Investors and savers will be hoping that chancellor Jeremy Hunt’s first Budget lands more favourably than his predecessor Kwasi Kwarteng’s mini-Budget.
After the former chancellor tanked the pound and caused chaos in markets through his low-tax, high-growth agenda, he was ousted, followed by prime minister Liz Truss.
Now, with the official Budget just one week away, prime minister Rishi Sunak and Hunt will hope that the latest set of measures will be more appetising to markets.
Below, we look at some of the key points that investors and savers may expect from the new Conservative administration.
Tax freezes
Analysts at AJ Bell said there could be a number of ‘stealth taxes’ on the agenda. These are not necessarily done by raising the tax percentage, but by freezing allowances or thresholds.
Laura Suter, head of personal finance, said: “Stealth tax freezes generate far fewer negative headlines than hiking tax rates or lowering thresholds, so it’s understandable that the new chancellor looks to be eyeing up a huge swathe of them.”
One example could be the freeze on income tax thresholds, after Sunak already announced tax threshold freezes until 2026. “In a bid to improve the longer-term finances of the country he could be set to extend this until 2028,” said Suter.
“The tax band freeze has already led to predictions of a 50% leap in the number of additional rate taxpayers in the current tax year and a 44% increase in those paying the higher rate of tax, as high inflation pushes up wage growth and more people into higher tax bands.”
Also on the docket could be the inheritance tax freeze, with expectations that Hunt will hold the bands for at least another two years, pushing more people into paying the ‘death tax’.
Again he would be extending previously announced freezes from 2026 to 2028, meaning the £325,000 tax-free allowance will be unchanged for almost two decades.
Tax rises
For investors, dividend tax is likely in the crosshairs. While it was expected that this would be slashed from next April, higher rates or the cutting of the £2,000 tax-free allowance are both on the table.
“The move would not be popular. Investors and company directors getting dividend payments have faced a continual hike in tax over the past six years with rates being increased and the tax-free allowance having been slashed already,” said Suter.
Meanwhile, capital gains tax (CGT) could rise from the current levels, despite earning the government £14.3bn last year alone from around 323,000 people.
“A hike in rates from the current 10% to 20% for basic-rate payers, or 20% to 40% for higher rate payers would significantly boost government coffers,” she said, although cutting the tax-free allowance from £12,3000 may also occur next week.
Pensions
Sean McCann, chartered financial planner at NFU Mutual, said one area of interest could be pension relief, which currently costs the government £48.2bn per year, with more than half of that going to higher and additional rate taxpayers.
Hunt and Sunak could choose to scrap higher-rate pension relief altogether, although it is a complicated procedure. Tom Selby, head of retirement policy at AJ Bell, suggested it could save the government £10bn per year, but warned it could “hit middle England directly in the pocket”.
These wholesale changes are likely to be complicated so, in the interim, McCann said Hunt could look to reduce the annual allowance from £40,000 down to £30,000, “or even £20,000 to align with the annual ISA allowance”.
Another potential blow to pensions could be the freezing or reduction of the lifetime allowance, which currently stands at £1,073,100 and is in place until 2025/26.
One thing that should be safe is the triple-lock, which guarantees the state pension increases each year in line with the highest of average earnings, CPI inflation or 2.5%.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said there is still debate as to which rate will be used this year.
If it is inflation, state pension could rise 10.1%, an increase from £185.15 per week to £203.85 per week. However, if earnings growth for the three months to July (5.5%) is used instead, the full-flat rate state pension will rise to £195.35 per week.
“For anyone who receives a state pension this is a major concern, especially if they have based spending decisions on having this extra income in April,” she said.
“We wouldn’t want to see any dramatic changes of policy overnight, so if the government wanted to change pensions tax relief we would want it to be part of a broad consultation that instead of myopically considering potential rates of relief, looks at the much broader and more pressing question of how to use government support to properly incentivise people to save for retirement.”