With the Brexit deadline of 31st October now fast approaching, the Government has confirmed a Spending Review will take place next week with the aim of giving at least some certainty to Whitehall departments.
The last Spending Review in 2015 was focused on cuts and austerity, but next week’s event will be playing to a very different tune, with spending likely to be the main focus. Sajid Javid has warned that there are no blank cheques, but there will be key spending announcements in popular areas in a bid to win over voters, as part of a warm up to a much-expected General Election. The review will only cover one year, so we’re not likely to see massive overhauls of tax regimes, but instead quick wins and injections of money.
AJ Bell’s personal finance analyst Laura Suter and senior analyst Tom Selby consider the main pensions and personal finance areas the Chancellor is likely to target.
1. Pension tax relief
Tom Selby, senior analyst at AJ Bell, comments: “The Boris Johnson administration appears keen to distance itself from ‘Remainer’ former Chancellor Phillip Hammond and his successor Sajid Javid could use his first major set-piece to shift pension policy.
“The area we are most likely to see movement on is the pension tax taper. The impact the taper is having on high-earning public sector workers – and particularly those in the NHS – has been well-documented, and Javid recently confirmed the Treasury would ‘review how the tapered annual allowance supports the delivery of public services such as the NHS’.
“While pension tax policy should be designed for the long-term, the short-term pressures facing UK hospitals require rapid action. Scrapping the taper would be the simplest option, although the Exchequer would need to find around £1bn a year to cover the cost.
“Once the Government emerges from its Brexit bunker, a wider review of the pension tax system, with the central aims of simplifying the rules and encouraging more people to save for retirement, is long overdue.”
2. The state pension
“A hastily convened Spending Review with a General Election possibly just around the corner probably isn’t the time for a Conservative Government to announce any major state pension reforms.
“If anything, an administration hungry for votes might use the opportunity to further distance itself from a recent think-tank report which suggested the state pension age should increase to 75 by 2035. Although this might be attractive from a fiscal perspective, it would be a sure vote loser and would be pounced upon by the opposition.
“The state pension triple-lock, which increases the benefit by the highest of average earnings, CPI inflation or 2.5%, is one policy that at least merits review given the random mechanism it has introduced for increasing the value of the benefit. However, even a small tweak to this – such as replacing it with an earnings/inflation double-lock - is likely to be off limits in the current febrile political environment.”
3. Pensions Dashboards
“While Government business might be dominated by Brexit, behind the scenes work continues on building the framework for the creation of Pensions Dashboards. Over the long-term Dashboards could make a genuine positive impact on people’s lives in the UK, helping them locate lost funds online and potentially engage more proactively with their retirement savings. At this stage political support and certainty are the main requirements of the project, so a seal of approval from Number 11 would undoubtedly be welcomed by the industry.”
1. Stamp duty
Laura Suter, personal finance analyst at AJ Bell, comments: “The idea of reforming the stamp duty system so that sellers pay has already been floated and then quickly batted away, but it’s a tax that’s ripe for reform and would certainly be a vote winner.
“Javid has said he is a ‘low tax guy’ and is a fan of simplified tax, and Boris Johnson has previously talked about cutting the rate for the most expensive homes, so some reform in this area is possible. Further stamp duty cuts for first-time buyers in a bid to stimulate the property market would be a popular move with young people and their parents. However, Javid has also said he wants to focus on boosting prospects for lower-earners, meaning changes to shared ownership and potential boosts to make property more affordable for the masses could be seen.”
2. Income tax relief
“One of Boris Johnson’s campaign pledges was to hand a tax boost to those earning more than £50,000, so it wouldn’t be a surprise to see this big giveaway appear in next week’s review. The Prime Minister had pledged to increase the point at which the 40% income tax rate kicks in from £50,000 to £80,000, worth £2,500 a year for top earners.
“The IFS estimated that this move alone would cost around £9bn a year, taking a big chunk of any budget for spending. However, it’s also a move that’s set to benefit around 4 million people, which is a lot of potential vote winning.”
3. Inheritance tax reform
“The UK’s most hated levy, inheritance tax, could also be in the crosshairs. A recent review* has outlined how the horrendously complex tax could be simplified, making it easier for people to navigate and make use of tax breaks.
“The Chancellor is in luck, as the hard work on looking at how to reform the system has already been done by the Office for Tax Simplification, meaning he could just adopt some or all of their recommendations. These include reforming the gifting system, scrapping the seven-year taper and creating an online system to prevent hundreds of thousands of people having to go through the IHT process. And as far as populist moves go, slashing the death tax is a pretty good one.”
4. Student loans
“Another easy win to get younger voters on side would be reform of the student loan system. Currently graduates pay up to 6.3% interest on their loans, with the rate linked to the RPI measure of inflation – cutting this rate would curry favour with those looking down the barrel of 30 years of repayments and high interest rates.
“Javid has also said he wants to give a boost to entrepreneurs and business owners, raising the prospect of a cut to VAT or business taxes, but this is likely to be an announcement for the Autumn Budget later this year.”
* Office of Tax Simplification IHT review: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/814181/Final_Inheritance_Tax_2_report_-_web_copy.pdf