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Autumn statement 2016: what to expect

Published: 15 November 2016

With a new Chancellor in 11 Downing Street and the economy facing potentially strong headwinds, this year’s Autumn Statement is unlikely to be short on detail.

It may, though, be the last in a while. Philip Hammond reportedly wants to scrap the end of year fiscal set piece, apparently considering it something of a ‘gimmick’. This year’s is going ahead, however, and when Hammond delivers it next week (on 23 November) he will do so to a backdrop of post-EU referendum uncertainty.

Boosts for entrepreneurs and infrastructure?

Business leaders have already called for Hammond to launch a review of the UK tax code and consider changes to national insurance, corporation tax and business rates in a bid to boost entrepreneurs.

Hammond himself has talked about investing in infrastructure including roads and railways, in what would be a boost for sectors including construction, rail and potentially housebuilding.

Might the Autumn Statement mark a shift away from the deficit-reduction focus of his predecessor, George Osborne, pointing to a government that could be more willing to take advantage of low borrowing costs?

Potential changes to personal taxation and pensions?

As ever, there is also speculation over potential changes to personal taxation and pensions policy. The Chancellor, a shadow pensions minister when the Conservatives were in opposition, will be watched closely for clues as to how he approaches the long-term savings challenge.

George Osborne oversaw the pension ‘freedoms’, several changes to pension allowances and plans for the Lifetime ISA to be introduced next year, among other measures (including the now abandoned plans for secondary annuities).

However, a widely expected shake-up of pensions taxation didn’t, in the end, materialise in the 2016 Budget (Osborne’s last), prompting speculation that pensions tax relief changes may come in the Autumn Statement instead.

Although Osborne is now out and Hammond in charge, that may still be the case, with Theresa May’s Government talking of a new emphasis on fairness.

The current system of paying tax relief to savers at their highest marginal rate means the top 1% of taxpayers benefit from the same amount of pensions tax relief as the bottom 50%, according to the Resolution Foundation.

A move to flat rate pensions tax relief?

One option for Hammond is to move to a flat rate of pensions tax relief of 30% or even 25%. A 30% rate is seen by some as the level that ensures pensions remain attractive to higher earners while offering an incentive to basic rate taxpayers.

Tax relief speculation does seem to be a mainstay of Budgets and Autumn Statements these days, but there’s a good reason for that - it’s a clear opportunity for reform.

Higher rate taxpayers appear at greatest risk of losing out. If you are one, now may be a good time to think about maximising your pension contributions while higher rate tax relief is still available. If the Government does act on 23 November, you may only have until April 2017 or 2018 to make the most of the current rules.

Lifetime allowance scrapped?

In perhaps more positive news for investors, Hammond is also under pressure from the pensions industry to scrap the lifetime allowance (LTA) for pension savings.

In April this year, the latest in a series of reductions saw it fall from £1.25 million to £1 million, while the annual allowance - the maximum amound you can save into a pension each year and still potentially benefit from tax relief - is also now tapered by £1 for every £2 of income above £150,000. The taper means that people with income of £210,000 and over effectively have a reduced annual allowance of £10,000.

As the LTA in particular has been lowered, the argument that it penalises diligent savers and good investment performance has, naturally, strengthened. So it has been suggested that if tax relief were to be reduced, the LTA could be scrapped partly to offset the loss of savings incentive.

There is a risk that large scale changes such as an end to LTA could have the effect of adding yet more complexity to the pensions system for both savers and providers, so any measures would need to be set out carefully.

Changes to salary sacrifice?

There may be changes to salary sacrifice in the Autumn Statement too. This is the mechanism that allows employees to give up part of their salary in exchange for benefits such as extra employer pension contributions.

The cost to the Treasury of the national insurance exemption that salary sacrifice entails makes it a possible target should the Chancellor be looking for savings. HMRC has been consulting on limiting the range of benefits that are included in salary sacrifice arrangements. While pension contributions, childcare and health-related benefits are likely to remain eligible for salary sacrifice, there may be restrictions on the use of non-essential benefits such as car park spaces, mobile phones and computers.

Other things to look out for

Away from pensions, there have been calls for a stamp duty break for downsizing, to help both first-time buyers and older homeowners.

Other possible measures to look out for include a possible review of VAT rates and a tweak to the residence nil rate Inheritance Tax band, taking effect in April 2017. This protects an extra £100,000 per person where the main family home is being passed on at death, but it has been criticised for its complexity. One possibility is a review of both Inheritance Tax and Capital Gains Tax, which the Office of Tax Simplification has called for.

Will fiscal policy win out?

There are many possible changes to look out for, and this Autumn Statement will undoubtedly be an interesting one to watch. A key question though, given the circumstances - with a new Prime Minister in place and the UK’s exit from Europe in the pipeline – is might the attention be mostly on fiscal policy and forecasts and less on individual finances?

Whatever happens, at Alliance Trust Savings, we will be watching the Autumn Statement closely. Look out for our summary next week, drawing out the highlights for savers and investors and more besides.

Morals and money

Important information

These articles are designed to help investors make their own investment decisions. They do not constitute a personal recommendation to invest. If you have any doubts as to their suitability you should seek expert advice. Please be aware that the value of investments can fall as well as rise so you could get back less than you invest.

Your existing pension may have valuable benefits which you might lose when you transfer.

Laws and tax rules may change in the future without notice. The information here is our understanding in November 2016.This information takes no account of your personal circumstances which may have an impact on tax treatment.

Past performance is not a guide to future performance.

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