Spring Budget: what’s coming on ISAs, pensions and tax?

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

^{Source: HMRC, June 2023.}

A NatWest bargain sell-off?

The government owns a near 40% stake in NatWest, a legacy of the financial crisis. It has already announced that it plans to sell its shares and the Budget could flesh out how it plans to do that. A discounted sale - reviving memories of the ‘Tell Sid’ campaign to privatise British Gas in the 1980s - could be a populist measure for a Chancellor with one eye on an election.

Complicating matters are the existing shareholders in the bank, who would also need an incentive not to immediately sell their shares in order to buy newly discounted ones later.

A tax break on inheritance

Inheritance Tax (IHT) has political potency and rumours of its reduction - or even - removal are a regular occurrence before Budget statements. Could it really happen this time?

Currently, estates worth more than £325,000 are potentially exposed to 40% IHT, although there is an extra £175,000 of allowance if a primary home is being passed on. Spouses and civil partners can pass on unused allowance to each when they die.

Previous reports have suggested the 40% rate could fall, or the Chancellor could do away with IHT altogether. Otherwise, there’s dozens of rules on tax deductible ‘gifts’ that could be tweaked.

Such changes would have the advantage of being popular with some voters but not necessarily that costly to the exchequer. IHT brings in around £7bn a year for the government compared to around £18bn from Capital Gains Tax (CGT), for example.

It hasn’t been this Chancellor’s style to pander to the traditional, asset-owning Conservative voter, preferring tax cuts aimed more widely instead. A cut to IHT would buck that trend, but also cause a political headache for Labour in the process.

Tax on income

Jeremy Hunt surprised with a significant cut to National Insurance at the Autumn Statement. Now reports ahead of the Spring Budget suggest NI could reduce again.

In November the government cut the main rate of NICs paid by employees ('primary Class 1 NICs') from 12% to 10%. A further cut to 9% would cost the Treasury around £4.5bn a year, according to reports.

Hopes of a cut have been boosted by improving public borrowing figures out last week which showed a surplus - the difference between spending and tax income - of £16.7bn in January. That's twice the level of January last year, helped by lower spending. 

Lifetime ISA

Lifetime ISAs have proved successful for those able to use them within the rules but critics, including financial campaigner Martin Lewis, have argued that the rules have become outdated since the products were launched in 2017 and need to change.

It now seems that he, and other campaigners, will get their way with strong reports suggesting reforms will come in the Spring Budget. 

Lifetime ISAs can be opened by anyone aged 18 to 40 to save up to £4,000 each year, with a bonus of 25% of whatever is saved added by the government. Contributions can be made until age 50. The money can be withdrawn and used in the purchase of a first home worth up to £450,000, or else after age 60. If money is withdrawn outside those circumstances a 25% charge is applied.

The £450,000 cap on home purchases has not risen at all, despite average house prices rising by around 35% since then. If a first-time buyer wants to use their Lifetime ISA savings to buy a home worth more than £450,000 they face the 25% charge on their savings. This penalty not only wipes out the government bonus they would’ve received, but also takes 6.25% of their own contributions.

New reports suggest the penalty on purchases above £450,000 will be reduced to 20% - meaning only the government bonus is removed - while the £450,000 limit will be raised to £500,000.

A pension pot for life?

At the Autumn Statement the government put out a call for evidence on the proposed introduction of a ‘Lifetime provider’ model for workplace pensions. This is the idea that employees have the right to elect a pension scheme into which their workplace pension contributions are paid. That would be a change from the current model where eligible employees are enrolled into a scheme of their employer’s choosing.

The aim of the plan - sometimes called ‘pot for life’ - is to simplify the pension system and drive consolidation of schemes, in the hope that this will bring efficiencies and lower costs.

The plan faces opposition from some within the pensions industry - including Fidelity - on the grounds that it risks disrupting already successful elements of the pension system, such as Auto Enrolment which automatically brings eligible employees into pension saving.

The Spring Budget could bring more clues as to whether the plan will proceed.

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