What does the Budget have in store?

Chancellor Jeremy Hunt’s second fiscal statement of his tenure takes place against a more settled backdrop than his Autumn Statement in November, which reversed the majority of his predecessor Kwasi Kwarteng’s September mini-Budget. It was a demonstration of fiscal responsibility that had the desired effect of calming markets.

 
Four months on and UK finances are now looking in better shape than expected. Bumper tax receipts provided a surprise £5.4bn surplus in January, and a warm winter has helped keep a lid on the cost of energy subsidies. This gives the Chancellor room for manoeuvre, and he faces calls to address the sharp fall in living standards driven by the recent surge in inflation.

Rob Morgan, Chief Investment Analyst at Charles Stanley looks at what tax changes might be announced on 15^th March.

Short term tax cuts could fuel inflation and are at odds with the Chancellor’s present strategy targeting debt reduction and suppressing rising prices. Tax changes will therefore most likely be at the margin or longer term in nature.

In the absence of rabbits pulled from hats, investors will need to live with the changes unveiled at the Autumn Statement, which involved a freezing of major tax bands and thresholds, a reduction in the dividend allowance and smaller capital gains tax allowance.

There may instead be some targeted tax changes with the aim of encouraging people back into work, particularly the over-50s. One obvious route would be to relax the pension lifetime allowance, the limit on how much you can save across all your pensions before being hit with a tax charge. This is currently frozen at £1.073m until 2026, but by increasing it some older people that are close to, or over, the limit could be encouraged back into work as they could accrue further pension provision without being penalised.

In the same vein, the Chancellor may also be eying reform of the money purchase annual allowance (MPAA). This rule reduces the pension annual allowance (the maximum you can add to your pension each year) to as little as £4,000 for those who have already flexibly accessed taxable income from a retirement pot such as a personal pension from age 55. Presently, this complexity stands in the way of some retirees wishing to return to the workforce and significantly rebuild their pension pot.

There are also rumours that the Chancellor may announce changes to the State Pension. The age at which you can claim it is set to gradually increase to 67 by 2028, before going up slowly to 68 between 2044 and 2046. There is speculation this could be brought forward to the mid-2030s.
 

What other changes might there be?

 
Finally, although there is likely to be considerable focus on the cost of living, changes to current policy on energy bills hangs in the balance. The Energy Price Guarantee (EPG) that currently limits the average annual household bill to £2,500 is set to rise to £3,000 in April, an unwelcome squeeze for many struggling households. Yet there may be better news around the corner. Falling wholesale gas prices could mean that the Energy Price Cap calculated by the regulator Ofgem sinks below the EPG and and means a reduction in bills in the third quarter of this year.

Mr Hunt may therefore be tempted to take the sting out of the April rise, or he may look to extend a cut in fuel duty due to expire at the end of March, a welcome move for motorists and hauliers dealing with elevated prices at the pumps.