Chancellor of the Exchequer Jeremy Hunt has confirmed inheritance tax (IHT) will remain frozen as part of his Autumn Statement, while the triple-lock on pensions will also remain in place. The planned cap on care costs, however, has been delayed for two years.
The so-called Dilnot reforms would have capped the amount any person in England or Wales would have to pay towards social care at £86,000 per person, with Hunt saying councils had “very real concerns” about their ability to deliver the policy.
The IHT freeze includes both the standard and residence nil rate band at £325,000 and £175,000 respectively. The nil rate band has been at £325,000 since 2009. If this had risen in line with inflation, it would today sit at £407,000, hitting over £500,000 by 2027/28 in line with inflation.
Figures from HM Revenue & Customs in late October revealed total IHT receipts since April are up to £3.5 billion – £400 million higher than this time last year – with £600 million coming in September alone.
According to Office for Budget Responsibility projections, this freeze will lead to an increase in receipts from £6.1 billion 2021/22 to £7.8 billion in 2027/28 – an increase of 28%.
Pledging to calm the economic “storm” engulfing the UK amidst soaring inflation – which sits at a 41-year-high of 11.1% – Hunt is aiming to raise around £54 billion over the next two years in order to plug the current hole in UK finances.
Other announcements made by Hunt include:
- The threshold at which the 45p tax rate is paid will be reduced from £150,000 to £125,140
- Annual exemption rate from Capital Gains Tax to be reduced from £12,300 to £6,000 next year, and £3,000 from April 2024
- Increase to public spending limited to 1% from 2025 – 2028, down from previous plans of 3.7%
- Income tax personal allowance and national insurance frozen until 2028
- Additional funding for adult social care of £2.8 billion next year and up to £4.7 billion the year after, providing 200,000 new care packages
- Energy industry to receive expanded windfall tax from 25% to 35%
- Tax-free dividend allowance reduced to £1,000 in 2023-24, then £500 in 2024-45
- A £13.6 billion package of business rates support
- Energy price guarantee to remain in place beyond April, though the cap will be raised from £2,500 to £3,000
- An additional £3.3 billion in 2023-24 and again in 2024-25 will be allocated to the NHS
- Government’s review of state pension age to be published in early 2023
- Stamp duty cuts to remain in place until 31st March 2025 to support the housing market and those working within it, after which changes to nil-rate thresholds will be reversed
- Introduction of the Organisation for Economic Co-operation and Development’s “historic” global tax reforms to ensure multinational corporations pay the right tax in the countries they operate
- Energy price guarantee to remain in place, though at a higher level of £3,000. The most vulnerable will receive up to £900 to help offset this
- Cap on increase in social rents to a maximum of 7% in 2024 – a £200 saving for the average tenant
- National Living Wage to rise to £10.42 per hour next year
Commenting on this announcement, Emily Deane TEP, STEP’s Technical Counsel and Head of Government Affairs, said:
‘‘STEP has long argued that the inheritance tax system is too complex, unfair and in dire need of reform.
A low-rate tax with few reliefs and exemptions is far preferable than one with a high headline rate that those who can afford professional advice can avoid.
However, instead of simplifying the system, which would still benefit the public purse, the government is essentially maintaining the status quo by freezing the nil-rate band.
It is incredibly disappointing that the government has frozen inheritance tax until 2028. Tinkering with rates and reliefs will do nothing to address the huge complexity many families face.
Any changes must look at the tax as a whole, not just individual reliefs and rates, which if scrapped and amended in isolation can lead to increased avoidance and abuse.
Not reforming inheritance tax would be a missed opportunity to make positive changes to address this complex, ineffective and unfair tax.”
Andrew Tully, technical director, Canada Life, described the IHT freeze as a “stealth tax increase” meaning “more people being caught by the IHT trap and having to complete IHT returns and pay IHT on their estates in the near future”.
Tully also criticised the “sting in the tail” that could see millions of pensioners paying income tax on their pension as a result of today’s decision to maintain the triple-lock:
‘This will be welcome news to the millions of pensioners struggling with the current cost of living crisis. However, given inflation for pensioners is likely to be higher than the headline 10.1% it may not completely cover the increases people are seeing in their outgoings. There is a sting in the tail as there is potential for the state pension to exceed the frozen personal income tax threshold by 2028, potentially dragging many millions more pensioners into paying income tax.”
Joanne Segars, Chair of Trustees at NOW: Pensions, commented on the triple-lock:
“Retirees will be reassured by the Chancellor’s commitment to the triple-lock. This will bring much-needed respite to retirees who rely heavily on income from the State Pension to get by. Without today’s action, there was a possibility pensions would have just risen in line with average earnings, which rose by only 5.7% in the year to September, excluding bonuses. This would have left pensioners at a significant financial disadvantage, with inflation now sitting at 11.1%.
For pensioners and anyone approaching retirement, this news is a welcome relief at a time when the value of retirement pots has been particularly volatile as a result of wider market uncertainty. The government’s decision to take this necessary step is fundamental to protecting the wellbeing of this group in the years to come.”
Colin Clarke, Head of Product Policy Strategy, Workplace Savings, Legal & General, said:
“It’s good to see the Government has protected the most vulnerable, with the boost in pension credit and triple lock remaining. But freezing tax allowances will move more people into higher tax brackets, although maintaining pension contribution tax relief will lift at least some of the burden on them.”
According to Clarke, however, the statement missed several opportunities to “help people save for and enjoy the retirement they deserve”.
“First, there’s the savings journey. We should review auto-enrolment and pension freedoms to check that they really do raise savers’ retirement incomes. Let’s finally make long-promised changes like age limit reduction. And we should help people save properly by boosting engagement levels.
We should remove the Lifetime Allowance for Defined Contribution Pensions. Now that people live and work for longer, and the onus is on the individual to fund these longer later lives, it can penalise them for making good long-term investment choices. And the cost of living crisis is making it even more important not to restrict people’s hard-earned savings.
Finally, we need to introduce regulated personalised guidance. That’ll close the advice gap, helping firms deliver better financial outcomes and savers make better financial choices.”