The Budget: What it means for you and the economy

Hargreaves Lansdown comments on the Chancellor’s Autumn Statement/Budget (17 November 2022), detailing what it means for the public and for the economy.

Key areas for analysis:

- Market reaction
- Stealth taxes hurt all tax-payers
- Triple lock returns – and more help for pensioners
- Energy bills support
- Windfall tax
- Stamp duty shock
- Tax on higher earners
- Tax on investments: dividend tax and capital gains tax
- Social care put on the backburner
- Council tax set to rise further
- Support for lower earners
- Climate-friendly pledges light on detail

Overview of the Autumn Statement

Sarah Coles, senior personal finance analyst, comments:

“This budget faced the challenge of a Ninja in hobnail boots. In order to appease the Bond markets, Jeremy Hunt had to clatter down the corridors of power, meting out hefty blows on all sides, delivering all the festive joy and financial pain of Hans Gruber without memorable one-liners.

“Meanwhile, in order not to upset the political applecart, he had to do it with enough stealth to escape the notice of significant numbers of voters.

“As a result, we have stealth taxes galore, accompanied by significant tax raids on everyone from higher earners to investors and entrepreneurs.”

Susannah Streeter, senior investment and markets analyst, comments:

“Jeremy Hunt has continued to steady the ship through the turbulent waters of a cost-of-living crisis, sailing away from the market mayhem which erupted with the previous Chancellor at the helm.

“The journey ahead will be far from smooth, with the economy forecast to shrink by 1.4% next year, a grim outlook which is partly behind the retreat in sterling which has fallen by more than 1%.

“But there is some relief that the outlook from the Office for Budget Responsibility indicates that the downturn may end up being shallower because of the measures being introduced. ‘’

Financial market reaction

Susannah Streeter, senior investment and markets analyst, comments:

“This time around a bond market tantrum has not materialised although gilt yields have begun to edge up a little, perhaps an indication of some nervousness about significant spending cuts being pushed into the long grass.

“The mantra from this administration is appears to be that those who have the broadest shoulders can bear the biggest weight.

“The big ogre of inflation which has caused so much financial pain, does look as though it will recede sharply next year. It’s clear the economy will already be facing plenty of deflationary forces in the months to come, from rising unemployment to the biggest drop in living standards on record and cuts right now to spending risk pushing the UK into a much deeper downturn.

“The pledge to maintain some key infrastructure projects is also highly welcome with improvements to the rail network, investment into cleaner greener energy and efforts to improve the UK’s tech sector going ahead. But growth prospects would be boosted if the UK reassessed its current trading relationship with the EU.

“British brands like Fortnum and Masons turning down Christmas hamper orders for the EU, because of ‘delivery issues’, epitomises the struggle of UK businesses which are desperate to expand but feel cut off from their closest overseas market.’’

Stealth taxes hurt all tax-payers

Sarah Coles, senior personal finance analyst, comments:

“Stealth taxes mean that long after the fuss of the Autumn Statement dies down, the taxman will be quietly picking your pocket for years to come.

“Income tax bands were already frozen to 2026 and will now be frozen to 2028. We don’t tend to notice stealth taxes, because they only kick in as we get a pay rise. It means we lose more of our extra pay – so we’re never actually worse off in nominal terms.

“Of course, once you take inflation into account, it’s another matter entirely, and the taxman taking an extra slice leaves us with an even harder struggle to make ends meet.”

Helen Morrissey, senior pensions analyst, comments:

“Inheritance Tax (IHT) used to be seen as a wealthy person’s tax, but a mix of booming house prices and threshold freezes mean this is no longer the case. This latest freeze will only make matters worse.

“Inheritance tax (IHT) receipts received by HMRC during the financial year 2021/22 were at an all-time high of £6.1 billion, with estates over this level facing eye watering 40% tax bills.”

Triple lock returns – and more help for pensioners

Helen Morrissey, senior pensions analyst, comments:

“After weeks of speculation about whether the triple lock would return next year many pensioners will be viewing today’s news with a sigh of relief. A 10.1% increase along, with the extra cost of living payments of £300, will be hugely welcome for pensioners struggling to keep up with their bills.

“The decision to uprate Pension Credit by 10.1% comes as a welcome surprise and will boost the income of single pensioners to around £201 per week. They will also be in line for cost-of-living payments of £900.

“However, it’s also worth saying that this increase will only come into effect from April so there is a tough winter ahead. The reinstatement of the triple lock after its suspension last year will cool some of the discussion around its long-term viability for a while, but with a review of state pension age due to be published soon, now is the time to carry out a comprehensive review of the state pension to ensure it best helps those who need it most, both now and into the future.”

Energy bill support

Sarah Coles, senior personal finance analyst, comments:

“The new energy support package will come as a relief for average earners, who were worried they might be left out in the cold.

“The new package, from April, will keep bills at £3,000 for average users – protecting them from a rise to as much as £3,700. This still leaves them with a horrible mountain to climb, and the fact that this comes on top of so many other price rises means life will be even tougher next spring.

“The rise would be an impossible challenge for those on lower incomes, so the additional support payments from the government are absolutely vital. However, even at this level there will still be enormous number of people facing impossible choices.

“Across the board we can expect more people to run into real difficulties. Given that we will be going through a recession at this point, it means that those who have found it difficult to manage in 2022 could run into a brick wall financially next year.”

Windfall tax

Susannah Streeter, senior investment and markets analyst, comments:

“Share prices of energy generating companies retreated but then bounced back as investors recognised that the plan to scoop up money which has been falling into their profit baskets would be temporary and could be alleviated by investment allowances which will allow them to offset the levy.

“A much bigger slice of profits of energy giants such as BP and Shell will now also be raked in, with the energy profits levy increased from 25% to 35%. The door had already been inched open on the case for a windfall tax following comments made by Shell’s outgoing boss that the tax burden had to fall on the energy sector to help the poorest in society.

“This is partly why the latest move has been shrugged off but investment allowances also will help.

“There will be concern this may lead to lower investment into renewables but given the clamour for acceleration companies could be hit by ethical investor headwinds if funding of greener, cleaner projects is scaled back at a time when large dividends are still paid out.

“The time limit set is important and will help with certainty for investment horizons. BP had initially warned it may scale back North Sea investment after the first windfall tax was announced but then rowed back on that once a clearer timescale was set.

“For the government there is a risk that energy prices will continue to fall back, which will limit what can be creamed off.”

Stamp duty shock

Sarah Coles, senior personal finance analyst, comments:

“Property buyers will have been thrown into a quandary by the announcement that the stamp duty cut will be reversed in 2025. This could be a useful short-term boost to the market. By moving from an open-ended stamp duty cut to a limited opportunity, it could hurry through more sales, and help to keep the market ticking over until March 2025

“But this may not be the best outcome for buyers. Right now, the market is sending out every possible signal that they might want to hang fire, because we could be reaching the peak, but the desire to save tax could force them to buy sooner than they otherwise would, and expose them to the risk of property price drops.

“Meanwhile, if they decide to hold on for the bottom, they could end up rushing for the end of the stamp duty break along with so many others that they end up paying over the odds.”

Tax on higher earners

Sarah Coles, senior personal finance analyst, comments:

“The cut in the higher rate threshold from £150,000 to £125,140 means more than 200,000 more people will be dragged into the 45% bracket, and additional rate taxpayers will pay an average of £1,200 more.

“Those on higher wages tend to have more wiggle room in their budgets, but rising prices have created headaches for top earners. Those with big mortgages will feel particular pain from higher mortgage rates too, so this additional tax blow is an unwelcome extra burden. It’s not a massive money-spinner for the government, so it’s likely to be more of a symbolic gesture that we’re all in it together.”

Tax on investments: dividend tax and capital gains tax

Susannah Streeter, senior investment and markets analyst, comments:

“Entrepreneurs are being penalised with the increase in taxes on both capital gains and dividends, and those people who have diligently invested over the long term to build up their financial resilience will no doubt feel unfairly swiped by this grab from profits.

“Investors who hold money in funds or shares outside a pension or an ISA will face a greater tax burden, which is a reminder of the value of ISAs in protecting investors from having to consider CGT or dividend tax. However, there is a risk that the government may still end up receiving less in tax because investors hoard assets.

“For buy-to-let investors who own property as part of a limited company these changes could be a triple whammy, coming on top of rises in corporation tax. They will not only have to pay more tax on dividends on profits from rent but now that CGT has been aligned with interest rates and they sell up, they could be faced with a hefty bill in just one hit.

“This could discourage them from selling, causing parts of the housing market to potentially seize up.”

Capital gains tax changes for a basic rate taxpayer:

	New non-residential	New non-residential	Change	New Residential	Old Residential	Change
£10,000.00	£400.00	£0.00	£400.00	£720.00	£0.00	£720.00
£30,000.00	£2,400.00	£1,770.00	£630.00	£4,320.00	£3,186.00	£1,134.00

Capital gains tax changes for a higher/additional rate taxpayer:

	New Non-residential	Old Non-residential	Change	New residential	Old residential	Change
£10,000.00	£800.00	£0.00	£800.00	£1,120.00	£0.00	£1,120.00
£30,000.00	£4,800.00	£3,540.00	£1,260.00	£6,720.00	£4,956.00	£1,764.00

Social care put on the back burner

Helen Morrissey, senior pensions analyst, comments:

“News that the social care cap could be delayed will be greeted with horror by the many people currently wrestling with the huge costs of paying for care. Families would still have had to find the money to pay their loved one’s accommodation costs but the £86,000 cap on social care would have given some relief.

“A delay risks leaving people’s long-term planning in tatters and there will be huge concerns that this is a step towards this plan to deal with social care being put on the backburner.

“The Chancellor did announce more funding for the social care sector over the coming years but, as yet, we lack detail as to what that entails and for now struggling families have little insight into what help might be available to them.”

Council tax set to rise further

Sarah Coles, senior personal finance analyst, comments:

“Ever since the government highlighted the massive shortfall in care funding, pledged to fill it with extra National Insurance, and then u-turned on the hike, we’ve been waiting to see how this particular black hole was going to get filled. It turns out that taxpayers will be coming to the rescue, with the biggest hike in council tax since 2018.

“The Chancellor has removed the requirement for local authorities to hold a referendum before increasing council tax by more than 2.99%. The new threshold is 5%. It means band D council tax could rise from an average of £1,966 to as much as £2,064.”

Support for lower earners

Susannah Streeter, senior investment and markets analyst, comments:

“The fact that benefits will rise with inflation in April will come as a huge relief. Those on the lowest incomes still face a struggle to make through the winter, but this at least gives them hope that things won’t always be so difficult.

“A lift in the minimum wage will be another small drop of comfort, but with inflation rising at the 41-year high of 11.1%, lower earners are still likely to face huge challenges to cover their rising costs.

“More lump sum payments are also very welcome. The HL Savings and Resilience Barometer looks at how much cash people will have at the end of the month next summer, assuming the usual uprating, and for those on the lowest incomes the picture is bleak.

“Among the bottom five deciles – so the lowest-paid half of the country – fewer than one in 100 people will have enough cash left at the end of the month to be considered resilient. All these measures will help, but it’s still clearly going to be a tough time ahead for millions of people, until the painful rises in prices subside.’’

Climate-friendly pledges, but few details

Laura Hoy, ESG analyst, comments:

“It was encouraging to see Jeremy Hunt address the underlying issue of energy efficiency in the UK with a pledge to double the government’s annual investment and decrease consumption by 15% by 2030.

“A new energy efficiency task force will be set up to determine exactly how to funnel the additional £6bn pledged to the projects that need it most. However, judgement on whether or not these programmes are adequate to truly make a dent in the necessary refurbishments around the country will be reserved for their unveiling.

“The windfall tax has also been accelerated and extended as the government looks to the energy companies riding high on ballooning oil prices to plug its budget shortfalls.

“However, the increased tax rate does little to combat the loopholes that allow oil and gas companies to duck their tax obligations by reinvesting in new projects.

“The eco-credentials of those projects aren’t tied to these breaks, so there’s no added incentive for reinvestment in green energy instead of handing those funds over to the government.”

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay