These days we look forwards with a sense of trepidation to a UK Chancellor’s Autumn Statement. The government has not had good form with these in recent years. Will there be any early Christmas presents for investors though?
New ‘leaks’ have emerged ahead of the Chancellor of the Exchequer’s watershed fiscal statement on Wednesday, with reports now suggesting that, alongside tax incentives to encourage business investment, ‘everything is on the table’ including a possible income tax cut of some description.
As the government and an ascendant Labour opposition gear up for an election year, the Chancellor has spent a good deal of 2023 stressing that tax cuts are ‘virtually impossible’, due to budgetary constraints and inflationary risks – despite calls from many in his party to take steps to relieve a tax burden that has risen to the highest levels in 70 years.
Evelyn Partners’ Head of Tax Sian Steele notes that the narrative has changed over recent weeks and days as the prognosis on the public finances has improved and the latest ONS data has shown inflation retreating to 4.6%:
“The Office for Budget Responsibility presented the Chancellor on Friday evening with finalised public finance forecasts, and the speculation is that the fiscal headroom might have expanded to as much as £25 billion,” she said. “Unconfirmed reports have suggested that an income tax or national insurance cut could now be on the table, and Mr Hunt said nothing in interviews over the weekend to rule out that possibility.”
One effect of such a big-ticket move on direct taxation of income could be that more targeted moves like a reduction in inheritance tax for instance might be shunted into the sidings until the Spring Budget or the Conservatives’ election manifesto.
“To announce cuts to a wealth tax as well as income taxes would be something of a handbrake turn from the Chancellor, and – to mix metaphors – the hat is probably not big enough for such a large rabbit,” Steele said. “Mr Hunt’s newly bullish emphasis on growth as well as inflation does suggest both households and businesses can expect some tangible tax reductions on Wednesday.”
Could we see a boost to infrastructure investment?
The grindingly slow place of planning approvals is part of the reason key infrastructure projects have been beset with so many delays and increased costs. The government is clearly worried that net zero commitments won’t be reached if brick walls of opposition build up. The idea is that cash sweeteners for residents would turn more NIMBYs into YIMBYs – more likely to vote ‘yes in my backyard’ to plans to upgrade the electricity network, such as large pylon sites.
Even though there will inevitably be claims that a postcode infrastructure lottery would emerge, it’s clear that incentives to steamroller opposition are needed. If the plans are announced they are likely to be a blueprint for other crucial projects, like connectors to improve the grid for wind power transmission.
Recognising offshore wind as part of critical national infrastructure is set to be a bigger game changer to batting away opposition. This is because it would mean there would be a presumption that most other environmental impacts are unlikely to outweigh the urgent need for the energy source.
ISA reform and boosting retail investment
ISAs are a popular product for people starting their investing journey. The Autumn Statement remains a key opportunity to make vital changes to ISAs to offer simplicity, predictability and the right incentives for long-term saving and investment.
“Hunt could open the door to multiple ISAs of the same kind in a single tax year, injecting some much-needed flexibility and simplicity into the system, and making transferring ISA cash easier, so people can improve their returns,” said Sarah Coles, a personal finance analyst with Hargreaves Lansdown. “It will also prevent people from accidentally wandering into making expensive administrative mistakes.”
Hargreaves Lansdown also expects the ISA to be opened to Long Term Asset Funds (LTAFs) which will increase choice and allow people to allocate a suitable amount of their portfolio to less liquid assets, in line with the FCA’s approach on retail distribution.
- Obsession over property, cash costs UK trillions: abrdn
- Can a Stocks & Shares ISA beat a Cash ISA?
- XTB’s new investment ISA to address cost issues for traders
At the moment, they can’t be held within an ISA, because ISA assets need to have the ability to be sold within 30 days. This rule could be applied on a permissive basis, so firms that are happy to distribute LTAFs could do so within an ISA. This would simultaneously mean real fixed term cash ISAs could be introduced – which can’t be accessed for a penalty – which could improve the fixed rate ISAs available on the market.
We may also get news of a wider consultation on the future of ISAs and LISAs – with technical measures for simplification alongside the possibility for more far-reaching changes.
“The key here is to ensure any changes genuinely make retail investing easier for people,” said Coles. “The main barrier to retail investment is building confidence and here the review of the advice/guidance boundary has the potential to have a much greater impact than ISA rule tinkering.”
Take the idea of a British ISA, for example. A further ISA allowance for investment in UK companies adds unnecessary complexity and may not make much difference to investment in UK companies either, because investors could just rejig their holdings to syphon off the UK ones to the UK ISA and invest more internationally. Eighty per cent of Hargreaves Lansdown share trading ISA investors choose UK companies now and simply boosting the overall allowance would achieve similar results in a simpler way.
There was no news on a potential rise in the overall allowance, which, would be a shot in the arm for investors battered by cuts in the allowances for dividend tax and capital gains tax. It would automatically encourage more investment in UK companies too. There is still hope though, because Hunt could be keeping his powder dry on some positive announcements until the day.
There are also other approaches that could make investing in UK equities more popular, including cutting stamp duty, doing more to enable retail investors to access secondary capital raising rounds, and reversing the proposed cuts to capital gains tax and dividend allowances due in April. So far these have gained little focus in the debate, but they remain sensible options that could join the array of potential changes on the table.
“It would be incredibly disappointing if Hunt decided not to take the opportunity to make small changes to the LISA that would make it fairer and even more effective,” said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. “We still think there’s room to cut the LISA penalty. If people need to withdraw money for any reason other than a first-time property or after the age of 60, the 25% penalty currently not only claws back the government bonus to save, but also applies an additional 6.25% penalty based on the amount invested.”
This is a horrible price to pay for trying to do the right thing, Morrissey argues. “We also think it’s only fair that the limit on the price of a property you can buy with a LISA is raised to reflect rising house prices,” she said. ” The house price thresholds should also be increased to reflect the rise in house prices since these thresholds were set in 2017.”
Hargreaves Lansdown said they would like to make the LISA a more attractive vehicle for saving for retirement for the self-employed, by raising the age that anyone can open and pay into a LISA to 55.
Self-employed LISA holders accessing before age 60 would also benefit from a reduction of the penalty to 20%. The HL Savings & Resilience Barometer found that those two measures could help 1.2 million households that have a self-employed earner paying basic rate tax – a group that are chronically underprepared for retirement.
