10 changes the experts predict in next week’s Spring Budget
Following the disastrous mini Budget and the corrective Autumn Statement, the pressure is on the Chancellor to deliver a fair and balanced Spring Budget. Here’s what the experts predict will make the cut.
The Spring Budget will take place on Wednesday 15 March where the Chancellor of the Exchequer, Jeremy Hunt, will set out the Government’s planned spending and objectives.
Here are 10 predictions by finance experts about what will be announced next week:
1) Energy Price Guarantee to remain at £2,500
In November the Government announced that the Energy Price Guarantee would be extended for 12 months come April, but average bills would climb from £2,500 to £3,000 as the scheme would become less generous.
April will also see the end of the Government’s Energy Bills Support Scheme giving households £400 towards the soaring cost of gas and electricity.
Given the two changes, there’s mounting pressure on the Government to help households who are already struggling.
However, rumours surfaced last week that some energy providers are preparing for the Government support to remain in place until June to help customers with rising bills, as wholesale energy costs have fallen.
Laura Suter, head of personal finance at AJ Bell, said: “It’s a no brainer for Jeremy Hunt to extend the Energy Price Guarantee for another few months, until energy prices fall further. The plan to make the Energy Price Guarantee less generous in April at the same time as the government stops the monthly rebate we’ve all been getting off our bills would have landed the average household with an extra £900 on their annual fuel bills in one swipe.”
2) Freeze fuel duty
In last year’s Spring Statement, the Government introduced a 5p fuel duty cut to last for 12 months.
Fuel duty is currently levied at a flat rate of 52.95p per litre for both petrol and diesel but given the previous details of the measure, it is due to rise back to 57.95p per litre, meaning motorists face a “pump price shock”, according to The RAC.
Simon Williams of the motoring group added: “While we accept the 5p cut introduced last year can’t last forever, with household finances under even more pressure this Spring than they were a year ago, we don’t think now is the time to be removing it.”
It is hoped the fuel duty will be frozen. Before last year’s cut, the duty had been frozen for 12 consecutive years.
3) Cut the Lifetime ISA early access penalty
The Lifetime ISA (LISA) is a hybrid scheme allowing people aged 18-39 to save for a first home or for retirement. The maximum that can be saved or invested is £4,000 up until the age of 50, and the Government applies a 25% bonus, up to a maximum of £1,000 a year.
Withdrawals in the first year of opening the product or for any reason other than buying your first home or retirement from the age of 60 carry a 25% penalty on the whole amount, so you would lose more than just the Government’s 25% bonus for early access. As an example, if you save £4,000 and gain the £1,000 Government bonus and you wanted to access this £5,000, you would face a penalty of £1,250.
Jon Greer, head of retirement policy at Quilter, said: “On the face of it the 25% bonus is attractive and could be an excellent way of helping to give ‘generation rent’ a helping hand onto the property ladder or an additional boost to retirement savings. However, the punitive 25% penalty means that those who have done the right thing by saving are penalised if they need to access their cash, which given the current economic climate might be more likely.
“At the very least, the Government should only take away the bonus rather than raid people’s savings as well. This could easily be achieved by dropping the 25% penalty to 20% essentially ridding the product of an exit charge levied on people’s actual savings.”
At the onset of the pandemic, the Government relented on this charge, providing a temporary cut to the LISA penalty to 20%. It was restored to 25% in April 2021 and now, given the cost-of-living crisis, it means many may once more be forced to dip into this ISA cash to keep afloat.
4) Re-think the frozen tax thresholds
Following the disastrous mini Budget by former Chancellor Kwasi Kwarteng and PM Liz Truss, Hunt moved quickly to restore the economy, where he announced a number of frozen thresholds stretching as far as 2028.
However, Rachael Griffin, tax and financial planning expert at Quilter, said now we have entered a more predictable era, the Government should re-think these frozen thresholds which will pull more people into paying higher rate and additional rate of income tax. However, people won’t feel richer as salaries have simply kept up with inflation.
“This means that in real terms their buying power remains much the same, yet their salaries are taxed much more. It is understandable the Government is keen to refill public coffers, but this should be balanced with a fair tax system that is not dragging more and more people into higher taxes,” Griffin said.
5) Cut childcare costs
As well as help to cut energy bills, it is hoped the Government will tackle soaring childcare costs too.
Suter said: “The Government has mooted extending the ‘free’ hours of childcare to one and two-year-olds, but this comes at a huge expected cost, with some estimates putting it at £10bn. The other issue is that the ‘free’ hours are anything but, with the Government paying such a low fee to nurseries for these hours that parents have to foot the bill for top-ups and extras so nurseries can keep afloat.
“An alternative is to boost the Tax-Free Childcare support, which currently gives up to £2,000 a year per child towards nursery costs. The Government could increase this figure and vastly improve awareness of the failing scheme, where uptake has been 75% lower than expected at launch.”
Suter added that “the no-cost option”, is to change the ratios of adults to children at nurseries and childminders, allowing fewer staff to look after the same number of children. Despite many nurseries saying this isn’t workable and won’t reduce costs, the fact it will cost the Government absolutely zilch makes it a contender.”
6) High income child benefit charge upper limit
Continuing with the cost of children theme, Suter said the high income child benefit charge (HICBC) is “ripe for overhaul”.
Introduced in 2013, it affects families where one parent earns more than £50,000 a year, with the main bugbear being that this threshold has not changed since inception.
Those with income over this figure are required to pay 1% income tax on the child benefit for each £100 of income above this. This means the value of child benefit is eroded to nil once the taxable income of one of the adults exceeds £60,000.
Suter said: “With wages rising, inflation rampant and childcare costs soaring, it feels particularly unfair that a single-income family where one person earns £60,000 wouldn’t be entitled to any child benefit, while a couple who both earn £50,000 would get the full benefit.”
She explained that the Government has two options. One would be to scrap the threshold altogether, meaning everyone would be entitled to child benefit regardless of income, or it could raise the threshold to a higher rate.
“The first option is radical and feels more like the playbook of Liz Truss’ Government rather than Rishi Sunak. But raising the threshold to reflect rising wages is less extreme and means that families with two children would get a boost of £2,075 a year.”
7) Review the pension triple lock
Whether you love it or hate it, the pension triple lock is safe for now, with retirees expecting a double-digit state pension hike this April.
The pension triple lock guarantees the basic state pension will rise by the higher of average earnings, inflation or 2.5%. As it will rise by the inflation figure of 10.1%, some will see their pensions breach £10,000 a year for the first time.
However, debates around intergenerational fairness and affordability of the state pension have been ramped up, with figures revealing every 1% increase in the state pension costs the taxpayer £900m a year.
Andrew Tully, technical director at Canada Life, said: “That’s a hugely expensive state benefit today but looking ahead even more so, as the ratio of workers to retirees is forecast to change. By 2045 the number of people of pensionable age will grow to 15.2 million, an increase of 28% on the level in 2020. There is a tricky balancing act for Government as it looks to the medium and long-term sustainability of this policy.”
8) Measures to get the over 50s back into work
A big number of over 50s are economically inactive and not thought to be looking for work, official data revealed. The majority of these workers are thought to have a long-term illness or disability, while others have taken early retirement or have taken on care responsibilities.
Either way, the Government is keen to get some of this workforce back in to the workplace and out of retirement, with onus on businesses to offer more flexibility for those workers with long-term illnesses or looking after family.
9) Increase the Money Purchase Annual Allowance (MPAA)
If the Government is set to get more over-50s back into employment, one missing piece of the puzzle relates to the MPAA.
Ordinarily, people have an annual allowance of £40,000 or 100% of earnings if lower that can be paid into pensions.
However, for anyone who has accessed their retirement money, the MPAA kicks in as the Government looked to curb double tax relief on these sums deposited.
The MPAA is a restricted annual allowance for those aged 55+ who have released or drawn down some or all of their tax-free cash sum and who have benefitted from an income from the remaining drawdown pot. It applies to contributions paid by the worker, an employer or anyone else and was cut from £10,000 to £4,000 in 2017.
Pension experts have long condemned this move and last week, a host of financial organisations submitted a letter to the Treasury calling for the MPAA to be restored to £10,000.
Tom Selby, head of retirement policy at AJ Bell, said: “If the Government is serious about tackling labour market shortages and getting over-50s back to work, addressing this pension tax penalty feels like a no-brainer.”
10) Accelerate the state pension age to 68
In another pension conundrum, the Government could announce an acceleration of the state pension age to 68 by the years 2037 to 2039, instead of by 2044 to 2046 amid longevity and falling birth rates. Rumours surrounding this were first aired earlier this year and potentially means millions of people will need to adjust their retirement plans as a result.
Tully said: “Many people will face a challenge to bridge the gap between when they want to retire and when the state pension starts. And for many, the state pension won’t provide a desirable standard of living in retirement, so other savings will be required.”