The Spring Budget will likely be the last major fiscal event before the next general election and expectations are that the Chancellor will focus on potential vote-winning measures. Despite International Monetary Fund (IMF) counter-warnings, he has suggested there may be room for further tax cuts following the Autumn Statement 2023 national insurance changes. Personal tax giveaways will likely be front-and-centre, while measures that are aimed at businesses and reinforce the government’s economic growth narrative may take a back seat.
A green light for tax cuts?
Lower than expected public borrowing and an economic recovery later this year will probably give chancellor Hunt scope to cut taxes again on 6 March. The size of the tax cuts will depend partly on revisions to the Office for Budget Responsibility’s (OBR) economic projections. Lower inflation, lower interest rates and a stronger outlook for growth will help. But the OBR’s forecast that productivity growth will double looks ripe for a downgrade, which would hinder the chancellor’s aim to cut taxes.
However, we doubt that the OBR forecast changes will prevent Mr Hunt from cutting taxes. To meet his main target for a falling debt-to-GDP ratio in five years’ time, he may simply pencil in unspecified spending cuts in the next parliament.
Instead, it is likely to be the reaction of the Monetary Policy Committee (MPC) and the financial markets that Mr Hunt is more concerned about. Mortgage rates have fallen sharply over the last two months and at its February meeting the MPC signalled that interest rate cuts were likely to happen this year. The chancellor would be hesitant to sacrifice any popularity bought through expensive tax cuts by being blamed for a resurgence in interest rates.
The chancellor may come up with a tax cutting package not dissimilar in size to the one announced at the last Autumn Statement but focused even more on reducing the personal tax burden. That would be enough to make a splash, but not enough to trigger action from the MPC or spook financial markets.
Taxes on income
Income tax cuts appear likely and could be delivered by increasing the personal allowance and/or basic rate tax band, or by reducing the basic rate. Alternatively, the chancellor could follow his Autumn Statement approach and cut NIC rates further.
The personal allowance and higher rate threshold have been frozen at £12,570 and £50,270 since April 2021. With inflationary increases they would now exceed £15k and £60k respectively. A personal allowance increase would be most beneficial to those with lower incomes, reducing the amount on which tax is payable whilst providing no benefit to the highest earners who have no such entitlement.
Comparatively, a reduced basic rate or increased basic rate band would provide greater benefit to higher earners, with increases to income tax thresholds likely mirrored in NICs thresholds, which have been aligned since April 2022.
Inheritance tax (IHT)
HMRC statistics show just 3.73% of UK estates suffered an IHT charge in the 2020/21 tax year. This probably prompted the chancellor’s silence on IHT in his Autumn Statement, despite significant prior speculation.
IHT cuts in the Spring Budget now seem unlikely to be as significant as previously rumoured, with most tax cuts likely to be directed towards the working population to encourage economic growth. Smaller IHT changes, such as increasing allowances, seem more likely, perhaps with a pledge to reform or abolish it following the general election.
Business taxes
Most voters are not directly impacted by business tax changes, so it can take time to feel their impact. Consequently, with big capital allowances and R&D tax relief policy changes last autumn, we expect a quiet budget for businesses. Although there are calls for a headline corporation tax rate reduction, where there is headroom, we expect taxes suffered directly by voters to be prioritised. Nevertheless, there are likely to be progress updates on the government’s investment zones policy, the OECD’s global minimum tax plans, and technical changes to ensure the capital allowances and R&D tax regimes work as intended. Such announcements will largely confirm what we already know.
SDLT
To stimulate the property market and help individuals onto the property ladder, we may see SDLT relief and financial support extended for first-time buyers.
We expect reform of SDLT reliefs on transactions involving mixed-use properties and multiple dwellings, following previous consultation on reducing scope for incorrect and/or abusive claims. Additional yields and reduced compliance costs from such changes could facilitate SDLT cuts, at the risk of increasing house price inflation.
ISAs
Several changes were announced in the Autumn Statement to simplify ISAs. The financial sector’s response was that these modest reforms do not deliver the radical simplification savers and investors need. The chancellor may therefore respond to calls for further change.
The Lifetime ISA (LISA) threshold for first-time property buyers has been £450k since it was launched in April 2017, with average UK house prices increasing by more than 30% since then. When LISA funds are used on properties costing more than £450k, a 25% withdrawal penalty applies, which usually exceeds any government top-up. The chancellor may heed calls to increase the threshold in line with property prices and reduce the impact of the penalty.
Simplification and modernisation
We expect the chancellor to build on his previous announcements regarding tax simplification, with the possibility of some early changes and a broader long-term plan.
Employment taxes
Several recent HMRC consultations and announcements focus on reforming areas of employment tax, including employee share schemes, modernising tax-free occupational healthcare and the treatment of employment expenses, benefits and related allowances. We anticipate the chancellor will outline next steps and proposals for simplification arising from these consultations, including more detail on payrolling employee benefits and the tax treatment of certain reimbursed employee expenses.
High income child benefit charge (HICBC)
The chancellor may make changes to the controversial HICBC after acknowledging its unfair impact on single earner households. The HICBC is assessed on an individual’s income rather than that of the household receiving child benefit. A single earner making £60k incurs a tax charge equivalent to the household’s child benefit, while a couple each earning £50k incurs no charge. We could see radical reform to how the HICBC operates, but perhaps just an increase in the £50k threshold above which it currently applies.
Non-UK domiciled individuals and non-UK residents
If the chancellor’s appetite for tax cuts exceeds his available headroom, he may look to raise additional revenues elsewhere.
A potential source of additional receipts is non-domiciled individuals (non-doms), who presently benefit from a favourable UK tax regime on offshore income and gains. Given the Labour party’s proposed review and potential abolition of the non-dom tax regime if they were to take power, tactical tweaks to this regime to increase the tax yield could benefit the current government whilst limiting the scope for future changes.
Increasing the rate of the non-resident SDLT surcharge and/or extending the surcharge to include commercial properties are also options.
As ever, any tax hikes require a balancing act, so as not to compromise the chancellor’s economic growth and prosperity objectives.
Ali Sapsford, RSM UK
The Spring Budget will likely be the last major fiscal event before the next general election and expectations are that the Chancellor will focus on potential vote-winning measures. Despite International Monetary Fund (IMF) counter-warnings, he has suggested there may be room for further tax cuts following the Autumn Statement 2023 national insurance changes. Personal tax giveaways will likely be front-and-centre, while measures that are aimed at businesses and reinforce the government’s economic growth narrative may take a back seat.
A green light for tax cuts?
Lower than expected public borrowing and an economic recovery later this year will probably give chancellor Hunt scope to cut taxes again on 6 March. The size of the tax cuts will depend partly on revisions to the Office for Budget Responsibility’s (OBR) economic projections. Lower inflation, lower interest rates and a stronger outlook for growth will help. But the OBR’s forecast that productivity growth will double looks ripe for a downgrade, which would hinder the chancellor’s aim to cut taxes.
However, we doubt that the OBR forecast changes will prevent Mr Hunt from cutting taxes. To meet his main target for a falling debt-to-GDP ratio in five years’ time, he may simply pencil in unspecified spending cuts in the next parliament.
Instead, it is likely to be the reaction of the Monetary Policy Committee (MPC) and the financial markets that Mr Hunt is more concerned about. Mortgage rates have fallen sharply over the last two months and at its February meeting the MPC signalled that interest rate cuts were likely to happen this year. The chancellor would be hesitant to sacrifice any popularity bought through expensive tax cuts by being blamed for a resurgence in interest rates.
The chancellor may come up with a tax cutting package not dissimilar in size to the one announced at the last Autumn Statement but focused even more on reducing the personal tax burden. That would be enough to make a splash, but not enough to trigger action from the MPC or spook financial markets.
Taxes on income
Income tax cuts appear likely and could be delivered by increasing the personal allowance and/or basic rate tax band, or by reducing the basic rate. Alternatively, the chancellor could follow his Autumn Statement approach and cut NIC rates further.
The personal allowance and higher rate threshold have been frozen at £12,570 and £50,270 since April 2021. With inflationary increases they would now exceed £15k and £60k respectively. A personal allowance increase would be most beneficial to those with lower incomes, reducing the amount on which tax is payable whilst providing no benefit to the highest earners who have no such entitlement.
Comparatively, a reduced basic rate or increased basic rate band would provide greater benefit to higher earners, with increases to income tax thresholds likely mirrored in NICs thresholds, which have been aligned since April 2022.
Inheritance tax (IHT)
HMRC statistics show just 3.73% of UK estates suffered an IHT charge in the 2020/21 tax year. This probably prompted the chancellor’s silence on IHT in his Autumn Statement, despite significant prior speculation.
IHT cuts in the Spring Budget now seem unlikely to be as significant as previously rumoured, with most tax cuts likely to be directed towards the working population to encourage economic growth. Smaller IHT changes, such as increasing allowances, seem more likely, perhaps with a pledge to reform or abolish it following the general election.
Business taxes
Most voters are not directly impacted by business tax changes, so it can take time to feel their impact. Consequently, with big capital allowances and R&D tax relief policy changes last autumn, we expect a quiet budget for businesses. Although there are calls for a headline corporation tax rate reduction, where there is headroom, we expect taxes suffered directly by voters to be prioritised. Nevertheless, there are likely to be progress updates on the government’s investment zones policy, the OECD’s global minimum tax plans, and technical changes to ensure the capital allowances and R&D tax regimes work as intended. Such announcements will largely confirm what we already know.
SDLT
To stimulate the property market and help individuals onto the property ladder, we may see SDLT relief and financial support extended for first-time buyers.
We expect reform of SDLT reliefs on transactions involving mixed-use properties and multiple dwellings, following previous consultation on reducing scope for incorrect and/or abusive claims. Additional yields and reduced compliance costs from such changes could facilitate SDLT cuts, at the risk of increasing house price inflation.
ISAs
Several changes were announced in the Autumn Statement to simplify ISAs. The financial sector’s response was that these modest reforms do not deliver the radical simplification savers and investors need. The chancellor may therefore respond to calls for further change.
The Lifetime ISA (LISA) threshold for first-time property buyers has been £450k since it was launched in April 2017, with average UK house prices increasing by more than 30% since then. When LISA funds are used on properties costing more than £450k, a 25% withdrawal penalty applies, which usually exceeds any government top-up. The chancellor may heed calls to increase the threshold in line with property prices and reduce the impact of the penalty.
Simplification and modernisation
We expect the chancellor to build on his previous announcements regarding tax simplification, with the possibility of some early changes and a broader long-term plan.
Employment taxes
Several recent HMRC consultations and announcements focus on reforming areas of employment tax, including employee share schemes, modernising tax-free occupational healthcare and the treatment of employment expenses, benefits and related allowances. We anticipate the chancellor will outline next steps and proposals for simplification arising from these consultations, including more detail on payrolling employee benefits and the tax treatment of certain reimbursed employee expenses.
High income child benefit charge (HICBC)
The chancellor may make changes to the controversial HICBC after acknowledging its unfair impact on single earner households. The HICBC is assessed on an individual’s income rather than that of the household receiving child benefit. A single earner making £60k incurs a tax charge equivalent to the household’s child benefit, while a couple each earning £50k incurs no charge. We could see radical reform to how the HICBC operates, but perhaps just an increase in the £50k threshold above which it currently applies.
Non-UK domiciled individuals and non-UK residents
If the chancellor’s appetite for tax cuts exceeds his available headroom, he may look to raise additional revenues elsewhere.
A potential source of additional receipts is non-domiciled individuals (non-doms), who presently benefit from a favourable UK tax regime on offshore income and gains. Given the Labour party’s proposed review and potential abolition of the non-dom tax regime if they were to take power, tactical tweaks to this regime to increase the tax yield could benefit the current government whilst limiting the scope for future changes.
Increasing the rate of the non-resident SDLT surcharge and/or extending the surcharge to include commercial properties are also options.
As ever, any tax hikes require a balancing act, so as not to compromise the chancellor’s economic growth and prosperity objectives.
Ali Sapsford, RSM UK
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