From extended energy support to a scrapping of the pension lifetime allowance, yesterday’s Budget set out a range of new measures – with a few interesting surprises thrown in. But what didn’t Jeremy Hunt tell you? Paul Lewis has gone through the fine print and finds out.
SUBSIDY BOOST FOR BIGGER PENSIONS
Tax relief on pensions costs an eye-watering £27billion a year and most of that goes to people who pay higher or top rate tax. Now the Chancellor will spend another £1billion a year helping them put even more into their pensions.
From April he will let you bung £60,000 a year into a pension pot. The current annual limit is £40,000 and there is also a lifetime limit of just over £1million – which is being completely abolished. For context, my rough calculation is that someone on the National Living Wage who paid into an auto-enrolment pension would be lucky to have £60,000 in their pot after 30 years never mind one year!
To bung £60,000 into your pension pot your income must be at least £60,000 in 2023/24. You must also find the money to make that contribution. The higher your income the less that will cost you. Basic rate taxpayers need to find £48,000 and the ever generous (to some) Jeremy Hunt will bung in £12,000 tax relief to make up the £60,000.
Higher rate taxpayers can then reclaim another £12,000 tax relief. So to get £60,000 in their pension pot will cost them just £36,000. And top rate taxpayers can reclaim £15,000 meaning they only need spend £33,000 to get £60,000 in their pension – a massive £27,000 subsidy from other taxpayers. Then, if they are aged 55 or over, they can immediately take out a quarter of that £60,000 free of tax. Win win win, If you can afford it.
FUEL BILLS TO RISE
The Government is spending nearly £3billion to keep your energy bills down from April. But you probably won’t notice. Because average bills will actually rise by £67 a month to £2,500 a year – roughly double what they were in winter 2021. That is because the £400 payment from the Energy Bill Support Scheme which cut them by £67 a month for six months ends on 31 March and is not being replaced. So at the moment your average annual bill is around £2100. But from 1 April it will be £2500 – a rise of nearly a fifth.
INCOME TAX UP
In every Budget I can remember there has been some announcement about income tax – normally a change from April. Not this year. The only mention of income tax was to say how marvellous it was that “people in our country can earn £1,000 a month without paying a penny of tax”.
The Chancellor failed to mention his policy to freeze that personal tax allowance at £12,570 not just this year and next year but every year until 2027/28. The result is that from April basic rate taxpayers will be paying £340 a year more in tax than if it has risen with inflation – as it should have done – to £14,270. The independent Office for Budget Responsibility revealed on Wednesday that this six-year freeze will mean another 3,200,000 people on low incomes will start to pay income tax for the first time as wage and pension rises push their income above the frozen allowance.
The freeze will cost higher rate taxpayers even more. The 40 per cent rate of tax begins (outside Scotland) at £50,270. From April that should have reached £57,170 but it too is frozen, so higher rate taxpayers will pay £1,720 extra tax in 2023/24. The six-year freeze will mean 2.1 million people will pay higher rate tax for the first time. Overall taxpayers will be sending the Chancellor £110 billion extra over the six years to 2027/28. To bring in that much through raising the basic rate of income tax would need to increase from 20p to 24p. But he avoided that shock announcement!
MORE TAX FROM SAVERS
The £1,000 savings allowance has also been frozen. That’s the amount of interest you can earn before paying income tax. Two years ago you would have needed over £150,000 in a best buy one year savings account to earn enough interest for tax to be due. Today’s higher interest rates mean you would need just over £23,000. So millions of savers will find that they have to pay income tax on their savings interest. And the amount you can protect from tax in an ISA has also been frozen again at £20,000 a year, an amount unchanged since 2017/18.
FREE CHILDCARE FOR UNBORN CHILDREN
Nearly seven million working age people do not work and are not looking for work. The Chancellor calls them ‘economically inactive’ though in fact many are performing unpaid roles, such as caring for older people or children, which are very important for the economy.
The Chancellor wants to help some back to work by extending free childcare to working parents with a child aged from nine months to two years old. Currently parents in England only get that free childcare once a child is three. But the extension will not be fully in place until September 2025. So it will only help parents of children who have not yet been conceived.
WORK OR LOSE YOUR BENEFITS
People on Universal Credit who are looking for work can have their Universal Credit cut or taken away altogether if their efforts in finding a job are deemed not good enough. This sanctions regime applies to around two million people and the number sanctioned in any month has doubled to around one in fifteen. But the Chancellor wants to go further and apply sanctions “more rigorously to those who fail to meet strict work-search requirements”. And if they earn less than £189 a week they will have to earn more or suffer “a more intensive conditionality regime”. Also known as a big stick.