The “Back to Work Budget” could create a quiet revolution in financial planning outcomes
Chancellor Jeremy Hunt’s Spring Budget 2023 took place against a backdrop of great economic uncertainty, with interest rates rising, inflation stubbornly high and the banking sector beginning to wobble. Uncertainty over inflation, interest rates, the progress of the economy and even the banking sector abounds.
However, despite concerns about how much fiscal power this would leave the Chancellor in the Budget, he managed to introduce a series of measures that could lead to a radical rethink in terms of financial planning strategies.
Spring Budget 2023 – the key measures
Economic forecasts
The Office for Budget Responsibility (OBR) has issued fresh economic forecasts showing a modestly improved outlook for the UK economy.
It predicts the UK will no longer slip into a technical recession – two quarters of economic retraction – in 2023 but growth will instead flatline, before picking up in the middle of the decade: 1.8% in 2024, 2.5% in 2025, 2.1% in 2026, 1.9% in 2027.
Inflation is set to fall to 2.9% by the end of 2023, according to the OBR, down from a peak of 11.1% in October 2022, while it expects the Bank of England base rate to peak at 4.3% in the third quarter of 2023.
The fiscal watchdog has forecast higher-than-expected employment but predicts unemployment will rise to 4.4% in 2024 from 3.7% at the end of 2022, before returning to a structural rate of 4.1% by 2028.
Employment will increase in the long-term thanks largely to the State Pension age increase in 2028 and other measures in the Budget designed to encourage people back into the workforce, it says.
Real household disposable income is expected to fall by 5.7% over two years (2022-23 and 2023-24), 1.4 percentage points less than previously expected. The fall is thanks chiefly to rising energy costs for households and will be the largest decline since 1956-57.
As for the property market, the OBR sees house prices falling around 10% between the fourth quarter of 2022 and the end of 2025. However, it believes prices will have recovered by the end of 2027.
Meanwhile, it sees mortgage rates peaking much lower than previously, just above 4% in 2027 – 0.8 percentage points lower than it predicted in November.
Business and economic measures
The Government has pressed on with the previously announced hike of corporation tax to 25% from 19%. However, Jeremy Hunt stated that just 10% of businesses would end up paying this level of tax.
He also announced the replacement of the business tax super deduction with a ‘full capital expensing’ scheme, worth £9 billion a year over three years to businesses. The OBR forecasts this will increase business investment by around 3% a year.
The Ministry of Defence has had a spending boost of £11 billion over five years, while a new potholes fund of £200 million has been created for local councils to fix roads. The Chancellor is also setting £60 million aside to help local pools and leisure centres in financial straits.
Meanwhile nuclear power will be reclassified as sustainable for tax purposes alongside wind and solar, while a new ‘Great British Nuclear’ institution will be created to oversee a transition to more nuclear power for the country. The government will also tender for the provision of small nuclear reactors.
Personal taxation
Big change comes for pensions. The pensions annual allowance is rising 50% – from £40,000 to £60,000.
The big rabbit from Jeremy Hunt’s hat came with the abolition of the pensions lifetime allowance. It had been expected to be raised from £1.073 million to £1.8 million but it has been removed completely. The charge has been cancelled from the new tax year 2023-24, while it will be abolished entirely in a future finance bill.
Alongside this, the money purchase annual allowance (MPAA) and tapered annual allowance (TAA) have been hiked from £4,000 to £10,000.
Plus, the adjusted income level required for the tapered annual allowance to apply to an individual increases from £240,000 to £260,000. However, the pensions tax-free lump sum has been capped at 25% the original lifetime allowance or £268,275.
All these changes will take effect from 6 April this year. There are no changes to income tax thresholds or ISA allowances for the new tax year. There are also no new reductions to dividend or capital gains tax allowances, other than those already announced for the new tax year.
Households, lifestyle and sins
Among the Chancellor’s banner announcements were big changes to how childcare provision is funded and regulated in England and Wales. The childcare staffing ratio is being aligned with Scotland at 5:1 while nurseries will receive a significant funding uplift and all schools will begin to offer wraparound care from September 2026.
Hunt also announced a giveaway worth more than £6,500 a year on average for young families with the extension of free childcare hours to children aged nine months and over.
Any child over two years old will be able to receive 15 hours of free childcare a week from April 2024. From September 2024 this will be extended to nine months and over and from September 2025 this will increase to 30 hours. The policy is expected to cost the Government around £4 billion a year, according to the OBR.
The energy price guarantee (EPG) has been extended for a further three months. This will cap the average household energy bill at £2,500.
It is expected that the price of energy will fall below the guarantee level in the intervening period, making further guarantees from the Government unnecessary as average bills reach £2,200 by year end according to the OBR.
Fuel duty has been frozen for another year while the 5p reduction – introduced last year amid soaring prices – has been maintained for another 12 months.
As for sin taxes, alcohol duty is increasing in line with RPI. The Government is increasing draught relief – the level of tax on fermented alcohol bought from a pub (i.e., beer, cider and wine) – giving pubs an 11p tax advantage over supermarkets. Tobacco duties are increasing again by RPI + 2%.