Personal finance and economic challenges ahead

23 March 2022

Personal finance and economic challenges lie ahead, despite Chancellor Rishi Sunak unveiling a raft of measures in his Spring Statement to try to stem the squeeze on households – as the UK battles rising inflation, higher energy prices and lower-than-expected growth.

In his statement on Wednesday, the Chancellor revised UK GDP growth down to 3.8% for 2022, a sharp cut from its previous 6% forecast. The economy is forecast to grow by 1.8% in 2023 and 2.1% in 2024.

Meanwhile, the annual inflation rate reached 6.2% in February and is forecast to average 7.4% for the rest of the year, reaching a peak of over 8% in the final quarter of 2022.

Tax cuts

Following growing pressure upon the Government to take steps to ease the rising cost of living, the Chancellor unveiled a new tax plan, designed he said, to “put billions back into the pockets of across the UK”.

The income threshold at which point people start paying National Insurance is set to increase to £12,570 from July, which is expected to benefit employees by £330 a year. The move should result in 70% of workers who pay NICs paying less, even after accounting for the imminent Health and Social Care Levy. In addition, 2.2 million people will be taken out of paying NICs altogether.

Steven Cameron, pensions director at Aegon, said: “The Chancellor’s decision to increase the lower threshold of earnings on which employees pay National Insurance will be welcomed by many as helping mitigate the cost of living squeeze. There had been calls for the Government to defer the increase of 1.25% in NI, but Rishi clearly was not prepared to do so and instead has opted to make a major increase in the NI threshold.

“However, increasing the threshold has longer term ramifications. Setting aside the 1.25% increase, raising the threshold will reduce the amount being collected in NI from today’s workers to pay for today’s state pensions. This will happen not just in the coming year but also in all future years, storing up longer term challenges for the funding of state pensions which are paid out of NI on a pay as you go basis.”

The Government has also pledged to cut the basic rate of income tax from 20p to 19p from April 2024, which is worth £5 billion for workers, savers and pensions and will be the first cut to the basic rate in 16 years.

But while this will help many lower rate taxpayers, pension experts warned that the move would be detrimental to pension savers.

Kate Smith, head of pensions at Aegon, commented: “People receive tax relief on pension contributions at their highest marginal tax rate. A reduction in the basic rate of income tax means that people will get lower tax relief on their pension contribution, meaning that the government top-up directly into their pensions will be less. This means that to get the same retirement income, people will have to pay a little bit more into their pensions.

“If they can, people may want to think about putting more into their pensions over the next couple of years to make the most of the current 20% tax relief.”

Smith said the Government had also missed an opportunity to increase the Money Purchase Annual Allowance, despite the Office for Budget Responsibility predicting that even more pensioners will draw on their pensions earlier.

“OBR data is predicting that over 55s are expected to access their pensions earlier and take out more money simply to maintain their cost of living as pay packets are squeezed even further. It is clear few people have understood the consequence of flexibly accessing their pensions, potentially with devastating consequences for their future finances.

“It’s time that this little-known complex rule is increased to £10,000 allowing people to rebuild their pension savings and get their retirement plans back on track.”

The lack of pension reform was echoed by Cyprian Njamma, client strategy director, UK Institutional Group, SEI, who said: “Given the prevalence of issues, such as the cost of living crisis, the Chancellor’s lack of pension reform today is understandable, but a missed opportunity to communicate hope to savers while addressing some of the country’s most critical economic needs.”

“Simplifying pension contribution tax relief in the right way while reforming long-term capital investment allowances could have boosted retirement savings for millions of lower-earning savers during hard times, while also shoring up direct investment in British infrastructure through the pensions industry. This shrewd move could at once have reduced the government’s tax relief burden and increased investment within the pensions industry, while making the system fairer for millions.”

Fuel and energy costs

Fuel duty will be cut by 5p per litre until March 2023 to help drivers across the UK with rising costs, in what the Chancellor described as the “biggest cut to all fuel duty rates.”

According to the RAC, the cut would decrease the cost of filling a typical 55-litre family care by £3.30.

It follows rising prices at the pump as a result of Russia’s invasion of Ukraine, which has stoked supply fears.

The Chancellor also announced that he will scrap VAT on energy efficiency measures such as solar panels, heat pumps and insulation installed for five years.

Investment and innovation

To boost growth among UK businesses, the Chancellor increased the Employment Allowance – a relief which allows smaller businesses to reduce their NI contribution bills each year – from £4,000 to £5,000. It will take effect on 6 April.

But despite the Chancellor’s message that the Government is committed to targeted action to help with the cost of living, commentators warned that the measures may not go far enough.

Richard Carter, head of fixed interest research at Quilter, said: “While Rishi Sunak announced a number of welcome measures to help households cope with the cost of living crisis, these measures most likely will not go far enough to protect the consumer from a very challenging outlook. The rise in the National Insurance threshold and the cut in basic rate income tax at the end of this parliament will go some way to put more pounds in the pockets of voters ahead of the next general election, but it doesn’t necessarily help people with the here and now.

“With the war in Ukraine continuing to push up the oil price and utility bills due to rise sharply in the spring, and later in the year, inflation is beginning to bite for businesses and households.

“While the unemployment rate is expected to be unaffected by the slowing of economic growth, it does feel as if we are entering a stagflationary period. It will be difficult for the economy to emerge from this without some additional stimulus, but with interest rates on the rise it is a tricky balancing act for the government and the Bank of England.”

Professional Paraplanner