Why Jeremy Hunt could cut taxes for next fiscal year in his Autumn Statement

Chancellor Jeremy Hunt’s last Autumn Statement left the country facing the largest tax burden since World War Two, leaving many questioning what could be in store for the next fiscal year.

Mr Hunt will announce the new Autumn Statement on November 22, and analysts anticipate he may address a series of tax policies in his speech.

But while Mr Hunt has largely downplayed the likelihood of tax cuts while the Government maintains its focus on “stability”, low public borrowing figures paired with higher-than-expected tax receipts may “provide wiggle room”.

Colin Graham, head of tax policy at PwC, said: “The Chancellor has been at pains to manage expectations ahead of the Autumn Statement, stressing that there’s no room to deliver tax cuts until the economy improves.

“While any immediate blockbuster tax changes are seemingly off the table, recent lower-than-expected public borrowing figures and higher-than-anticipated tax receipts alongside signs that inflation is being brought under control may provide a little wiggle room.”

Mr Graham explained that, since October 2022, the Government has sought to focus on stability. For businesses, the most regular feedback was the need for consistency and a stable platform to facilitate investment.

In that context, Mr Graham said: “A tax roadmap to stimulate growth and long-term investment would be welcome, particularly in light of the increase in the Corporation Tax headline rate to 25 percent from April this year and the concurrent end to the ‘super-deduction’ relief.

“The prospect of an extension of the full expensing window which replaced it will be welcomed by many given the popularity and simplicity of the scheme. Clarity on the merger of R&D schemes is also anticipated.”

Mr Graham said it’s also possible that some form of relief for the smaller businesses set to be hit by next year’s business rates revaluation may be announced.

He said: “Announcements that go towards encouraging long-term growth could be achieved through support for high street retailers and hospitality, alongside encouragement for emerging markets, such as green investment incentives.”

Income tax

Income tax cuts are, however, less likely to be announced, analysts have said. Christine Cairns, a tax partner at PwC, said: “Despite pressure to reduce headline tax rates and increase allowances, we’re unlikely to see any movement in this regard at the Autumn Statement with the Chancellor committed to increasing tax revenue through the fiscal drag effect of freezing bands and allowances.

“The Chancellor has a difficult balancing act; fiscal drag is doing a lot of heavy lifting and is costly to relax, but the real terms burden across millions of people is only increasing, weighing down the ‘feel good’ effect that might stimulate the growth needed to support a less painful route to raising taxes.”

Sian Steele, head of tax at Evelyn Partners echoed the sentiment, saying: “Hunt seems very unlikely to cut income tax, to the chagrin of many in his party.

“The tax-raising effects of frozen thresholds have perhaps still not been fully appreciated by the public: the long-term suppression of the personal allowance and the higher rate threshold will, by the time it plays out, be equivalent to a 3.5 percent hike in the headline tax rates for middle-earners, according to one estimate.”

The highest earners have seen the additional rate threshold fall to £125,140 this year, and due to the withdrawal of the personal allowance, are subject to a marginal tax rate of 60 percent from incomes of £100,000 up to that mark.

Ms Steele said: “There has been a limited amount of speculation that Hunt could alleviate the tax squeeze on middle-earners by relenting on the allowances freeze and raising the higher-rate threshold from £50,270, where it has stood since a negligible increase in April 2021 and is due to remain until 2028.

“This freeze will draw at least 2.1 million more earners into paying higher rate tax at 40 percent, but it is earning billions for the Treasury, and with the current inflationary risk it seems unlikely that Hunt will take such an unexpected step in the Autumn Statement.

“But if public finances and the inflation outlook improve significantly by the time of the Spring Budget… who knows?”

Capital tax

According to Alex Henderson, tax partner at PwC, the Chancellor may see the Autumn Statement and next year’s Spring Budget as an opportunity to embody a narrative of aspiration.

He explained: “Reforming capital taxes such as capital gains tax (CGT) and inheritance tax (IHT) may be a way to demonstrate that aspiration, however, while much smaller than the main taxes of income tax, VAT and NIC, they still raise handy amounts of revenue for a Chancellor looking to balance the books.”

The Chancellor may want to focus on the interaction between the two and the “demarcation” from income tax instead.

Mr Henderson said: “Looking at these taxes together could provide scope for targeting taxes and reliefs while potentially simplifying the whole regime.

“Any move to change capital taxes, where the gains typically accrue over a longer period, has been complicated by the higher inflationary environment, which could see taxpayers pay more. This could be another negative impact of inflation, partially undermining the Chancellor’s likely call for further long-term investment in the UK.

“It’s a feature of efficient design in capital taxes to capture longer-term accrual of value and to marry the liability to tax to have the funds to pay. So with careful targeting, this is an area where there is scope for a ‘win/win’ for the Chancellor: if he incentivises growth, both the taxpayer and the Treasury will share in the proceeds.”

Stamp Duty Land Tax

Stamp Duty Land Tax (SDLT) is charged at five percent between £250,001 and £925,000, starts at £425,000 for first-time buyers, and rises to 12 percent for properties exceeding £1.5million. It raises £14billion to 15billion a year for the Treasury, compared to just £3.68billion in 2000/01.

Ms Steele said: “SDLT has in recent history been one of a number of fiscal drag cash cows for the Treasury, with receipts growing substantially year on year as UK property prices soared over the long term. The perception that it has become a rather effective ‘stealth tax’ has made it quite unpopular among both potential and actual homebuyers.

“But it has also come under increasing criticism for congesting some parts of the property market, as a disincentive towards downsizing for older homeowners, and even damaging UK business by restricting labour mobility.”

Ms Steele said the notion that SDLT acts as a drag on moving at this and other rungs on the property ladder has propelled it into Autumn Statement speculation.

She said: “Reports suggest that the Conservatives are looking at some sort of further stamp duty relief or reduction, which as with IHT, could be a popular but relatively inexpensive move.

“SDLT reliefs and holidays – such as the raising of the threshold to £500,000 for all buyers during the Covid crisis in 2020/21 – are relatively easily implemented, although they do cause angst for those caught on the wrong side of deadlines.

“It has also been reported that Hunt could link stamp duty relief or rebates for first-time buyers to green home improvements made post-purchase, and it’s thought he will extend the Help to Buy mortgage guarantee scheme to help more first-time buyers borrow with a five percent deposit.”

The scheme was extended for 12 months to finish in December 2023, but Ms Steele says we may see it continue for another year.