The Autumn Statement and your money 

Jeremy Hunt this week presented UK voters with imminent tax cuts, a boost to pensions and a range of money-related measures — all made possible, he said, by faster than expected growth in the UK economy.

According to the chancellor, inflation was coming under control, debt was falling and those left reeling from the rising cost of living would be better protected under his plans. 

But many economists and market analysts picking through the Autumn Statement concluded that Hunt had glossed over some important realities. High inflation, rather than growth, had been a key contributor to bigger government tax revenues. And the effects of freezing tax thresholds and allowances will continue to weigh heavily on individuals. Many will be pushed over the line into paying tax — or into a higher-rate bracket — as prices and wages rise. 

As a result, the tax burden on individuals would rise to the highest level since the second world war by 2028-29, according to the Office for Budget Responsibility. An expected fall in living standards would be the largest since the data was first collected in the 1950s, it added.

Paul Johnson, director of the Institute for Fiscal Studies, says: “The £10bn or so cut in the national insurance contribution rates pales into relative insignificance alongside the long-term increase in personal taxes created by the six-year freeze in allowances and thresholds.”

Savers, workers and investors may nonetheless have reasons to welcome elements of Hunt’s overall package, from reductions to national insurance rates, to modernisation of the pension system and a revamp of the Isa tax wrapper rules. FT Money assesses the impact on individuals and their finances. 

Tax cuts and freezes

Hunt made a series of eye-catching cuts to national insurance in the Autumn Statement in a bid to win over workers whose incomes have been hurt by higher inflation and the cost of living crisis.

He cut national insurance contribution (NIC) rates for employees and the self-employed, but chose to leave income tax and NIC thresholds frozen. There was also no uplift in other personal tax thresholds or the individual savings allowance.

There is growing awareness among the public that the chancellor’s national insurance cuts would not fully balance out the effect of frozen thresholds, tax experts say.

Katharine Arthur, partner at accountants Haysmacintyre, says that, over the past year, “sky-high inflation” has pushed many people into higher tax bands and that receipts for a number of personal taxes have reached record levels.

“While the national insurance cuts will somewhat lessen the burden for many individuals, the actual annual saving is, in reality, minor when compared to the current tax burden on households,” Arthur says.

The effect of freezing allowances is a stealth increase in taxes. At a time of higher inflation, “fiscal drag” means the government will raise £44.6bn more in 2028-29 than if allowances had risen in line with inflation.

If Hunt had done so, the income tax personal allowance it would now be worth £13,380, rather than £12,570, a year. The higher-rate threshold would have increased to £53,580, rather than the current £50,270.

The OBR calculated that the changes to national insurance, worth £10bn in 2028-29, would reduce the impact of the government’s £44.6bn tax increase by just under a quarter. It added that the chancellor’s decision not to raise thresholds in line with inflation would cause roughly 7mn people to be dragged into paying more tax.

Between 2022-23 and 2028-29, 4mn people will be brought into paying income tax for the first time. Another 3mn will move on to the higher rate and 400,000 more would qualify for the additional rate. This is equivalent to an 11 per cent rise in the number of taxpayers in the basic rate band, a 68 per cent rise in higher-rate taxpayers and a 49 per cent rise in additional-rate taxpayers.

Paul Falvey, tax partner at accountants BDO, points out that the number of people who will be pulled into paying higher taxes because of the continued freezing of tax allowances has grown even since the OBR’s last statement in March.

He warns that fiscal drag will pose a “very significant administrative challenge” both for individuals, more of whom will have to file self-assessment tax returns, and HM Revenue & Customs (HMRC), which will need to process them.

The maximum annual saving from the cut in the main national insurance contribution is £753.96, for anyone earning £50,268 or more a year. Earnings up to that level currently pay a 12 per cent NICs rate, which will fall to 10 per cent. Above £50,628, the contribution rate falls to just 2 per cent — a rate that was unaffected in the statement.

Meanwhile, according to Tom Evennett, partner at consultants EY, a self-employed person earning £50,000 will save £566.70 in 2024-25; one earning £60,000 will save £569.40.

But these cuts will not fully compensate for the impact of frozen allowances experienced in recent years and expected in future, he says. 

Fiscal drag also applies to the inheritance tax threshold — which has been held at £325,000 since 2009. There was widespread speculation in the run-up to the Autumn Statement that IHT would be reformed, but the chancellor left it in place. 

James Cook, partner in the private client team at Russell-Cooke, a law firm, says: “While house values have taken a bit of a hit in the last year or so, overall growth since 2008-09 may well mean many more households will find themselves snared by IHT in the coming years — which could soon change the perception of IHT being a wealth tax in all but name.”

Reshuffling the Isa pack

The Treasury announced a series of measures designed to make it easier for savers to choose the best Isa accounts and move money between them. These aim to boost investment and address longstanding complaints from brokers and users about problems with the rules. Isas are a key way for people to invest and save, since capital gains and dividend income are protected from tax. 

But some providers warn the measures are likely to make the regime more complex and inaccessible.

The Innovative Finance Isa, a type of peer-to-peer loan scheme, is to be expanded to include open-ended property funds and long-term asset funds (LTAFs) holding illiquid investments including private equity and property.

The Treasury also announced plans to allow savers to pay into multiple accounts of the same type from April next year. Partial transfers would be allowed between providers, instead of requiring all the money held in a fund to be moved.

Andy Bell, founder of investment platform AJ Bell, tells the FT that measures to ease transfers are “sensible” but “picking at the edges”. He initiated discussions with the Treasury this year after publishing a set of proposals aimed at streamlining the current Isa regime, including axing the Innovative Finance Isa.

“In the run-up to the Autumn Statement, I had sensed a real desire in the Treasury to grasp the nettle and properly simplify the Isa regime,” he says. The chancellor instead delivered a “pick‘n’mix of in-the-weeds proposals” that fails to improve access for novice savers, according to Bell.

Changes will remedy some technical limitations affecting Isas, including plans to digitise records, but proposals omitted several changes suggested by the industry ahead of the chancellor’s statement.

Brokers and advisers had hoped Hunt would make changes to the Lifetime Isa (Lisa), a savings product that offers a 25 per cent boost to savings up to £4,000 for first-time home buyers. An exit penalty imposed on savers was a particular point of contention. The industry had also called for caps on qualifying house values to be raised after a period of strong house price growth. In the event, the Lisa remained untouched.

The Investing and Savings Alliance (Tisa), a trade body, says it was “disappointed that the changes did not include enhancing Lisas by reducing the [currently 25 per cent] penalty charge to 20 per cent, making it a fairer option for savers”.

Meetings between the Treasury and the savings industry had taken place this year, though Bell suggests the general election looming next year has shortened the time available to ministers to deliver reforms.

He says this means the government has opted to deliver “marginal improvements” rather than the “radical rethink” to the scheme he argues was required.

Investors will be “disappointed” that the Isa allowance was kept at £20,000, says Gary Doolan, financial adviser at MHA, an accountancy firm, arguing Hunt “missed a trick by not increasing Isa allowances”. There was also no detail following up on hints of a British-focused Isa encouraging investors to put money into UK companies, with an additional £5,000 allowance for such investment. 

One measure welcomed by Isa providers was the planned inclusion of fractional shares within the regime. The decision will help settle a dispute between HMRC and several trading platforms, and enable young savers to continue buying small stakes in expensive US stocks such as Apple, Amazon and Tesla.

Adam Dodds, chief executive of trading platform Freetrade, says he welcomes these changes but is awaiting clarification on when and how they will be implemented. This includes whether proposals mean savers can retain current holdings in their portfolio.

Nation of pension pickers?

Hunt unveiled big changes to pensions in his Spring Statement this year, announcing the abolition of the lifetime allowance on pension contributions and a significant boost to the annual allowance on contributions. But there were further measures this week, with sweeping reforms to the pension system to give savers more choice over where they build their retirement funds.

His proposals will give workers the right to choose which retirement plan their employer uses to pay its pension contributions. The idea is that the pension pot will stay with the worker for life, and follow them from job to job.

At present, when someone starts a job, their employer automatically enrols them into the company pension it has selected. This means a new pension pot is created each time they move jobs. 

This has led to small pension pots proliferating in the system and some are getting lost. According to government estimates, there are 20mn “inactive” pots worth less than £10,000, representing around £30bn in savings. Hunt believes his changes will mean fewer pension pots, making it easier for people to manage them efficiently. 

Becky O’Connor, director of public affairs with PensionBee, a pension provider, says the “pot for life” is a good solution to the multi-pot problem, but also has other benefits.

“Pot for life has the potential to shake up the industry, bringing what consumers actually care about to the forefront [and] boosting competition,” she says.

Emma Watson, head of financial planning with Rathbones Group, the wealth manager, says the “lifetime pension provider” model could prompt savers to become more involved with their retirement planning.

“From an investment perspective, it could allow them [savers] to be invested in assets that are suitable for their circumstances and risk profile over a longer term and avoid the hassle and administration that comes with joining a new pension scheme every time you change jobs,” she says.

However, there are concerns the shake-up could leave low earners worse off. This is because, under the current system, employers are responsible for ensuring their workers are enrolled into a good-value scheme, typically with low charges. 

Aon, a consultancy that also offers a workplace pension plan, says historically asking individuals to make choices on pensions has led to “no decisions or poor decisions”.

“The risk to the individual of remaining in a poor-performing fund over their entire lifetime is huge,” it says.

Calculating the impact on pots in the best and worst-performing master trust default funds, it says this could equate to “a difference of over £300,000 over the working life of an individual sitting in the worst- performing fund”.

A sudden shift to a “pot for life” system risks people choosing a suboptimal pension plan if they are swayed by marketing over value, according to Barnett Waddingham, an independent pension consultancy. This could ultimately exacerbate the UK’s retirement crisis.

“For a ‘pot for life’ to work, there must be a robust central clearing house, a working pension dashboard, and a faultless administration system which directs contributions and amplifies the employers’ critical role in ensuring value and good governance,” says Mark Futcher, partner at Barnett Waddingham.

The idea is expected to be floated in a call for evidence. That means it still has to progress through several consultation stages before any changes are made — and overnight changes are highly unlikely.

Limited fiscal firepower has curtailed the chancellor’s room to make further cuts in personal taxes, but all eyes are now on the Spring Budget next year. Rushing through national insurance cuts for January has prompted talk of a general election in May. If the economic picture has brightened by then, this could result in more promises of tax cuts in years to come. If not, shadow chancellor Rachel Reeves could be presiding over the next Autumn Statement.

Reporting by: Emma Agyemang, Josephine Cumbo, Mary McDougall, Rafe Uddin and Arjun Neil Alim