Looking ahead to the Autumn Statement
What do we know about the Autumn Statement?
With the Chancellor’s Autumn Statement approaching on October 30, Prime Minister Sir Keir Starmer has warned of a “painful” adjustment. We have spoken to our investment partners and offer a straightforward look at what we know now and what some of the possible changes may be.
Just like with your own household budget, the government needs to balance its income and expenses. But when it spends more than it earns, it borrows to cover the gap, creating what’s known as a *budget deficit*. For the financial year 2023/24, this deficit was roughly £120bn or 4.4% of the UK’s GDP. On top of this, the national debt—the total amount borrowed over time—has risen to approximately £2.7tn.
While these numbers may seem alarming, it’s important to remember that a government’s finances operate differently from personal finances. Unlike households, the government has tools like raising taxes or even printing money to meet its spending needs. However, excessive debt can lead to rising interest rates and inflation, impacting savers by reducing the value of their money.
Tax rises or spending cuts?
The government has promised to reduce the debt as a percentage of GDP over the next five years. However, it may achieve this goal by pushing back cuts, creating a situation where immediate borrowing continues while future savings are anticipated.
While spending cuts are an option, it’s also likely the government will look to raise taxes. Current manifesto commitments make it unlikely that major taxes like income tax, VAT, or National Insurance will be increased. But other areas—such as pensions or capital gains tax—might be targeted.
Possible pension changes
The pension system is complex and often criticised for being inefficient. One proposal could see the government restrict pension tax relief, which may hit higher earners the hardest. Alternatively, National Insurance (NI) could be applied to pension contributions or withdrawals, a move that could undermine trust in the pension system.
Could your pension be affected?
You can usually take up to 25% of your pension pot as a tax-free lump sum, and the rest as a taxable income. Alternatively, you can leave your pension pot invested and take out money as and when you need it, subject to the annual allowance and the lifetime allowance. This is called pension drawdown. The amount of tax you pay on your pension income depends on your total income and your tax rate.
Labour have pledged to review the pension tax relief system, to ensure it is fair and progressive. It has not been confirmed by the labour manifesto or by 10 Downing St that they will make changes to the Tax Free cash element of pensions and although we have seen much in the press this is simply conjecture at this point.
They have also promised to scrap the state pension triple lock, which guarantees that the state pension rises by the highest of inflation, average earnings, or 2.5% each year. As such, this may or may not impact your pension.
They have also proposed to extend the inheritance tax to pensions, which are currently exempt from inheritance tax (IHT). So, if for instance, if you wanted to take money out of your pension these funds will be treated the same for IHT. These changes are not yet confirmed or implemented, and they may face opposition or amendments in parliament.
Capital gains tax changes
Capital gains tax (CGT) could also come under scrutiny. While increasing CGT rates might seem like an easy solution to raise revenue, doing so could discourage investment and reduce overall tax income. The government may choose to freeze allowances, quietly increasing the tax burden without raising rates.
In Summary
Here is what has been confirmed:
- Tax Adjustments – The government has already pledged not to raise income tax, corporation tax, National Insurance (NI), or VAT, but we anticipate changes elsewhere, particularly to allowances and reliefs.
- Freezing of Tax Thresholds – We expect the freezing of tax thresholds to continue, which will naturally push many taxpayers into higher income categories due to inflation, increasing their tax burden.
Possible Changes Under Discussion:
- Pension Reforms – The government is exploring adjustments to pension tax relief, potentially limiting higher-rate relief and considering a flat rate. The tax-free lump sum benefit may also face restrictions.
- Capital Gains Tax (CGT) – Although the Chancellor has not ruled out an increase, raising CGT rates to match income tax could negatively affect transactions and long-term revenue, though it may prompt short-term sales.
- National Insurance on Pensions – There are discussions about applying National Insurance to pension contributions or income, which could affect both employee and employer contributions.
What does this mean for you?
The upcoming Budget may increase complexity in the tax system, making it harder to understand how the changes impact your savings, investments, or retirement plans. However, with proper planning and advice, you can prepare for these potential shifts and ensure their impact on your financial is taken in line with your long term planning and objectives.
Our advice would be not to make hasty decisions based on speculation or fear. We are keeping abreast of changes and wait for more clarity and certainty before making decisions about how best to proceed with any investment related changes.
We are monitoring the Autumn Statement closely and will be keeping abreast of changes and how these could impact you. We plan to write out to everyone with a post Autumn statement very quickly after the Chancellor delivers it, so please have the peace of mind we have our fingers on the pulse of this and will be ready to advise you accordingly very soon. Please feel free to reach out to one of our Advisers, who can provide tailored advice based on your situation.