UK Chancellor of the Exchequer Rishi Sunak has failed to better his mediocre Autumn Budget performance with a handful of small changes during his Spring Statement 2022.
Not much was expected from Sunak in the current geo-political climate, as he announced the Office for Budget Responsibility (OBR) slashed its GDP forecast for this year to 3.8% from 6% with inflation and the Ukraine/Russia war continuing to affect global markets.
The statement was seen as Sunak’s time to shine and ease pressure on Brits with the rising of living and fuel costs. One of the biggest features of the statement for financial advisers was the change to National Insurance thresholds.
From July 2022, the annual National Insurance primary threshold and Lower Profits Limit will be aligned with the income tax personal allowance, making the first £12,570 ($16,565, €15,105) of earnings tax-free.
HM Treasury said that almost 30 million working people will benefit from the change and the cut is worth over £6bn. The threshold lift comes as National Insurance contributions will rise by 1.25% in April 2022 to fund a health and social care levy.
Also, Sunak announced that, from April 2024, the UK government is cutting the basic rate of income tax to 19% from 20%. This cut is worth around £5bn.
Long-term ramifications
Steven Cameron, pensions director at Aegon, said that the National Insurance tax cut will be “welcomed by many as helping mitigate the cost of living squeeze”, but highlighted that “increasing the threshold has longer term ramifications”.
“Setting aside the 1.25% increase, which will be ringfenced to pay for social care and NHS support, raising the threshold will reduce the amount being collected in National Insurance from today’s workers to pay for today’s state pensions,” he said. “This will happen not just in the coming year but also in all future years, storing up longer term challenges for the funding of state pensions which are paid for out of National Insurance on a pay as you go basis.
“There have been calls for the planned increase in state pension age to 67 by 2028 to be deferred but having lower National Insurance receipts will make that less affordable. Similarly, lower National Insurance receipts could once again call into question the ongoing affordability of maintaining the state pension triple lock beyond this Parliament.
“Furthermore, at present, those above state pension age don’t pay National Insurance on earned income so will not benefit from the threshold increase.”
Income tax cut impact on pensions
Shona Lowe, financial planning expert at Abrdn, said: “While we welcome the £0.01 reduction in the basic rate of income tax, savers still need to take steps to reduce the impact of inflation.
“Moving cash into arrangements where the returns could be closer to the inflation rate could be an effective way for people to make the most of their savings this year, while speaking to a professional adviser will help savers ensure they are maximising those returns, benefitting them both now and in the future.”
Kate Smith, head of pensions at Aegon, added: “The chancellor’s announcement that the basic rate of income tax will fall from 20% to 19% from April 2024 will be good news for many and will help to offset the tax threshold freeze.
“However, there’s a pensions fly in the ointment. People receive tax relief on pension contributions at their highest marginal tax rate. A reduction in the basic rate of income tax means that people will get lower tax relief on their pension contribution, meaning that the government top-up directly into their pensions will be less.
“This means that to get the same retirement income, people will have to pay a little bit more into their pensions. If they can, people may want to think about putting more into their pensions over the next couple of years to make the most of the current 20% tax relief.”
Tax reforms
HM Treasury also said within its ‘Tax Plan’ that alongside cuts, it wants to “make the tax system simpler, fairer and more efficient”.
It added that there are over 1,000 tax reliefs and allowances in the tax system and “they play an important role but can also be costly and complex”.
The government body added: “We have already reformed some reliefs and allowances and will look to go further ahead of 2024.
“Tax reliefs are available for individuals investing in start-ups, and efforts to reform Solvency II and the pensions charge cap to unlock institutional capital into illiquid assets are ongoing. The government is also reforming listing rules to make it easier for companies to raise public funding.”
Callum Stewart, head of defined contribution (DC) investment at Hymans Robertson, said: “It is great to see Rishi Sunak reiterate and confirm his intention to relax DC charge cap rules to ease the potential for greater levels of investment and innovation in regard to illiquid assets.
“This is great news for individual DC pensions scheme members as this will provide attractive opportunities for them to improve outcomes through their DC pension scheme.”
Cameron’s Aegon added: “Tax policy can also have a big impact on pension savers and investors as rates and thresholds often directly affect tax reliefs and incentives.
“The plan refers to 1,000 tax reliefs and allowances in the tax system, which while playing an important role can be costly and complex. There is always speculation that the chancellor may seek to review and simplify pensions tax relief, so it will be interesting to see if this is advanced as part of the tax plan.”
Andrew Barr, wealth planner at Succession Wealth, said: “Sunak is boxed in, and is signalling his intentions now with the Budget and 2024 election on the horizon. Tax reform feels like it’s being lined up for the next Budget.”
Reception
Overall, there was a lukewarm reception to Sunak’s Spring Statement – with many asking, “is that it”?
Steve Webb, partner at pension consultancy firm LCP, said on Twitter: “If you’re a pensioner who doesn’t drive and isn’t planning to install solar panels, the chancellor’s package of help with the cost of living isn’t going to do much for you.
“I’m genuinely shocked that the chancellor has done nothing at all for pensioners for whom fuel bills make a large part of their budgets and face hikes in bills with no additional help.”
Myron Jobson, senior personal finance analyst at Interactive Investor, added: “The Spring Statement was only designed to provide a snapshot of the UK’s financial standing, but this year, it has evolved into a mini-Budget to tackle the escalating cost of living crisis which is squeezing many household budgets to breaking point.
“Overall, shouts of ‘is that it’ is likely going to be the overarching sentiment shared by those struggling to stay financial afloat amid the cost-of-living squeeze. The bottom line for consumers is strap in for a heightened inflation that is expected to last until 2024 according to official estimates. The cost-of-living crisis is set to get worse before it gets better.”
Laura Suter, head of personal finance at AJ Bell, said: “The big rabbit out of Rishi Sunak’s hat was announcing a cut to income tax rates from 2024, and while that will grab the headlines it’s precisely zero help to families struggling with the cost-of-living crisis now – or indeed for the next two years.
“The announcement today, which clearly could have waited until the full Budget later this year, appears to be the chancellor’s way of coming through on his promise to deliver a low-tax nation without actually handing the tax cut to the nation now.
“Opposition MPs and his own peers had called on him to do more to help families who are facing rising bills now, but on the basis that those bills can’t be paid with an IOU for two years’ time, many will think he’s fallen short of this task.”
