but raising the threshold for the Child Benefit High Income Charge to £65,000 should be justified on the grounds of fairness, economic stimulation and better reflecting the modern financial realities faced by UK families."
3. Simplify inheritance tax – increase the nil rate band and abolish the RNRB
"It is no surprise that reports of a potential cut and even eventual abolishment of inheritance tax (IHT) have been swirling in recent weeks as something the Chancellor might pull out of his hat to drum up support from core voters. While this is certainly an area ripe for reform, any changes to IHT must be properly consulted on to ensure there are no unintended consequences.
"Increasing the nil rate band to £500,000 and £1 million for married couples would be a relatively straightforward option that would help to slow the ever increasing numbers of people getting caught in the IHT net. It could be accompanied by the removal of the residence nil rate band, given it is fiendishly complex and favours married households, which is not reflective of the modern society we live in. The Government could also look at simply lowering the headline rate of 40%. This could be lowered to a 30% or 20% rate, with the latter aligning to the chargeable lifetime transfer regime. This alongside the removal of many of the available exemptions available would be sensible and help to simplify IHT.
"Britain’s finances are not looking on a particularly sure footing and the revenue generated from IHT is set to reach a record £8 billion this year. While it is not a huge generator of Treasury revenue, IHT is playing an increasingly significant role in the UK's economic framework.
"As the government navigates the tightrope of public approval and fiscal responsibility, abolishing this revenue source altogether will create a fiscal hole that needs to be filled. The answer might just as unpalatable and those calling for IHT to be completely scrapped may need to be careful what they wish for as it opens the door to new kinds of wealth taxes under future governments."
4. Increase annual IHT gifting exemption to £11,000
"The government should also look carefully at gifting rules, especially amidst the cost of living crisis which disproportionately impacts the young and could better encourage the flow of wealth down generations. People could be given the option to make larger gifts each year rather than the current £3,000 limit and have them be immediately exempt from inheritance tax.
"Gifting laws are currently frozen in time, after being set in 1981 and not changed since. Had the allowance tracked inflation, it would be permissible to gift nearly £11,000 per tax year according to the Bank of England’s inflation calculator.
"Given the allowance has been unchanged for more than 40 years and considering the economic backdrop it would be wise to change this and give a well needed carrot to a public who have suffered a lot of stick.
"Even if the various allowances are not uprated to help increase the amount of people making lifetime gifts all the allowances could be amalgamated into one annual relief at a rate that better reflects current inflation."
JON GREER, HEAD OF RETIREMENT POLICY, QUILTER
5. Overhaul the triple lock
"The new Tory slogan is “long-term decisions for a brighter future” and in that vein while it is a potentially difficult and unpalatable policy to reform, decisively deciding how to sustainably set the state pension for the long term would provide a solid proof point for Sunak’s new ethos.
"The "triple lock" system, introduced in the UK in 2010, guarantees that the state pension will rise each year by the highest of three measurements: average earnings growth, the Consumer Prices Index (CPI) inflation rate, or 2.5%. While it has played an important role in protecting pensioners from inflation and ensuring that their income doesn't fall behind that of the working-age population, there are also valid arguments that it simply is not sustainable over the long term. Therefore reforming the triple lock would fit nicely with Sunak’s new found ethos of taking difficult decisions for the long term prosperity of the country.
"At some point whichever party is in government needs to face up to the fact that we need to look at the policy and replace it with something that can help ensure future generations can have access to a state pension that is of a meaningful value and is sustainable and fair.
"The triple lock can be financially unpredictable as we have seen over the past few years where soaring inflation and wage growth has triggered a significant state pension uprating. In years where inflation or average earnings growth spike significantly, the cost to the Treasury is immense and uncertain.
"Pegging pensions to a fixed percentage of average earnings provides is a more predictable and sustainable model. Tying pensions to a percentage of average earnings, mean that the state pension would rise in line with the prosperity of the country. If the nation prospers and average earnings increase, so too would pensions. Conversely, if the country faces economic challenges and average earnings stagnate or decrease, pensions would reflect this. This ensures a fair distribution of economic prosperity (or challenges) across generations.
"For budgetary planning, having a more predictable system would be also beneficial. While average earnings can fluctuate, they might do so less dramatically than inflation, making it easier for governments to plan for future pension costs.
"Similarly, the triple lock has been criticised for disproportionately benefiting pensioners at the expense of younger generations, especially during times when wages for the working population are stagnant. Pegging the state pension to a percentage of average earnings ensures that pensioners' incomes don't outpace that of the working-age population by too great a margin.
"While the triple lock has played a valuable role in protecting pensioners' incomes over the past decade, there are compelling reasons to consider a shift towards a system pegged to a percentage of average earnings. Such a system could provide a more sustainable, fair, and predictable approach to pension uprating in the UK. But we are mindful that it may take some time to reach that point."
