Chancellor Jeremy Hunt could have more options ahead of March’s Budget as government borrowing halved at the end of 2023. With a general election looming, Hunt may take the opportunity to ease the tax burden. Read on to discover some of the personal finance changes that could be announced.
Figures from the Office for National Statistics (ONS) show that government borrowing halved in December 2023. The lower deficit of £7.77 billion – the lowest month since 2019 – means the chancellor has more scope to implement tax cuts, increase public spending, or pay down debt.
The annual Budget sets out the government’s proposals for changes to taxation. So, the announcements could affect your finances and long-term plan. Here are three changes the chancellor is reportedly contemplating.
1. Cutting Income Tax
There’s speculation that changes to Income Tax could reduce the tax burden on households. It would follow National Insurance rates being cut for employed and self-employed workers in the Autumn Statement.
While Income Tax rates haven’t increased in recent years, the thresholds have been frozen until April 2028. While your tax bill might not rise immediately, frozen thresholds could mean you pay more in the medium term or that you’re pushed into a higher tax bracket, even if your income hasn’t increased in real terms.
Indeed, the Office for Budget Responsibility (OBR) estimates that freezing the threshold for paying the higher- and additional rate of Income Tax will raise £42.9 billion by 2027/28.
Hunt has a few options if he wants to decrease the Income Tax burden before the general election. He could opt to increase the thresholds in line with inflation or reduce the tax rate.
2. Abolishing Inheritance Tax
Ahead of Hunt delivering the Autumn Statement in November 2023, it was reported he was mulling over abolishing Inheritance Tax (IHT).
IHT is a type of tax on the estate of someone who has passed away if the value of their estate exceeds certain thresholds.
While only around 4% of estates are liable for IHT, it’s often referred to as “Britain’s most-hated tax” in the media.
The ONS data shows that between 2022 and 2023, IHT tax receipts were £7.1 billion. While that may seem like a large number, it represents just 0.28% of GDP. As a result, abolishing IHT could be viewed as a way to deliver a pre-election day boost with a relatively small reduction in the total tax collected.
Alternatively, the chancellor could increase the thresholds for paying IHT or lower the tax rate.
The thresholds for paying IHT have remained the same since 2020, and are currently frozen until April 2028. As they’re not rising in line with inflation, more estates are becoming liable for IHT as the value of assets, particularly property, may have increased.
For the 2023/24 tax year:
- The nil-rate band is £325,000. If the entire value of your estate is below this threshold, no IHT is due.
- The residence nil-rate band is £175,000. Your estate may be able to use this allowance if you leave certain properties, including your main home, to direct descendants.
The standard rate of IHT on the proportion of the estate that exceeds the thresholds is 40%. So, another option Hunt may consider is reducing the rate.
3. Increasing the ISA annual allowance
Again, there was speculation ahead of the Autumn Statement that the ISA annual allowance would increase. This didn’t materialise, but Hunt did announce key changes to simplify ISAs and make it easier for consumers to transfer their money.
ISAs offer a tax-efficient way to save or invest. In the 2023/24 tax year, you can add up to £20,000 to your ISA. The annual allowance has remained at this level since 2017 rather than rising at the same pace as inflation.
Money saved or invested outside of an ISA could be liable for tax. As a result, raising the allowance may provide some people with a lower tax bill overall.
The latest government figures show 11.8 million adults used their ISA to save or invest in the 2021/22 tax year. So, increasing the ISA allowance could be a savvy option before the public goes to the polls.
We can help ensure your financial plan continues to reflect policies
Keeping track of government policies and understanding what they mean for your financial plan can be difficult. As financial planners, we can help you keep your long-term plan up-to-date and explain when announcements might affect you.
If you have any questions about what the upcoming Budget may mean for you, please get in touch.
Please note:
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 06/02/2024
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