Tax cuts seem unlikely, despite the recent windfall in government revenues
In normal times the kind of public finance windfall reported by the ONS this week would be wind in the sails of a chancellor a few weeks out from the Budget. But being around £7bn better off than expected has arguably placed a bullseye on the Chancellor and his red box. Rebellious back benchers, buoyed by Liz Truss’s recent return to the fray, will be emboldened to push even harder for tax reductions, while there will be a deafening chorus from the unions calling for a loosening of the purse strings.
All of this will be difficult for a chancellor who’s guiding mantra has been prudence and to distance himself from the not so ancient regime of Truss, Kwarteng and co.
The noises coming from the Treasury so far certainly suggest the chancellor and the prime minister have every intention of staying the course they’ve set. It would be no surprise to see them point to the ONS figures as being evidence that the plan is working and that to change tack would be an unnecessary risk.
The likely intention is to save unveiling any big tax giveaways until we’re closer to the next general election.
If tax cuts are on the cards, the likelihood is they will be part of a longer-term plan of lower taxation – a ‘jam tomorrow’ strategy that might reassure the market that growth is on the agenda, but long-term enough that it won't risk undermining the chancellor’s strategy to tackle inflation…
While all eyes are of course on the Budget in mid-March, the more significant date as an indicator of the direction of tax policy is 6th April, the start of the new financial year, when the changes to tighten the tax regime announced in November will come into force. The annual tax-free allowance for dividends will be halved from £2,000 to £1,000, as will the annual exemption amount for CGT, from £12,300 to £6,000, both of which are due to fall again in 2024/25.
As far as it is possible to discern one, the direction of travel seems to be towards freezing thresholds and with inflation in double digits and pay rises responding in, although not at the same levels, to allow fiscal drag to do its work in increasing the tax take.
With the Tory backbenchers and heartland already disgruntled by the chancellor's current high-tax approach, it seems unlikely we will see him implement the recent IFS proposal to extend inheritance tax to pension savings held at the point of death. While the IFS may justify their proposal on the grounds that IHT should apply equally across all forms of wealth, IHT is already deeply unpopular, despite it only affecting a very small proportion of estates. Extending it to pension savings would increase the numbers of people in the IHT net and likely intensify the general public's distaste for the tax. It also flies in the face of government efforts to encourage older workers back into the workplace.
With recent good news from the National Audit Office that a mild winter means that the cost of government schemes to insulate UK families and businesses from rising electricity prices may only be half of the originally forecast £139bn, the chancellor may feel he has some room for some modest give aways, although he will be wary of being too bold and creating the same kind of backlash his predecessor experienced.
Much of the focus has also been on growth, and to fight off the recent re-emergence of the prime minister’s two predecessors it would be no surprise to see further enhancements to the annual investment allowance, possibly increasing the expenditure limit from its current £1m, although the majority of businesses do not spend enough to benefit from this. In light of some of the perceived abuses, we already have tightening up of Research & Development tax relief from 1 April, so it is hard to see the chancellor backtracking on this.
We’ll have to see whether now he has had a few months to settle in, Mr Hunt is the sort of chancellor who likes to pull the proverbial rabbit from the hat or whether he feels sober and sensible is the way ahead for the time being.
Mike Hodges, partner and head of the private wealth team at Saffery Champness
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Budget predictions: private client view
Tax cuts seem unlikely, despite the recent windfall in government revenues
In normal times the kind of public finance windfall reported by the ONS this week would be wind in the sails of a chancellor a few weeks out from the Budget. But being around £7bn better off than expected has arguably placed a bullseye on the Chancellor and his red box. Rebellious back benchers, buoyed by Liz Truss’s recent return to the fray, will be emboldened to push even harder for tax reductions, while there will be a deafening chorus from the unions calling for a loosening of the purse strings.
All of this will be difficult for a chancellor who’s guiding mantra has been prudence and to distance himself from the not so ancient regime of Truss, Kwarteng and co.
The noises coming from the Treasury so far certainly suggest the chancellor and the prime minister have every intention of staying the course they’ve set. It would be no surprise to see them point to the ONS figures as being evidence that the plan is working and that to change tack would be an unnecessary risk.
The likely intention is to save unveiling any big tax giveaways until we’re closer to the next general election.
If tax cuts are on the cards, the likelihood is they will be part of a longer-term plan of lower taxation – a ‘jam tomorrow’ strategy that might reassure the market that growth is on the agenda, but long-term enough that it won't risk undermining the chancellor’s strategy to tackle inflation…
While all eyes are of course on the Budget in mid-March, the more significant date as an indicator of the direction of tax policy is 6th April, the start of the new financial year, when the changes to tighten the tax regime announced in November will come into force. The annual tax-free allowance for dividends will be halved from £2,000 to £1,000, as will the annual exemption amount for CGT, from £12,300 to £6,000, both of which are due to fall again in 2024/25.
As far as it is possible to discern one, the direction of travel seems to be towards freezing thresholds and with inflation in double digits and pay rises responding in, although not at the same levels, to allow fiscal drag to do its work in increasing the tax take.
With the Tory backbenchers and heartland already disgruntled by the chancellor's current high-tax approach, it seems unlikely we will see him implement the recent IFS proposal to extend inheritance tax to pension savings held at the point of death. While the IFS may justify their proposal on the grounds that IHT should apply equally across all forms of wealth, IHT is already deeply unpopular, despite it only affecting a very small proportion of estates. Extending it to pension savings would increase the numbers of people in the IHT net and likely intensify the general public's distaste for the tax. It also flies in the face of government efforts to encourage older workers back into the workplace.
With recent good news from the National Audit Office that a mild winter means that the cost of government schemes to insulate UK families and businesses from rising electricity prices may only be half of the originally forecast £139bn, the chancellor may feel he has some room for some modest give aways, although he will be wary of being too bold and creating the same kind of backlash his predecessor experienced.
Much of the focus has also been on growth, and to fight off the recent re-emergence of the prime minister’s two predecessors it would be no surprise to see further enhancements to the annual investment allowance, possibly increasing the expenditure limit from its current £1m, although the majority of businesses do not spend enough to benefit from this. In light of some of the perceived abuses, we already have tightening up of Research & Development tax relief from 1 April, so it is hard to see the chancellor backtracking on this.
We’ll have to see whether now he has had a few months to settle in, Mr Hunt is the sort of chancellor who likes to pull the proverbial rabbit from the hat or whether he feels sober and sensible is the way ahead for the time being.
Mike Hodges, partner and head of the private wealth team at Saffery Champness
