Millions of people are likely to face tax rises and spending cuts when the government announces its new economic plan next week. Chancellor Jeremy Hunt will deliver the Autumn statement on Thursday, November 17, laying out the government's economic policies over the coming months and years.
The chancellor is reported to be considered wide-ranging spending cuts in a bid to plug a £50bn funding gap, despite years of austerity putting mounting pressure on public services. Areas that will be on the table include taxes, spending, the pension triple lock and benefits with Mr Hunt saying the government would have to make "difficult decisions... that stand the test of time". It comes after the Bank of England warned the UK faces its longest recession on record after it hiked interest rates to 3% last week in a bid to tackle rising inflation.
While the plan will not have the same level of importance as a Budget, it will play a hugely important role in shaping how the government tackles the cost of living crisis and has major implications for millions of people's finances. Although final details haven't been revealed yet, here's what you could expect in the Autumn statement next week.
Read more: Five things we know about the economy as experts predict longest UK recession on record
Income tax and national insurance
The threshold (or personal allowance) where you start paying 20p income tax and 12p national insurance - £12,570 - is already being frozen for four years until April 2026. But multiple sources suggest Mr Hunt is planning to freeze it for two more years, to April 2028. It means the point at which you start paying 20% tax will be frozen at £12,570, while the threshold for paying higher-rate tax (40%) will stay at £50,270.
While the move will reportedly net the Treasury £4bn a year, it will also drag millions more people into higher tax brackets as salaries rise with inflation. Most of us see our wages go up each year so that they keep up with inflation – wage growth is currently 6%, according to the Office for National Statistics. But unless tax bands increase at the same time, many workers will find themselves dragged into a higher tax band by stealth and end up paying more income tax.
The freeze to income tax had already spelled trouble for taxpayers - a recent Institute for Fiscal Studies (IFS) report said the number of income taxpayers would rise to 35.4 million (66% of adults) by 2025/26 as a result of the four-year freeze to the personal allowance, by 2025/26 – 1.4 million more than the number today. By 2025/26 the freeze will be costing basic-rate taxpayers £500 per year in today’s prices. The four-year freeze to the higher-rate threshold means that by 2025/26, 7.7 million people will be paying higher-rate tax (14% of adults) – the highest rate on record. This is also 1.6 million more than the figure today (6.1 million, 11% of adults). Together with the freeze to the personal allowance, freezing the higher rate will cost most higher-rate taxpayers around £3,000 per year.
State pension
A major point of contention in recent years has been the government's commitment to the pensions triple lock, which guarantees how much pensioners see their income rise. At the moment the state pension is supposed to increase each year in line with whichever of the following three things is highest: inflation as measured by the consumer prices index (CPI); the average wage increase; or 2.5%. Introduced by the Conservative/Liberal Democrat coalition government in 2010, the Tories' 2019 manifesto pledged to keep the triple lock in place for the duration of that parliament. However the triple lock was suspended during the pandemic because of an unusually large 8% rise in average earnings following the end of the government's furlough scheme.
In April pension pay rose by just 3.1% as inflation rose close to 10%, leaving millions of pensioners worried about meeting their bills. Since then ministers have given varying responses on its future. In October then-prime minister Liz Truss said she was "completely committed" to maintaining the triple lock – the government had previously pledged to restore it from April 2023 – but foreign secretary James Cleverly said he could not give people "certainty" that the state pension would rise with surging inflation.
Since Rishi Sunak became prime minister the government has failed to commit to restoring the triple lock, and with difficult decisions likely to be made it remains a possibility that the guarantee will not be reinstated. During the Tory leadership race Mr Sunak said he would “deliver on the promise of the 2019 manifesto". If this is to be true the triple lock will stay in place and the state pension will increase by 10.1% next April – a massive win for pensioners. However Mr Sunak's willingness to discard the 2019 manifesto during the pandemic – admittedly an unprecedented situation – means we can't be entirely sure what will happen.
Charities have warned the impact on poorer pensioners, who are facing soaring food and energy bills amid the cost of living crisis, could be huge.
Benefits
For several years benefits in the UK have been uplifted in line with inflation – the CPI figure from the previous September – each April. Under Liz Truss’ government ministers refused to confirm whether this would be the case in 2023 with benefits already well behind living costs, putting pressure on millions of households. The Resolution Foundation has said raising universal credit by 5.5% earnings instead would be a real-terms cut of £978 a year for a working couple with three kids.
When benefits were last increased in April it was based on the previous September’s figure of 3.1% - but by then inflation was running three times higher. When Mr Sunak was serving as chancellor under Boris Johnson he committed to uprate welfare payments in line with September’s CPI, which reached 10.1%. With the new prime minister under pressure to be seen to be prudent with government finances, it remains to be seen how much benefits will rise, but we will find out in November's statement.
New work and pensions secretary Mel Stride has not even ruled out means testing some benefits including personal independence payments, carers allowance, attendance allowance, and disability living allowance for children.
Other taxes
Jeremy Hunt is also said to be considering rises to tax on dividends and capital gains tax levied on sales of shares and assets like property. Currently everyone has a yearly allowance that lets them sell assets such as a second property or shares with the first £12,300 free of capital gains tax (CGT). If you’re a basic rate tax payer you’ll pay 18% on that and if you’re a higher rate tax payer you’ll pay 28%. If you sell stocks and shares, you’ll pay CGT in the same way - 10% if you’re a basic rate taxpayer and 20% if you’re a higher rate and additional rate taxpayer.
The government could change this in a few ways such as by reducing the exempt amount or matching CGT rates to income tax. If CGT rates are aligned with income tax, a basic rate tax payer will go from paying 18% (for property) or 10% (for shares) to 20% while higher and additional rate taxpayers will go from paying 28% (for property) or 20% (for shares) to 40% or 45%.
The chancellor is also looking at a cut to the £2,000 tax-free dividend allowance and a 1.25 percentage point increase to all dividend tax bands, according to the Telegraph. This would hit savers and small business owners who pay themselves in dividends rather than taking a salary.
2% public sector pay rises
According to reports, the government could limit sector pay rises to just 2% in 2023/24, which would affect around 5.4m people of which the NHS alone employs 1.85m, and also includes teachers, civil servants, police, social workers and carers. It would come after far below inflation rises worth as little as 4% for millions of NHS staff and other public sector workers this year.
This would only be decided next year - not in the November 17 Autumn statement - and would depend on a pay review body process. But the chancellor is able to give a broad outline of what departments can afford and may refer to the government's intentions for public pay in next week's statement.
Spending
Nothing concrete has been confirmed so far on spending, but the main reason the Autumn statement was delayed by 17 days - it was supposed to take place on October 31 - was so new Cabinet ministers would have time to look at spending cuts. Mr Hunt has warned no area of government will be exempt from so-called efficiency savings despite many lying in crisis after austerity. It is thought the chancellor will slash £33bn a year from services by 2027/28.
Even if there are commitments to raising spending, with inflation so high spending can rise in cash terms but still fall in real terms, so the details of any announcements will be especially important. And even a 'real-terms rise' isn’t always what it seems, as the government uses a GDP deflator of 3.7% rather than 10.1% consumer inflation.
Income tax relief
Mr Hunt is also said to be looking at reducing the tax relief on pension contributions. The plan ministers are said to be discussing would see the rate at which relief is applied drop from 40p to 20, the Telegraph reports, which would be designed to encourage workers to contribute more to their pensions.
Windfall tax on oil and gas profits
One policy which might be considered is the introduction of a windfall tax on excess oil and gas profits. Ex-prime minister Liz Truss opposed this but it's been reported that Mr Sunak's government is considered pursuing a new levy to raise £40billion over five years.
Options include extending the temporary 25% levy to 2027/28, raising it to 30% or extending it to electricity suppliers, with The Times reporting that all of these could be on the table.
Defence spending
Liz Truss had promised defence spending would hit 2.5% of GDP by 2026 and 3% by 2030, but Rishi Sunak hasn't committed yet.
According to the Mirror defence Secretary Ben Wallace has said he will have a meeting with Jeremy Hunt this week to discuss what it means. He told peers: "Obviously, we're having to take... account of the economic challenges at the moment, and we'll wait to see what the chancellor's budget produces. I myself will have a meeting with the chancellor this week around what that means for my department."
While in office, Ms Truss commissioned an update to the Integrated Review (IR) of defence and security, which was published in March 2021. Unveiled by her predecessor Boris Johnson, it had seen the size of the Army reduced by 9,500 and a third of its ranks scrapped. The update was expected to be published by the end of 2022.
Inheritance tax
New reports from the Financial Times suggest that Mr Hunt is planning a stealth raid on inheritance tax in a bid to tackle the funding gap by extending a freeze on the "nil rate band" for an extra year, which would raise at least half a billion pounds for the Treasury.
It means that more people will have to pay inheritance tax while others who would already have paid some tax will also have to give over a larger chunk of their estate. Each individual can pass on £325,000 in inheritance tax free, a level which was first set in 2009, while a couple can jointly pass on £650,000.
Rishi Sunak agreed to freeze that threshold at £325,000 until April 2026 last spring and it is expected this could be further frozen next week until April 2028. By keeping the threshold at a fixed point, rather than rising in line with prices, more people’s estates are dragged above the tax threshold. This is known as 'fiscal drag'. To get all the latest money-saving news straight to your inbox twice a week sign up here.
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