Four things to look out for in the Spring Statement

Chancellor Rachel Reeves’s second round of fiscal announcements since last year’s general election is set to take place on 26^th March. How might she spring into action? By Rob Morgan

The Budget is the traditional occasion for the government to announce broad tax and spending measures. Yet with a backdrop of weak growth and high borrowing costs, not to mention additional strain from renewed defence spending, this inaugural Spring Statement could be more than a routine economic update.

It’s anticipated that high borrowing costs and low growth have already wiped out the government’s “fiscal headroom”. Several billion pounds in spending cuts are therefore expected to be announced, but with the OBR forecasts potentially painting a deteriorating picture it could mean some future measures aimed at increasing tax revenue are flagged too.

If the Chancellor does take further action beyond what was announced in last October’s Budget what are the things to look out for from a personal finance perspective?

1. Extended tax threshold freeze

At the Budget last October the Chancellor pledged to end the freeze on income tax thresholds in 2028.  This phenomenon which is pulling a larger proportion of people’s earnings into higher tax bands is known as ‘fiscal drag’, and it’s a favoured trick of politicians as it increases the tax take by stealth.

Despite her previous promise to return to increasing the tax bands in line with inflation, it’s thought the Chancellor may revisit this decision. Having previously ruled out increases to people’s rates of income tax and national insurance, as well as a VAT hike, there aren’t many other options.

Yet taxpayers are already feeling the chill of frozen tax bands in their wallets. Had it risen with inflation, as was traditionally the case rather than largely flatlined for five years, the income tax personal allowance would be over £15,000 by now rather than the current £12,570. That’s equivalent to £600 extra tax a year for most basic rate taxpayers.

Similarly, the higher rate tax threshold has been stuck at around £50,000 since the 2019/20 tax year and that would be over £62,000 now if it had been increased with inflation. The effect is that many higher rate taxpayers carry an additional burden of £3,000 a year compared to a situation where tax bands increased with inflation. The longer the freeze continues the greater that burden becomes.

2. State Pension ‘triple lock’

A related issue to the freezing of income tax bands is the increases in the State Pension according to the ‘triple lock’. This is the mechanism used to increase payments to pensioners by the higher of inflation, wage increases, and 2.5% each year.

With the latest figures for wages at around 5% it is highly likely this element will be the relevant one for next April, and with the current level of a full New State Pension at around £11,975 for the 2025/26 tax year a rise at that order will take it beyond the £12,570 income tax personal allowance. That would mean a pensioner relying on the standard state pension alone for their retirement income having to pay tax on a small part of it.

As well as being administratively messy in terms of dragging an unprecedented number of low-income pensioners into paying tax, it seems odd that this level of income should be taxed at all.

According to the Pension and Lifetime Savings Association, a single person in retirement needs £14,400 a year for a ‘minimum’ standard of living, a figure which is after tax and assumes no mortgage or rent costs. This figure is significantly below where the income tax personal allowance would be if it had been increased with inflation, clearly demonstrating how low earners have suffered from fiscal drag too.

Having committed to the triple lock, at least for now, one option would be for the Chancellor to increase the personal allowance. Indeed, during last year’s election campaign the Conservative manifesto contained a promise to do this for people of pension age. This would give preferential treatment to that cohort, so an uplift across the board would be more equitable, but it stands at odds with a Chancellor attempting to increase tax revenue.

3. Changes to ISA rules

To ignite more demand for UK shares and reinvigorate capital markets without affecting savers, the Chancellor could consider cutting stamp duty on the purchases of London-listed shares or extending the Stock & Shares ISA allowance while leaving the Cash limit intact.

Certainly, the Chancellor has indicated she is open to some kind of ISA reform. It’s possible she will look again with the aim of encouraging investment while simplifying what has become a cluttered regime of various ISA types.

4. Inheritance tax update

There has been significant pushback around some of the Chancellor’s planned measures around inheritance tax (IHT) announced in October’s Budget. It’s possible we might see an update on the curtailment of agricultural and business reliefs or the inclusion of pension pots following industry petitions.

There is the opportunity to provide businesses and family farms some mitigation from the planned cap on exemptions on business assets and agricultural land at a combined £1m, with a lower 50% relief thereafter, from April 2026. In particular we shall see if protests by farmers have managed to sway the Chancellor’s views and alter her approach.

The planned changes will be of great concern to owners of family businesses and farms who aim to pass assets to the next generation. They potentially face additional complexities and large tax bills, especially in the absence of judicious financial planning.

Meanwhile, plans to bring pensions into the scope of IHT from 2027, and involving pension companies in the calculation and payment of the tax, stand to significantly increase complexity in the administration of a deceased’s estate. Having digested industry views, the Chancellor may seek to steer away from what stands to be a clunky and inefficient process while keeping to her overall principles.

Rob Morgan is Chief Investment Analyst at Charles Stanley