Comment: Can we expect tax cuts in the Spring Budget?

With the Spring Budget around the corner, Rob Morgan offers his predictions

 
With an increasingly weary electorate troubled by a higher tax burden and the escalating cost of living the Chancellor, Jeremy Hunt, will be keen to show his generous side with some crowd-pleasing measures. He will also have some scope to cut taxes with declining public borrowing and an economic recovery expected later this year. The extent of this will depend partly on revisions to the Office for Budget Responsibility’s (OBR) economic projections, and while falling inflation, lower interest rates, and a rosier growth outlook will help, the UK’s productivity growth is a hindrance.

Mr Hunt will also be mindful that any substantial giveaway might jeopardise the interest rate cuts the Bank of England has signalled are coming later this year, which should provide a boost to both businesses and households with borrowings, as well as impact the government’s own debt costs. Overall, a modest package of tax cuts, mostly focused on individuals, looks a likely scenario.
 

Spring Budget Predictions

 
With the Budget just a couple of weeks away, here is a roundup of the possible changes affecting personal finances that Mr Hunt may be weighing up.
 

1.Income Tax cuts on the horizon?

 
National insurance rates were cut during the 2023 Autumn Statement and took effect from January but there are hopes that attention will now turn to income tax in the Spring Budget to relieve the burden on households and provide simplification. Prime Minister Rishi Sunak promised to reduce the basic rate of income tax during his 2022 leadership campaign, but there has been no movement so far. Instead, the tax burden has become heavier with the income tax personal allowance and the threshold for the higher rate band barely budging since 2019 despite earnings rising substantially.

The personal allowance, representing the initial slice of income you pay no tax on, was £12,500 in April 2019 but if it had been raised in line with inflation it would be well over £15,000. Yet it has hardly moved. Similarly, the higher rate tax threshold which was £50,000 in April 2019 would be approaching £65,000 by now if it had been revised upwards with the Consumer Prices Index (CPI). As a result, the freeze has drawn huge numbers of people into the 40% rate as wages have risen.

Some upward movement on the tax bands or a cut to rates would be welcome. The Chancellor might also consider ironing out of the wrinkle of a 60% marginal tax rate caused by the personal allowance reduction that occurs above £100,000 of earnings.

In a similar vein, the £50,000 High Income Child Benefit Charge threshold is ripe for reform. Under current rules, claimants must pay back 1% of their family’s child benefit for every extra £100 they earn over £50,000 each tax year. If you or your partner earns £60,000 or more, the charge is equal to the full child benefit claimed. It means one person earning £60,000 doesn’t receive any child benefit, but a household with two people each earning £50,000 would get the full amount.
 

2. ISA allowance to be considered

 
ISAs (or Individual Savings Accounts) are one of the most tax-efficient ways of saving because any returns are tax free. The Treasury is reportedly looking at increasing the amount that can be saved into them, and possibly carving out part of the allowance to be used only for UK shares.

On the surface, a proposed additional allowance for UK stocks, a so-called ‘British ISA’, presents an elegant solution to two issues: The UK’s waning shareholder culture and the general lack of interest in the UK stock market, as well as the increasing tax burden on small shareholders. However, it would make the once simple ISA regime even more complex to navigate, and it may have little impact compared with measures targeted at larger, institutional investors such as pension funds.

Nonetheless, the ISA allowance has been £20,000 since the 2017/18 tax year, so seven consecutive tax years at this level and another freeze for 2024/25 would make it number eight, so there could be some movement on the overall level this time around.
 

3. An axe to inheritance tax?

 
A reform of inheritance tax (IHT) would be popular with many traditional Tory voters and there are even suggestions that the tax could be axed altogether at some point.

Many more families are finding themselves paying it because of a freeze to the tax threshold and higher asset prices, especially our homes. IHT is charged at a rate of 40% on the value of estates worth more that £325,000, but if you are married or in a civil partnership you can pass on your allowance to your partner, meaning no tax is payable until the combined estate is above £650,000.

A further boost to the allowance, or ‘nil-rate band’, can come from passing on the family home to direct descendants, meaning many couples can leave an estate worth up to £1 million to loved ones IHT free. There are also various annual gift provisions that mean you can reduce the size of your estate tax-free while alive – for more information check out our ten tips for inheritance tax planning.

Inheritance tax could be reformed in some way, but it would be a significant cost to abolish it entirely. Receipts amounted to approximately £7bn in the 2022/23 tax year and they are set to increase as the value of estates rise and the thresholds outlined above remain frozen. However, IHT accounts for less than 1% of total tax receipts overall. With most tax cuts likely to be directed towards the working population to encourage economic growth, it’s an area where the Chancellor will likely look to win support from voters with a pledge to reform rather than a Budget surprise. A nod towards this and some more generous gifting allowances in the meanwhile could feature.
 

4. Keen eyes on the CGT and dividend allowances

 
Many investors are increasingly caught by reductions in the dividend and capital gains tax allowances and have been drawn into reporting and paying tax on modest sums.

The dividend allowance was slashed in April 2023 from £2,000 to £1,000 and it will be cut in half again from £1,000 to £500 in the next tax year as things stand. It was far more generous previously, as much as £5,000 for the tax year 2017/18, so some ordinary investors are now suddenly having to pay income tax on what are potentially quite modest shareholdings.

Meanwhile, the CGT allowance, the level at which you start paying tax on realised profits, has been slashed from £12,300 to £6,000 for this tax year, and it will fall again to £3,000 from April 2024 as things currently stand. As a result, more people will have to pay tax on their investment profits. Abandoning plans to reduce the thresholds for dividend tax and capital gains tax again would relieve pressure on investors and entrepreneurs alike.
 

5. Stamp Duty to be reduced?

 
Stamp Duty Land Tax is once again in focus with housing market activity slowing due to higher interest rates pushing up the cost of buying a home or trading up. As well as becoming a hurdle to people moving around for their work, stamp duty is also seen to be a disincentive for older homeowners downsizing, leading to fewer homes available for families requiring larger properties.

It has been argued that the Treasury should reduce the rate of stamp duty land tax or remove the levy altogether at a far higher level. This is how the tax currently works, in a nutshell:
 

• Presently, purchases of less than £250,000 do not incur stamp duty, but it is charged at 5% cent of the next £675,000 of house purchase value up to £925,000.
• It then rises to 10% after that, and to a top rate of 12% on the portion above £1.5 million.
• First-time buyers do not pay stamp duty on properties under £425,000 and face a charge of 5% on the portion of homes between £425,001 and £625,000.
• If the price is over £625,000, you cannot claim the first home relief.

 
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Rob Morgan is Chief Investment Analyst at Charles Stanley