As the Chancellor begins a 12-week countdown to the Autumn Budget, experts warn that the long wait could increase speculation and uncertainty for investors.
On Wednesday, Rachel Reeves confirmed the Budget will be held on 26th November, later than expected and the first time it has been held at the end of November since the mid-1990s.
Reeves faces mounting pressure to balance the public finances, while maintaining investor confidence in the markets. However, industry experts have said the wait is likely to stoke speculation and could cause knee-jerk reactions based on rumours.
Rebecca Williams, divisional lead of financial planning at Rathbones, said: “It feels like a rather late fiscal event. For households, the long wait only prolongs uncertainty at a time when many are still grappling with the cost-of-living squeeze. Markets and savers alike dislike being left in the dark.
“But with public finances stretched thin, the delay underlines that ministers are in full-on thinking mode ahead of what is shaping up to be one of the most consequential Budgets in a generation.
It seems inevitable that some form of tax rises – stealth or otherwise – will be unveiled as the Government looks to balance the books.”
Rachel Vahey, head of public policy at AJ Bell, said: “The announcement effectively fires the starting gun for the Office for Budget Responsibility to complete its assessment of the UK’s financial health. But the current reading of the economy doesn’t make for good news.
“The Government has precious few options to turn this picture around. After boxing itself into a corner at the election by promising not to raise rates of income tax, national insurance or VAT for ‘working people’, it has few options to increase taxation. Speculation will be rife in the lead-up to the Budget over what measures it will resort to.”
ISA reform
There has been growing speculation that the Government could announce reforms to the ISA regime in the Autumn Budget, after making clear that it wants to encourage a retail investment culture in the UK.
Tom Selby, director of public policy at AJ Bell, says: “The Budget will likely prove to be the platform where the chancellor puts some meat on the bones of this agenda.
“Combining Cash ISAs and Stocks and Shares ISAs into a single main ISA product would be the obvious starting point. The current structure, which requires people to choose between a cash product or an investing product, is illogical and behavioural research commissioned by AJ Bell supports our contention that this risks acting as a barrier to people moving into long-term investing.”
AJ Bell points to the fact that only 16% of ISA holders hold a cash ISA and stocks and shares ISA in conjunction as evidence that the current regime could be improved.
Selby added: “If the Government wants to help more people invest, removing the unnecessary friction that exists in the system and enabling more useful guidance through targeted support would be a solid foundation.
“This package of reforms would be easier to introduce both practically and politically than cuts to Cash ISA allowances or forcing more money into UK companies.”
Pensions reform
The Budget is often preceded by feverish speculation about possible changes to pensions and the Chancellor has made clear that pensions are at the heart of her economic plans with the ‘Mansion House’ reforms.
David Brooks, head of policy at Broadstone, said: “This Government has got form already in making decisions for the longer term, for example, pushing through pension and investment reforms.
“To this end, the rumours around tax-free cash amendments feel too reactionary to be on the drawing board. However, the long-proposed pensions tax relief changes look likely to be an attractive fiscal lever for the Chancellor.
“This would need to come with a lengthy technical consultation but changing the bonus for saving into a pension to a flat rate could save the Government some money and also boost pension savings for the lower rate taxpayers.”
Jason Hollands, managing director at Evelyn Partners, says: “Speculation about pension tax reliefs has been doing the rounds for a decade, though cutting this would have major implications for those in generous public sector pensions, especially doctors and consultants, so this would open up a can of worms unless a highly controversial carve out for the public sector was introduced.”
However, AJ Bell warned that growing uncertainty around possible tax changes to pensions is damaging people’s confidence in retirement saving.
Selby called upon the Government to commit to a ‘Pensions Tax Lock’; a pledge not to change tax relief or tax-free cash, at least for the duration of this parliament.
“This would at a stroke remove a significant area of instability for savers and demonstrate this Government is truly on the side of hard-working Brits,” he added.
Inheritance tax changes
The Government has already launched an IHT raid on both farmers and pensions so further changes would be unwelcome to those prioritising passing wealth on to their loved ones.
However, having ruled out changes to employee income tax, national insurance and VAT, IHT is viewed as one the few remaining revenue-raising levers available to the Chancellor that would not undermine economic growth or spark severe backlash from public sector workers.
Selby said: “If Rachel Reeves wants to target inheritances again, the simplest way to do this would be to either reduce IHT thresholds or extend the ‘seven-year rule’ that applies to lifetime gifts.
“Given the freezing of IHT thresholds will naturally raise more cash for the Exchequer over time through fiscal drag anyway, a shift in gifting rules might be viewed as a politically more palatable option. But IHT remains one of the most hated taxes in Britain, so any move in this area will inevitably come at some political cost.”
Wealth tax
The notion of a wealth tax has continued to persist, with more than 30 sitting MPs signing an Early Day Motion calling for a 2% wealth tax on those with assets above £10 million.
While on the face of it, a wealth tax that targets a small number of very wealthy individuals may be appealing, AJ Bell warned that the devil lies in the detail.
AJ Bell head of investment analysis Laith Khalaf explained: “Part of the problem rests in which assets to include. Family homes, pensions and private businesses aren’t always easy to value, and can’t easily be turned into cash to pay taxes. However, excluding certain assets from a wealth tax clearly creates a loophole and a strong incentive to store wealth in anything that’s not subject to the tax.
“A wealth tax may also be counter-productive by encouraging rich individuals to relocate elsewhere, taking their tax revenues and economic contribution with them.”
Khalaf said it also raises questions around fairness, with accumulated wealth likely to have already been subject to income tax, capital gains tax, inheritance tax or a combination of all three.
“While it would only likely affect a small group of people, a wealth tax would likely be a controversial measure, not least because those caught up by it probably wield a disproportionate amount of influence as well as money.
“It’s also an odd choice for a government that is trying to promote wealth creation in the UK to bolster the economy, while adding a further layer of complexity to an already inscrutable tax system. But perhaps desperate times call for desperate measures,” Khalaf added.
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