OCTOBER 13, 2021
Chancellor Rishi Sunak is preparing to announce his Autumn Budget on 27 October 2021. With two weeks to go, AJ Bell’s experts look at the areas which could most affect people’s personal finances.
Laura Suter, head of personal finance at AJ Bell:
Capital Gains Tax
“This could be the big change we see announced on Budget day, with increasing ‘wealth taxes’ being a popular move to help restore the country’s finances after the pandemic. Capital gains tax generated £10.6bn last year, and this is rising as property and investment prices climb.
“The speculation is that the current capital gains tax rates of 10% and 20% (or 18% and 28% for property) will be scrapped and instead everyone will pay income tax rates on their gains. This move was mooted by the Office for Tax Simplification last year in its review. The stipulation from the OTS was that investors should get some sort of inflationary relief, so they are only taxed on above-inflation gains. Clearly any relief would reduce the tax-take for the Government, so that may be quietly ignored in any final rules.
“In a less radical move, the Government could cut the tax-free allowance from its current £12,300. The allowance has already been frozen until 2026, but now the manifesto promise of no tax increases has already been cast aside, there’s no barrier for Rishi Sunak to cut the allowance. Chopping it in half, to £6,000, would generate £480m, while cutting it to £2,500 would give an £835m boost to Government coffers, according to OTS predictions.”
“The Government is caught between a rock and a hard place with fuel duty. The tax on petrol and diesel has been frozen for the past 11 years and now feels like a ripe time for that to change.
“However, on one hand, the last thing people need right now is prices at the pump rising further, after surging oil prices and the recent petrol crisis driving prices up. Alternatively, the Government is still pushing its green agenda and maintaining the fuel duty flies in the face of that. With this particular political hot potato it feels likely that the freeze will be over, but with the government delaying the tax increase to next year – in the hope that fuel prices will have reduced by the time it kicks in.”
“Massive reform has already happened to dividend tax rates, but that doesn’t mean more tweaks are off the table. The tax on dividends will rise from April next year with an additional 1.25 percentage points on each rate to help pay for social care. But if the Government cut the current £2,000 dividend tax-free allowance they’d drag more people into the new tax rates.
“It would be a politically clever move to separate the two changes, if a little sneaky. At the current allowance the Government says 60% of people with dividend income outside an ISA or pension are within the current tax-free limit, which has to look like a fairly juicy percentage to reduce. The Government has form on this, having already cut the rate from £5,000 to £2,000 in 2019, so a cut to £1,000 or even £500 wouldn’t be impossible.”
“This year’s spending review neatly aligns with when the final report on post-18 education will be published, meaning all eyes are on what the Chancellor will do to the student loan system. Currently, only around a quarter of students will repay their loans in full, and this is something the Government could easily change.
“At the moment, graduates pay back their loans at 9% of their earnings above a threshold of £27,288 a year, but the Government could reduce this threshold and drag more people into repaying their loans. If the threshold was reduced to £25,000 it would cost anyone earning more than the current limit an extra £206 a year, while if it was slashed to £20,000 it would cost an extra £656 a year.
“Graduates will pay the new social care levy and so anyone above the existing threshold will already have a marginal tax rate of 42.25% from April. Any more hikes in their costs will be pretty hard to stomach, particularly as younger people were hit harder in the pandemic and are still struggling to recover financially.”
Energy price reform
“Soaring energy prices are at the biggest concern facing most households this winter – and are rapidly becoming one of the biggest problems the Government needs to tackle too. With many families facing the awful choice between affording food or heating this winter after wholesale gas prices rose 250% so far this year, the Government may offer a lifeline to those households.
“They could extend the Warm Home Discount scheme, to allow more people to benefit, or increase it from its current £140. The winter fuel payment could also be increased for pensioners, who spend a large proportion of their income on energy and so will be among the hardest hit this winter. The amount has been frozen for years, but there is precedent as the Government previously introduced a temporary uplift of £50 in 2009-11, although this was under Labour. Of course, the big criticism of these payouts, which already cost the Government £2bn a year, is they go to anyone, regardless of income or wealth, rather than being targeted at those who need it the most. Either measure would almost certainly be temporary for this year.”
“All eyes will be on how much funding the Government announces for local councils to spend in the coming year. Dealing with the financial fallout of the pandemic in their communities is a big enough task, but local councils also need to foot the bill for some of the new social care plans announced by the Government earlier this year.
“Put simply, if councils don’t get the funding from Government they’ll have to go to the public and hike council tax. The IFS has already predicted a potential increase of around £240 to average bills in the next few years if more central Government funding isn’t given, and even its best-case scenario sees an extra £160 added to bills in the next few years.”
Laith Khalaf, head of investment analysis at AJ Bell:
The Long Term Asset Fund
“Last year the Chancellor committed to launching a Long Term Asset Fund, which invests in illiquid assets like private equity, private debt, venture capital, infrastructure and real estate. Given that his stated deadline for getting one up and running was this November, the forthcoming Budget looks a likely podium from which the Chancellor can announce the arrival of these funds with a flourish.
“The Chancellor has no doubt eyed the huge sums of money sitting in pension funds and decided that would make a rather nice funding pool for infrastructure projects and private British companies. He’s not wrong on that score, but the challenges in bringing such a product to market are not inconsiderable, and the benefit to end investors is theoretical and unclear. The main issue with investing in illiquid assets is- drum roll- they aren’t very liquid. The fudge coming down the road is allowing long notice periods for LTAFs, possibly longer than 6 months, rather than standard daily dealing.
“All very well, but this shifts the liquidity problem onto the multi-asset default funds that are expected to invest in these products. These funds generally have well-diversified portfolios, and investors bases, so in theory a few percent of illiquid assets shouldn’t present any problems, providing they have extensive liquidity risk management in place. However, applying such risk management techniques to a newly created fund class also presents challenges, and some multi-asset managers may well prefer not to allocate some of their capital to funds they can’t get their hands on for the best part of a year, and then at an unknown price.
“The FCA is also considering extending these products to retail investors, where the intricacies of liquidity management probably aren’t quite as well understood. Retail investors also already have access to illiquid asset classes through investment trusts, an area big pension funds find it harder to access because of size and dealing constraints. Investing in assets like private equity and infrastructure is very much a minor sport amongst retail investors and financial advisers, and seeing as investment trusts already offer an option for the few who want exposure, it seems unlikely there will be significant demand for LTAFs in this market.”
“The FCA’s long awaited policy announcement on notice periods for open-ended property funds would also likely be forthcoming if the Chancellor announces the LTAF at the Budget, as the regulator was waiting for feedback on the LTAF consultation to make a final decision, and clearly the two policies are closely linked.”
NS&I Green Bonds
“The Chancellor has also committed to launching a green NS&I savings bond this year, and we could well see Rishi Sunak announcing the interest rate in this Budget, in much the same way George Osborne did with the NS&I Pensioner Bonds in 2014. The launch of a three year green savings bond, backed by the Treasury, will be a welcome addition to the UK cash market, and will give savers a place to park their money and do their bit for the environment at the same time.
“However, the question of what rate to pay is politically charged. Too little, and it will disappoint savers, and could lead to a product flop, particularly when the potential for interest rates to rise is already likely to deter savers from locking their money away for three years. Too much, and clearly questions will be asked about the cost to the taxpayer, particularly when taxes and the cost of living are on the up, and Exchequer resources are stretched to the limit.
“The government could borrow money for its green infrastructure spending plans through the gilt market instead of through NS&I. The current rate of government borrowing for a three year gilt is just 0.7%, and that compares to an interest rate of 1.8% on some of the best deals for three year savings products on the cash market. On the £15 billion of borrowing the NS&I will be raising through the green bond, closing that rate gap could end up being a significant cost to the taxpayer. If the Chancellor offers a market-leading rate, he will be open to accusations of buying green credentials with taxpayers’ money.”
“Thanks to concerns over climate change, the sale of the UK’s first ever green gilt went down a storm. £10 billion was raised on 21st September, and reportedly there were £100 billion of bids for the gilt. Bonds are already in high demand, thanks to the presence of a price insensitive buyer in the form of the Bank of England, as well as regulations which encourage pension schemes and insurance companies to hold gilts. Add in a green tint which can help pension trustees bolster their ESG credentials, and you have a very potent sales mix indeed. The fact there’s also so little supply has also no doubt helped to put bums on seats. Just £15 billion of green gilts are planned this year, a drop in the ocean compared to the £250 billion of bonds the government intends to issue in total. The Chancellor may therefore use the Budget to announce more green gilt issuance, ahead of COP 26 in November, and to capitalise on the huge current interest from the investment industry in ESG friendly assets.”
Pensions & IHT
Tom Selby, head of retirement policy at AJ Bell
“Pretty much every major spending event over the past decade has been preceded by rumour and speculation about the future of higher-rate pension tax relief.
“However, removing higher-rate relief would be a direct attack on middle Britain, leading to people who do the right thing and save for their future being hit with extra tax costs.
“It is also far from clear how a flat rate of pension tax relief would be applied to defined benefit (DB) schemes, where contributions come from pre-tax ‘net pay’.
“Any solution would inevitably see members of public sector DB members – including doctors and NHS workers who were clapped as heroes during the pandemic – landed with significant tax bills as well.
“While strained public finances demand the Chancellor reviews all areas of public spending, a dramatic pension tax relief raid would come with huge practical challenges and political risks. There are however, easier ways for the Chancellor to reduce the cost of pension tax relief.”
Annual or lifetime allowance cut
“If the Treasury is looking to save money on pension tax relief, the annual allowance is the simplest lever to pull. The annual allowance is currently set at £40,000, while savers can also ‘carry forward’ up to three years of unused allowances as well.
“Lowering this to £30,000 or even £20,000 – in line with the ISA allowance – would raise revenue for the Exchequer while only affecting those who make very large pension contributions.
“The lifetime allowance could also potentially be reduced, although given it was frozen for the rest of this Parliament at just over £1 million at the last Budget this seems highly unlikely.
Restrict pension tax-free cash
“Another rumour that often does the rounds is that the Treasury is planning to either remove or restrict the ability of savers to take a quarter of their retirement pot tax-free.
“While the Treasury has seriously explored radical tax relief reform, it is telling that tax-free cash has never been looked at in the same way.
“This is likely in part because any move to cap or abolish tax-free cash altogether would be extremely unpopular, and in part because it would almost certainly involve creating a protection regime, so pension contributions already made continue to benefit from their existing tax-free cash entitlement.
“This would deliver an unwelcome double for the Chancellor of unpopularity and complexity. What’s more, any savings to the Exchequer would potentially take years to materialise.”
“If the Chancellor wants to raise money from wealthier people, he could turn his attention to taxes paid on death.
“Pensions can currently be passed on tax-free on death if the person dies before age 75, and at your recipient’s marginal rate of income tax if you die after age 75.
“Applying a tax to inherited pensions would clearly raise much-needed cash for the Treasury, although how much would depend on whether a protection regime was introduced for existing funds or not.
“If it wasn’t, those who have paid into pension on the basis of the death benefits on offer would understandably feel angry at the rug being pulled from under them.
“Inheritance tax is the other lever the Treasury could pull here, either by reducing the headline rate or lowering the amount that can be inherited tax-free.
“Both measures would inevitably lead to ‘death tax’ headlines, however – not something politicians hoping for re-election would generally welcome.”
Automatic enrolment update
“There are various areas of the flagship auto-enrolment reforms that are currently up in the air and the Chancellor may use his Autumn Statement to provide an update.
“Top of the list is arguably the ‘net pay’ issue which means well over 1 million low paid workers are estimated to be missing out on pension tax relief each year. The Conservatives pledged to address this in their manifesto, so a solution should be forthcoming sooner rather than later.
“The Government has also committed to expanding auto-enrolment in the ‘mid-2020s’ by reducing the qualifying age from 22 to 18 and scrapping the ‘earnings band’ against which minimum contributions are calculated. If taken forward, this would mean every pound earned would qualify for a matched contribution from your employer.
“This would represent a significant boost to people’s workplace pensions but would also hike costs for employers. Given the stresses many firms are under, policymakers might be reticent about pushing ahead with this change right now.”
Minimum pension age hike delay
“The Treasury has got itself into a bit of a pickle over plans to increase the normal minimum pension age (NMPA) to 57 in 2028.
“Rather than simply raise the NMPA for all, policymakers have proposed a complicated protection regime for those who had an ‘unqualified right’ to access their retirement pot before age 57 on 11th February 2021.
“People will have until 5th April 2023 to transfer to a scheme with an unqualified right and retain a lower NMPA.
“This will create the ludicrous scenario where savers could have two different minimum pension access ages within the scheme.
“Such complexity risks undermining various key Government initiatives, including pensions dashboards, and will be a gift to scammers who will take advantage of the inevitable confusion it will create.
“The Budget might be the last opportunity for the Treasury to see sense and, at the very least, keep the NMPA rise out of the upcoming Finance Bill. This would give breathing room for a simpler, more sensible solution to be delivered.”
State pension age rethink
“Increases in the state pension age have been mired in controversy in recent years, particularly because of the impact on women born in the 1950s who argue they were not properly warned about the changes.
“The current state pension age is 66, with plans to raise this to 67 by 2028 and 68 by 2046 (although this could be brought forward to 2039).
“However, Prime Minister Boris Johnson used his Conservative Party conference speech to highlight regional differences in life expectancy as a key area of inequality and target for his ‘levelling up’ agenda.
“Furthermore, we have recently seen a sharp drop in average life expectancy – although this may be a temporary blip as a result of the pandemic.
“Against this backdrop, it is not beyond the realms of possibility the Government will announce a review of planned state pension age increases, with a focus on inequalities and the potential long-term impact of COVID.
“Any move to push back state pension age increases – or cancel them altogether – would likely be popular, although the costs to the Exchequer would be eye-watering.”