The most significant spending increases in the Autumn statement are continued government support for household energy bills, NHS/social care and education, offset by a planned slowdown in Government spending with expenditure savings from 2025-26 onwards. While taxes will rise through several thresholds being held flat and the additional (45%) rate income tax threshold being reduced, larger changes to pensions tax have been resisted and the pensions news is focused on the Triple lock being maintained in 2023 and publication of the final reforms to Solvency II.
The Chancellor told the House of Commons that “the Government’s review of the State Pension Age (SPA) will be published in early 2023”. That sounds like an announcement but really just confirms what was already known – the statutory deadline is 7 May 2023.
The Autumn Statement document emphasises that “The Review will need to carefully balance important factors, including fiscal sustainability, the economic context, the latest life expectancy data and fairness both to pensioners and taxpayers”. This provides a strong hint, if one were needed, that the Government will not simply plug the latest life expectancy numbers into its formula for raising the SPA (which is based on percentage of adult life in receipt of State Pensions). As discussed in our article “Lower life expectancies and the State Pension Age review”, this would be likely to suggest that the increases to 68 and beyond should slip back. Instead, the Government may look to bring forward the increase to 68, which is currently pencilled in to conclude in 2039.
Normal pension ages in many public sector schemes were tied to SPA at a time when the Government was suggesting that the SPA would rise with life expectancy (though its review mechanism always contained the flexibility to do something different).
The New (single tier) State Pension (NSP) and the Basic State Pension (BSP) will increase by 10.1% from April 2023, maintaining the Conservative Party’s 2019 manifesto commitment on the ‘triple lock’ (uprating in line with the highest of inflation, earnings and 2.5%). The increased full rates will be £203.85 (from £185.15) for the NSP and £156.20 (from £141.85) for the BSP.
The Chancellor did not explicitly say whether he intends to continue the triple lock beyond April’s uprating, but Office for Budget Responsibility (OBR) forecasts assume that pensioners will get a 6.9% increase in April 2024, in line with their projection of CPI inflation in September 2023. This inflation number will be lower than it otherwise would have been on account of the Government’s decision to maintain an energy price guarantee beyond March 2023, albeit at an increased level.
By telling pensioners that “now and always, this government is on your side” the Chancellor may have been paving the way for an ongoing commitment to the Triple Lock beyond the next election. If so, the OBR forecasts point to the 2.5% underpin biting at the 2025, 2026 and 2027 upratings.
When the NSP was introduced in 2016, the full NSP ate up 74% of a pensioner’s personal allowance. In 2023-24, that figure will be 84%. The combination of current policy (personal allowance frozen, pensions triple-locked) and OBR forecasts would see that rise to 97% in 2027-28. That reduces the end-to-end tax advantage from pension saving, especially as some individuals’ State Pension entitlements exceed the full NSP; beyond the 25% lump sum, many retirees will have little if any scope to draw tax-free income from their private pensions.
Earlier this year, the Government consulted on plans to reform Solvency II. Its response, published today alongside the Autumn Statement documents, states that the changes it is making should release funds for insurers to help invest for UK growth. In particular, this should facilitate further investment in infrastructure assets. The changes put forward are in line with those consulted upon in April, with the notable exception that the more onerous Index Spread Model for determining the matching adjustment has been dropped.
The Government is confident that changes to regulators’ powers to require regular stress-testing and for Senior Managers to attest to their continued ability to protect policyholders are sufficient to mitigate additional risks from these reductions in technical provisions. Moreover, the application of the matching adjustment amendments will be kept under close review. The greatest changes apply to life insurers and this might lead to future changes in buy-out costs.
The Spring 2021 Budget announced that the lifetime allowance (LTA) would be frozen at its 6 April 2020 level - £1,073,100 - until April 2026. Although many commentators had expected that the Chancellor would announce an extension of this freeze, there was none. So, unless and until the government chooses otherwise, the freeze remains in place until “only” 2026. Possibly, this reprieve was driven by concerns as to the impact on the NHS of any further tightening of the screws. The British Medical Association had already quoted previous comments back to the Chancellor, warning that extending the LTA freeze would “make [the] ‘national scandal’ forcing doctors to retire early much worse”.
No changes were announced to the standard annual allowance (AA) or money purchase annual allowance. These remain at £40,000 and £4,000 respectively. For higher earners, the AA taper thresholds and the rate at which the standard AA tapers away also remain unchanged.
Income tax operates at an effective rate of 60% from £100,000 to £125,140 (the income over which the personal allowance is tapered to nil), before dropping back down to 40%. The Chancellor has smoothed this drop a little (although few affected might thank him for it) by announcing that, from 6 April 2023, the threshold at which additional rate income tax (remaining at 45%) becomes payable will reduce from £150,000 to £125,140. This will increase the tax efficiency of pension savings on income within that band, although those wishing to increase their contributions will need to balance this against the prospect of hitting the LTA.
There might also be relatively few individuals who remain within tax-registered pension provision on incomes above £125,000. HMRC statistics for 2020-21 published in Sept 2022 indicated that 6% of tax relief on total pension contributions was relieved at the 45% additional rate. That percentage will increase once the additional rate threshold reduces to £125,140, although by how much is unclear. However, even if it is a relatively small increase, it will play into the hands of advocates for a move away from marginal rate tax relief on pension contributions, as it will skew the proportion of income tax relief on pension savings to higher and additional rate taxpayers.
In the Spring 2021 Budget the then-Chancellor Rishi Sunak announced that the personal allowance and the higher rate threshold for income tax would be frozen at their 6 April 2022 levels until 5 April 2026. The personal allowance is currently £12,570 and the higher-rate income tax threshold is £50,270. The current Chancellor, Jeremy Hunt, has today announced that this freeze will continue for a further two years, with neither figure now due to increase until 6 April 2028.
With the latest published whole economy earnings growth running at 6%, this is still well short of inflation at 10.1%, salary increases can nonetheless be expected to result in the thresholds biting more widely.
More individuals will be brought into income tax for the first time and more individuals will find that (more of) their earnings are chargeable to the higher rate of income tax. Those in this position may find (increased) pension savings attractive, although that begs the question of how many would have the disposable income to do so.
The primary threshold for paying employee National Insurance contributions (NICs) was aligned with the personal allowance for income tax at £12,570 on 6 July 2022. This NICs threshold will remain in step with the personal tax allowance – it will be frozen until 5 April 2028.
In addition, the point at which employers start to pay NICs on their employees’ earnings (the secondary threshold) will also be frozen at its current level – £9,100 – until 5 April 2028.
The NICs lower earnings limit (LEL), currently £6,396, has been frozen until 5 April 2024. The qualifying earnings level for automatic enrolment was aligned with the LEL until 2021-22, but it was then frozen at that level of £6,240 for 2022-23. This decision is therefore unlikely to impact the minimum contributions due.
The Health and Social Care Levy Act introduced a 1.25% levy on individuals and employers from 6 April 2023, which is chargeable on earnings that are over the NICs primary threshold for individuals and the secondary threshold for employers. For the 2022-23 year, a transitional extra 1.25% NICs charge was introduced. However, both were repealed by the Health and Social Care Levy (Repeal) Act 2022, with the additional NICs charge ceasing on 6 November 2022
The Chancellor confirmed that the Health and Social Care Levy will NOT be reintroduced from 6 April 2023. The cost of repealing this (around £17 billion a year for each of the next 5 years) was included in the policy costings.
From 1 April 2023, for profits of at least £250,000 the corporation tax rate will increase from its current 19% to 25%. This had already been legislated for in Finance Act 2021, but for a few days following the government’s mini-budget of 22 September 2022, the increase was set to be abandoned and the rate maintained at 19%. However, on 14 October 2022 the Chancellor announced that he was reversing most of the mini-budget decisions, including that on corporation tax. As a result of that reversal, the increase to 25% will go ahead as originally planned.
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