Autumn statement 2023

Autumn statement 2023

Britain is open for business

The Chancellor, Jeremy Hunt, used his Autumn Statement to ‘go for growth’. Because of better-than-expected economic performance, he put the increased tax receipts to use by unveiling a headline-grabbing 110-point plan for promoting growth. The highlights include making permanent, generous reliefs for business on investment, business rate support for smaller enterprises and the drive to ‘make work pay’.

Mr Hunt’s task was always going to be tricky, as reckless spending would likely stir up inflation, which he and the Bank of England had been fighting so hard to bring under control. Ironically, according to the Financial Watchdog it is inflation that has probably helped boost tax receipts.

Nonetheless Mr Hunt was never going to look a gift-horse in the mouth, particularly with an election on the horizon, so regardless how the windfall arrived, it did allow for some fiscal manoeuvring. As the chart below demonstrates, with a tax burden expected to hit 38% in the next few years, a post-war record, he was keen to re-establish the Conservative’s moniker as the party of lower taxes.

In the following pages, we look at some of the major announcements, starting with the economic forecasts, before ending with how the financial markets reacted.

The Economy

Growth – the autumn statement was accompanied by the Office for Budget Responsibility’s (OBR) economic and fiscal outlook, which gave a mixed review of the UK economy. For this year the economy is expected to grow by 0.6%, rather than contract. The forecast is for 0.7% for next year, which is quite a jolt down from the previous forecast of 1.8%. There’s a similar revision down for 2025 to 1.4% from 2.5%. Further out, GDP is expected to be 1.9% in 2026, 2% in 2027 and 1.7% in 2028. The chancellor’s 110-point plan is aimed squarely at boosting activity.

Inflation – should fall to 2.8% by the end of 2024 but is not expected to return to the Bank of England’s 2% target until the second quarter of 2025, more than a year later than previously forecast. House prices could fall by 4.7% next year as interest rates remain higher for longer. High inflation means real household disposable income per person is forecast to be 3.5% lower in 2024/25 than its pre-pandemic level. This is around half the peak-to-trough fall expected in March, but still represents the largest reduction in real living standards since comparable records began in the 1950s and is not expected to recoup pre-pandemic levels until 2027/28.

Public Finances

Borrowing was £19.8bn lower than expected in the first half of the current financial year, and forecast to fall from 4.5% of GDP in 2023/24 to 3% in 2024/25, 2.7% in 2025/26, 2.3% in 2026/27, 1.6% in 2027/28 and 1.1% in 2028/29.

Underlying debt forecast to be 91.6% of GDP next year, 92.7% in 2024/25 and 93.2% in 2026/27 before declining to 92.8% in 2028/29.

 Business Tax and Reliefs

Corporation tax – there were no changes to rates or thresholds. The main rate stays at 25% and the rate for small companies with profits below £50,000 is 19%. Tapering relief for businesses with profits between £50,000-250,000 applies to shield smaller enterprises from the main rate.

Capital allowances – at the Spring Budget 2023, the government replaced the super deduction regime with ‘full expensing’ for 3 years from 1 April 2023, allowing businesses to write off the full cost of qualifying plant and machinery investment against their taxable profits. The government is now making this change permanent with a 100% first year allowance for main rate assets and 50% first year allowance for special rate (including long life) assets.

Investment Zones Programme Extension – the Investment Zones programme in England will be extended from five to ten years and three new zones were announced in Greater Manchester, West Midlands and East Midlands.

Business rates support – the government will introduce a business rates support package worth £4.3bn over the next five years to support small businesses and retail, hospitality and leisure (RHL). This includes extending the 75% relief for RHL for 2024/25, up to a cash cap of £110,000, and freezing the small business multiplier for a fourth consecutive year. The standard rate multiplier will be increased in line with CPI inflation.

Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) – the EIS and VCT reliefs were due to expire after 5 April 2025 but new legislation will be introduced to extend the lifetime of these reliefs to 2035.

Personal Taxation

Income tax rates and thresholds – there have been no changes to income tax thresholds or rates. The dividend allowance will be halved from £1,000 for 2024/25, with the rate applied to basic, higher and additional rate taxpayers unchanged at 8.75%, 33.75% and 39.35% respectively.

National Minimum and Living Wage – from 1 April 2024, the National Living Wage will increase by 9.8% to £11.44 an hour for eligible workers across the UK aged 21 and over.

National Insurance Contribution (NICs) rates (employees) – the main rate of Class 1 employee NICs will be reduced from 12% to 10% from 6 January 2024. This will apply to earnings between £12,570 and £50,270 per annum. It is expected to be worth an extra £450 for an individual on the average income. The actual thresholds remain unchanged.

NIC for self-employed – the rate of Class 4 NICs, paid by the self-employed on earnings between £12,570 and £50,270 will be reduced from 9% to 8% from 6 April 2024. This represents a saving of up to £377.

In addition, the Class 2 NICs, paid at a flat rate of £3.45 a week by the self-employed with profits above £12,570 will be abolished from 6 April 2024. Access to contributory benefits, including the State Pension will be maintained. Those with profits of between £6,725 and £12,570 will continue to access benefits through a National Insurance credit without paying NICs as they do currently.  The government also pledged to expand and simplify the income tax cash basis for the self-employed and partnerships from 6 April 2024, following a consultation at Spring Budget 2023.

Employer national insurance – no changes, with rates staying at 13.8%

PAYE – individuals with income taxed only through Pay As You Earn (PAYE) will not be required to file a self-assessment return from 2024/25.

Making Tax Digital (MTD) – will be going ahead for self-employed individuals and landlords with annual income over £50,000 from April 2026, followed by those with income over £30,000 from April 2027. The position of those with income below £30,000 is being kept under review.

Inheritance tax – despite speculation that IHT might be abolished or significantly reduced, no changes were announced. The nil-rate band remains at £325,000 and £175,000 for the residence nil rate band.

Capital gains tax – the CGT exemption will fall from £6,000 to £3,000 from April 2024, a move announced previously. The rate stays at 10% for gains falling within the basic rate band, and 20% above. For gains on residential property, the rates are 18% and 28% respectively.

Savings

ISA limit – there were no changes to the subscription limits which remain at £20,000 for adult, and £9,000 for junior ISAs.

ISA restrictions relaxed – the Chancellor did announce the ‘one ISA of each type per tax year’ restriction will be removed from April 2024. This simplification will mean investors will be able to subscribe to multiple cash or stocks and shares ISAs in a year without fear of invalidating their subscriptions leading to a loss of tax-free status on their savings. It will also bring Long Term Asset Funds into the scope of Innovative Finance ISAs from April 2024. This will increase flexibility and choice for investors and support the development of long-term investment products.

ISA partial transfers – from April 2024 it will also be possible to do partial transfers of ISA funds. Currently there are separate rules for the transfer of current and previous years subscriptions. Whilst it is possible to make a partial transfer of previous years subscriptions, transfers of current years subscriptions must be for the whole amount including the attributable investment growth. This will be relaxed from April allowing partial transfers to apply to all ISA subscriptions whenever they were made.

The age at which an adult ISA can be opened will be fixed at 18 across all ISA types from April. This will mean it’s no longer possible to open an adult Cash ISA at age 16, removing the ability for 16 and 17-year-olds to pay £29,000 into ISAs by combining contributions into both a Cash ISA and Junior ISA.

Pensions

Pension reform – the government has announced a comprehensive package of pension reform designed to provide better outcomes for savers, drive a more consolidated pensions market and enable pension funds to invest in a diverse portfolio. The authorised surplus repayment charge will also be reduced from 35% to 25% from 6 April 2024.

Pension pot for life – a call for evidence will be launched on a lifetime provider model which would allow individuals to choose which pension scheme contributions are paid to, rather than the scheme chosen by their employer. This would reduce the number of small pots created when employees change jobs and a move towards having one pension pot for life. Following a recent consultation, the Government’s response confirms it will introduce a multiple default consolidator model to enable a small number of authorised schemes to act as a consolidator for eligible pension pots under £1,000.

Pension triple lock – the Chancellor confirmed the government will maintain the “triple lock”. From April 2024, the full new state pension will increase by 8.5% to £11,500 per year, an increase of over £900.

Lifetime allowance (LTA) – alongside the Treasury documents, HMRC published some further details on the new pensions regime for 2024/25, where the LTA will be completely abolished, and two new allowances come into play – the lump sum allowance and the lump sum & death benefit allowance.

Defined contribution (DC) rules – funds used by beneficiaries to go into drawdown or buy an annuity will continue to be tax free for the beneficiary where the member died before age 75. A previous policy document mentioned that on the death of the member such benefits would become taxable.

Green initiatives

Plastic Packaging Tax (PPT) – PPT will increase in line with CPI to £217.85 per tonne from 1 April 2024.

Climate change levy – the government will freeze the main and reduced rates of Climate Change Levy for one year from April 2025, and extend the Climate Change Agreement scheme for six years from 1 January 2025 to 31 December 2030. It will also increase the Aggregates Levy rate in line with RPI from 1 April 2025 to £2.08 per tonne.

Landfill – launch of a £78 million competitive pilot fund to alleviate the cost of landfill tax where it is acting as a barrier to the remediation and redevelopment of contaminated land.

Carbon Price Support (CPS) – current rates to be supported at a level equivalent to £18 per tonne of carbon dioxide in 2025/26. The government will continue to engage with industry and review CPS beyond the announced rates.

Emissions Trading System (ETS) – as set out by the UK ETS Authority in July 2023, the government will reduce the number of ETS permits available for purchase by 45% between 2023 and 2027. It will also extend the scheme to cover emissions from domestic maritime and energy from waste in 2026 and 2028 respectively.

Journey to net zero – consultation on the tax treatment of environmental land management and ecosystem service markets in spring 2024, following a review launched at Spring Budget 2023. This will seek views on how the tax system can support the delivery of public goods and the transition to a net zero economy.

Electricity Generator Levy – a new investment exemption for the EGL, which will apply to certain investments in renewable and low-carbon generation from 22 November 2023.

Other initiatives

Alcohol and tobacco – a freeze on alcohol duties until 1 August 2024 and delay its annual uprating decision to the Spring Budget 2024, to give businesses time to adapt to the duty system introduced on 1 August 2023. The government will increase duty on all tobacco products by RPI+2% and will increase the duty on hand-rolling tobacco by RPI+12%. These changes taking effect immediately.

HGV Levy and Vehicle Excise Duty – the HGV Levy and Vehicle Excise Duty for HGVs will be frozen at 2023/24 rates for 2024/25. The government will uprate Vehicle Excise Duty rates for cars, vans and motorcycles in line with RPI from 1 April 2024.

Gaming duty – the Gross Gaming Yield bands for gaming duty will be maintained for one year from April 2024. The government will consult on proposals to bring remote gambling (gambling offered over the internet, telephone, TV and radio) into a single tax, rather than taxing it through a three-tax structure (general betting duty, pool betting duty and remote gaming duty).

Summary

The Chancellor’s autumn statement represents an effort by the government to shift the economic narrative and follows the Prime Minister’s pledge to focus on tax now that inflation has halved.  Cuts in both personal and business taxes will provide some support to the economy but the sceptics will point to a likely dilution of public services, suggesting this will see an unwelcome return of austerity. Interestingly, inflation and wage growth were the key drivers behind the improvement in government finances (through higher tax receipts) which has given the Chancellor the headroom to implement these measures.

The Office for Budget Responsibility (OBR), cutting its 2024 growth forecast for the UK to 0.7% was not altogether surprising and whilst it is a steep revision from the previous 1.8%, it remains above most economists’ forecasts, which average just 0.3%. The market reaction was muted, with stocks hardly moving, but investors do seem to be coalescing around a view that interest rates will be heading down in 2024. We are of this view, though Andrew Bailey the Governor of the Bank of England has been keen to downplay quite how soon the first cut might be.

UK Gilts did move on the day, with yields rising after the Debt Management Office (DMO) said bond issuance would be largely as planned. We think this is more a reaction to events of the past few weeks, with the yield on the 10-year Treasury having fallen (price has risen) by 0.3%, quite a significant improvement for bondholders.

Attention now inevitably turns to the next general election, which had been expected to be late in 2024. There is now speculation that this could come as early as May, with the Chancellor potentially unveiling additional tax measures in an early spring budget. The latest polls continue to indicate a yawning gap between Labour and the Conservatives, though we have seen the fallibilities of these before.

Since our last update a fortnight ago, markets generally appear to be in a more upbeat mood on the expectation that interest rates will be starting to fall in 2024, though timing is still not clear. Whether the US economy avoids a recession is finely balanced but if the worst happens it should be mild in our view. Currency markets clearly feel there is a danger of some economic damage, with the dollar starting to weaken. Whilst this might sound like bad news, it isn’t. The strength of the dollar tends to be seen as a brake on world activity so any slackening off against other currencies should be supportive for financial markets.

 

Dr Andrew Mann

Investment Director