The run up to the Budget in November has already been dominated by headlines about a “meltdown” in the bond market and a yawning “£50 billion” black hole that will have to be filled by more tax increases. Some have even speculated that the UK is heading for another IMF bailout. Mercifully, the prospects may not be quite as dire as these reports suggest. But the recent increases in the cost of government borrowing are consistent with an emerging fiscal crisis. The chancellor is increasingly boxed in by her own fiscal rules – and there is no painless way out.

The problems are most apparent in the yields on 30-year UK government bonds, known as “gilts”, which have jumped to their highest level since 1998. This partly reflects a global shift upwards as investors become more jittery about increases in public debt worldwide. Similar headlines are being written in many other countries, notably France and Japan.

Nonetheless, the UK now consistently has the highest bond yields in the G7 group of advanced economies. The cost of new government borrowing for 10 years is currently around 4.6% in Britain, compared with 4.0% in the US, around 3.5% in France and Italy, 3.2% in Canada, 2.7% in Germany, and just 1.6% in Japan. This is all the more remarkable because UK public debt is not particularly high by international standards. In fact, the ratio of debt to national income in the UK, at around 100%, is lower than in Italy, at 135%, and much lower than in Japan, at 240%. Even Greece, with debt still over 150% of GDP, can borrow at 3.3%.

Why the UK seems stuck in a doom loop

Why has the UK become such an outlier? There are three main reasons.

First, many international investors are losing confidence in the Labour government’s willingness to take tough decisions to bring borrowing down, especially after the recent failures to curb welfare spending.

The prospect of more tax rises is simply reinforcing fears that the UK is stuck in a “doom loop” of sluggish growth and deteriorating public finances.

Second, the Bank of England has been actively selling its holdings of government bonds, reversing the previous policy known as “quantitative easing” (QE), and doing so more aggressively than other central banks.

The Bank itself has said that the new policy of “quantitative tightening” (QT) may have added as much as 0.25 percentage points to 10-year gilt yields. This additional selling is especially damaging at a time when there is less demand from defined-benefit pension funds, who traditionally have been big buyers of longer-dated government bonds. In turn, this helps to explain the relatively large rise in the yields on 30-year gilts.

Third, there are fears that higher inflation in the UK will keep official interest rates higher for longer too, while adding to the cost of inflation-index-linked borrowing (of which the UK has a relatively large amount). By contrast, yields in the euro area and Japan are anchored by relatively low inflation and the relatively low interest rates set by the European Central Bank and the Bank of Japan.

This does not mean that a full-blown debt crisis is imminent in the UK, or even inevitable. The increase in bond yields only affects the cost of new borrowing, not that of existing debt, which provides at least some breathing space. The average time remaining before each conventional gilt has to be refinanced is more than 13 years, with only 16% falling due in the next three years. The average left on index-linked bonds is even longer, at more than 17 years.

It is worth stressing, too, that the rise in government bond yields has been relatively orderly, with little contagion to other markets. Investors have been demanding higher returns to compensate for higher risks, but there has been no shortage of buyers at the lower prices. And when more cash is required, the government’s Debt Management Office is now selling more gilts with shorter maturities to avoid having to pay the higher interest rates on longer-dated bonds.

So far, this episode is therefore still different from the crisis in the wake of the mini-Budget in September 2022. The sell-off in gilts then was accompanied by a panic in the mortgage market, prompting residential lending to dry up. The sharp falls in the prices of gilts also caused immediate problems for some pension funds. The pound slumped too.

Is a 1970s-style debt crisis looming?

The UK is not yet on the cusp of an IMF bailout, either. Admittedly, an increasing number of commentators are warning of a “1970s-style debt crisis” unless the chancellor changes course.

These voices include three leading economists – Jagjit Chadha, Andrew Sentance and Willem Buiter – who are not the usual suspects and whose views should be taken seriously.

Chadha and others have also made the reasonable point that IMF involvement might enhance the credibility of the fiscal framework and restore some market confidence, thus attracting more private capital, which could dwarf the limited resources available to the IMF.

Nonetheless, the circumstances now are also different from the 1970s. The bailout from the IMF in 1976 was a US dollar loan. This was mainly used to pay back other countries that had lent foreign currencies to the UK government as it attempted to prop up the pound. That is not the problem now.

The UK is not facing a sterling crisis (at least, not yet) and the government would be right to let the pound fall if it were. Any IMF bailout would also come with such punitive conditions that it would be politically unacceptable, including big cuts in public spending.

Put another way, if the UK government were willing to take these tough decisions, we would not need the IMF in the first place. An IMF-imposed austerity programme would surely be the end for both Rachel Reeves and Keir Starmer, especially with the emerging threat from Jeremy Corbyn’s new far-left party. The markets would not necessarily be reassured.

More positively, the prospects for the UK are still better than in the 1970s – in some respects. The economy shrank by about 4% in total in 1974 and 1975, unemployment rose sharply (from a low of 3.7% in 1974 to a peak of 11.8% 10 years later), and both inflation (peaking at 24% in 1975) and interest rates (the Bank rate hit 15% in 1976) were much higher.

Averting a debt crisis: try the stop-gaps first

Finally, there are other things the authorities might try before calling in the IMF. In an emergency, the government could borrow short-term funds through an existing overdraft facility at the Bank of England, known as the “Ways and Means” (W&M).

There is a recent precedent; an agreement in April 2020 allowed for more use of the W&M during Covid, although this was never actually needed.

And if the bond markets did become disorderly, the Bank of England could step in to buy gilts again on a temporary basis – as it did (remarkably successfully) in September 2022.

But this is only partially reassuring. These stop-gaps could backfire if they are seen to underline just how big a mess the public finances are in, and if the government does not use the breathing space to tackle the underlying problems. Less positively, the public finances are now in a bigger mess than in the 1970s.

The annual budget deficit was similar (averaging 6% of GDP in 1974 and 1975), but the stock of debt was far lower (about 48% of GDP, compared with 96% now). Another new risk is that roughly a quarter of government debt is now linked directed to the rate of inflation.

In any event, the latest bond-market wobbles could hardly have come at a worse time. In a few weeks’ time, the Office for Budget Responsibility (OBR) will start to crunch the numbers for the Budget.

Importantly, the OBR’s forecasts will be based on whatever the markets are assuming about the path of interest rates over the next five years. These assumptions could therefore eat further into any remaining headroom against the government’s fiscal rules or, more likely, make the existing shortfall even larger.

In turn this could prompt Reeves to announce even larger increases in taxes, hitting consumer and business confidence hard and having an immediate impact on economic activity.

It is also still possible that the nervousness of bond investors will spill over into other markets, including equities. The property market already appears to have stalled again.

Sterling is especially vulnerable too if the loss of international confidence becomes a rout, which again could have an immediate impact on other asset prices, on inflation, and on the real economy.

At the moment, the risk of a sterling crisis is being minimised by the fact that other countries are in trouble, too. But that could easily change if the UK were seen as an even bigger outlier.

Time may be on the government's side

The main hope now is that conditions may improve before the Budget itself on 26 November. The relatively late timing has raised fears that a longer period of speculation and uncertainty will undermine confidence further. But there could be some advantages too.

Perhaps most obviously, the delay leaves more time for global bond markets to calm down, taking some of the pressure off borrowing costs in the UK.

This could also work in the opposite direction if there is more bad news from elsewhere, perhaps the US (for example, higher tariffs could finally feed through into consumer price inflation, exacerbating the tensions between Donald Trump and the Federal Reserve), or from France, or from half a dozen other countries where concerns about fiscal sustainability are also growing.

Fortunately, an improvement in global sentiment is not the only potential upside from having a late Budget. The second positive is that the UK government would have more time to find some new savings on the welfare bill to replace the £6 billion lost to the U-turns on working-age benefits and winter-fuel payments. These savings would still have to be acceptable to Labour MPs, but the government would have longer to get the politics right.

The government will also have extra time to persuade the OBR that the planned increases in public investment and supply-side reforms will boost the productive potential of the economy.

Indeed, the growth assumptions will be even more important than the assumptions about inflation and interest rates. The increase in gilt yields since the OBR’s forecast for the Spring Statement might add about £5 billion to the shortfall that has to be filled by spending cuts or tax increases. But this shortfall could swell to £50 billion if the OBR adopts the same pessimistic forecasts for productivity and growth as those used recently by the National Institute of Economic and Social Research (NIESR).

Fortunately, NIESR’s £50 billion is an outlier. It is still possible that the chancellor will be able to keep the fresh pain down to around £20 billion, with at least £5 billion of that coming from welfare savings rather than tax increases.

That might be the least bad outcome, and perhaps even a relief to some. But there can be little doubt that the UK is in the early stages of a crisis that could play out in many different ways – with or without the involvement of the IMF.

Julian Jessop is an independent economist.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

The Autumn Budget will finally take place on Wednesday (26 November), after months of speculation about what measures will be taken to rebalance the public finances.

Many are concerned that tax rises could be on the cards when chancellor Rachel Reeves addresses parliament. According to a survey by Hargreaves Lansdown in October, only 3% of people think they won’t be affected by Budget tax rises – whether that’s through changes to income tax, council tax, inheritance tax, capital gains tax, stamp duty or VAT.

In a speech delivered in Downing Street on 4 November, the chancellor told the nation she “will make the choices necessary to deliver strong foundations for our economy – for this year, and years to come”.

Treasury communications frame the policies set to be announced as “fair choices” that help deliver on the government’s priorities of cutting NHS waiting lists, national debt, and the cost of living.

Reeves has said higher taxes on the wealthy will be “part of the story” of this Budget and insisted that those with the broadest shoulders should be contributing the most.

But whatever your wealth, the Budget is likely to have significant implications for your personal finances.

Last year’s event saw a 6.7% increase to the minimum wage, as well as £40 billion worth of tax rises to balance the books and fund public services. This included the much-disliked National Insurance hike for employers.

This year’s Autumn Budget date is later than usual, with the fiscal event usually taking place in late October or early November.

We look at what the Budget is, and the types of things you can expect to be announced in it.

What is the Budget?

The Budget is an opportunity for the chancellor to set out the government’s plans for spending, taxation and the economy.

It typically takes place once a year, but previous chancellors have sometimes deviated from this schedule with two events. Reeves has committed to returning to just one annual Budget.

As well as announcing tax and spending policies, a key role for the chancellor is balancing the books at each Budget. Reeves’s fiscal rules prevent her from borrowing money to pay for day-to-day spending, and require her to have debt falling as a share of the economy by 2030.

Despite criticism that the self-imposed fiscal rules restrain the chancellor too much, Reeves reaffirmed on 3 September that they remain “non-negotiable”.

When chancellors set the Budget, they give themselves some financial leeway – a sort of margin for error known as ‘fiscal headroom’. This is essentially the amount by which they can increase spending or cut taxes without breaking their fiscal rules.

In the spring, Reeves had a fiscal buffer of £9.9 billion, but analysts believe this has now morphed into a black hole of around £22 billion due to weak economic growth, high borrowing costs and failed spending cuts. This means further tax rises look likely in the Autumn Budget.

Economic forecasts are also published at each fiscal event, giving a sense of what we can expect over the next five years. One of Reeves’s main missions is to deliver growth, so she will be judged against this objective.

Find out more about the potential economic impact in: How could the Autumn Budget affect interest rates, inflation and the financial markets?

What happens on Budget day?

The Budget will take place on Wednesday 26 November, with the chancellor delivering her statement at around 12.30pm, after Prime Minister’s Questions.

The shadow chancellor – currently Conservative MP Mel Stride – follows afterwards with his response to the policies announced.

Another key moment on Budget day is the photo opportunity before the statement to parliament. The chancellor famously poses in front of 11 Downing Street with the red box.

What to expect from the 2025 Autumn Budget

The economic outlook for the UK has been weak for some years now, and has not significantly improved since the pandemic.

The economy suffers from slow growth (as measured by GDP), low productivity, and high inflation, unemployment, and borrowing costs.

These factors mean the chancellor has much less money to spend on public services, new projects or to finance tax cuts.

In all, the Institute for Fiscal Studies (IFS), a think tank, estimates that Reeves will need to find £22 billion to simply maintain existing fiscal policy and keep the £10 billion of fiscal headroom she left herself in March, let alone to finance extra expenditure.

The money needed to balance the books will have to be found by either raising taxes, cutting government spending or borrowing more money.

But, as the chancellor’s self-imposed fiscal rules greatly limit her ability to raise more money through borrowing, and spending cuts (like those planned for welfare and the Winter Fuel Payment) have proved difficult to push through, the chances are that taxes will need to increase.

There are a number of ways that she could do this. While no confirmation has been made yet (and will likely not come until Budget day), one of the key tax-raising measures that is expected to be announced is an extension of the freeze on income tax thresholds.

Tax thresholds have been frozen since the 2022 tax year, meaning tax bands have not increased with inflation. This means that as inflation leads to higher prices and wages, workers start to be dragged into higher tax brackets without earning more in real terms, bringing in more revenue for the government. The phenomenon is called fiscal drag.

The threshold freeze was set to expire in the 2027/28 tax year, but it now looks like Reeves will extend it rather than raising income tax rates.

Other revenue-raising measures expected to be announced are an increase in how much expensive properties are taxed, a new tax on electric vehicles, a raid on salary sacrifice, and much more.

We could also see the cash ISA limit cut, which may result in savers paying more tax on money held in non-ISA savings accounts.

For a full list of all the policies confirmed to be in the Budget, as well as those which are widely expected to be announced, read our guide: Rachel Reeves’s Autumn Budget: what we know so far.

Who is responsible for the Budget?

As chancellor, Reeves has ultimate responsibility for the Budget and announces the main measures in a speech before parliament.

Other ministers that have a say over the Budget include Reeves’s second-in-charge, the chief secretary to the Treasury. This is now James Murray, but had been Darren Jones until he moved to the Prime Minister’s office on 1 September.

Pensions Minister Torsten Bell, who was the director of the Resolution Foundation think tank before becoming an MP, is also understood to be taking a key role in this year’s Budget.

The rest of the Treasury is also closely involved in the process and publishes a report alongside each Budget statement, providing further detail on the rationale and costing behind each measure.

The Office for Budget Responsibility (OBR), the UK’s fiscal watchdog, plays a role too, as the chancellor’s Budget decisions are partly informed by data and analysis provided by them. The OBR publishes its economic and fiscal outlook on the same day as the Budget is delivered.

After the Budget statement, MPs may be required to approve immediate changes to some taxes, such as alcohol and tobacco duties. A four-day Commons debate usually follows, after which MPs are asked to agree ‘ways and means’ resolutions to approve further tax proposals.

The last step is the Finance Bill, which gives permanent legal power to the measures introduced in the Budget. The Finance Bill often acts as a motion of confidence in the government – if it cannot pass key measures in the bill, it could be at risk of collapse.

Inheritance tax (IHT) receipts totalled £2.6bn between April and July 2023, a £237m increase compared to the same period last year as a combination of fiscal drag and higher house prices pull more taxpayers into the IHT net. 

The figures from HM Revenue and Customs (HMRC) show IHT receipts in June hit the highest-ever monthly level, putting the government on track for a year of record receipts from IHT.

HMRC said a small number of higher-value payments as well as increasing interest rates were the reasons behind the record-breaking IHT tax take.  

 Inheritance tax receipts set to hit a record  

Canada Life tax and estate planning specialist, Julia Peake, says the increase means that “HMRC is on course for a year of record receipts from IHT”.

She adds: “The Office for Budget Responsibility (OBR) has forecasted that IHT will raise £7.2bn for the Exchequer this financial year.”

Property price gains and frozen thresholds are pushing more households into paying the tax. 

Rachael Griffin, tax and financial-planning expert at Quilter, says: “The latest HMRC figures show that bereaved families are increasingly filling government coffers due to frozen IHT thresholds.

“The chancellor’s IHT threshold freeze was extended last autumn until at least April 2028 and is set to rake in record amounts by stealth.

“In many cases, higher property prices are helping lift the number of households falling within the scope of IHT. While growth has slowed in the housing market, it hasn’t yet seen the drop in prices some were expecting.”

The average UK home has more than tripled in value over the past two decades from £84,620 in 2000 to £288,000 today, fast approaching the frozen IHT nil-rate band of £325,000.

HMRC’s annual bulletin shows that in the financial year 2020/21, some 27,000 estates paid IHT, a 17% increase compared to the previous year.

Laura Hayward, tax partner at Evelyn Partners, says: “Inflationary growth of asset values coupled with frozen allowances means that an ever-increasing number of people are being dragged into paying IHT which can leave the descendants of those who have passed away in a difficult position. Loved ones may need to sell family homes or take on more debt if they need to settle a large IHT bill.”

The latest figures come amid data that shows that a significant number of high net worth individuals are failing to plan ahead, with 28% of those with investable assets of £250,000 not putting measures in place to deal with IHT, according to the latest Saltus Wealth Index Report.

 Inheritance tax bands frozen

 Chancellor Jeremy Hunt confirmed the threshold for inheritance tax (IHT) would be frozen until April 2028 in his Autumn Statement last year, despite double-digit inflation.  

How can you minimise your inheritance tax bill?

“Making gifts to family members can be one of the best places to start in reducing or eliminating an IHT bill. Gifts you make are generally not subject to IHT unless you die within seven years. There is also an annual gift allowance of up to £3,000 per tax year, and this will not be subject to IHT even if you do die within seven years,” says Hayward.

“Setting up trusts can be a helpful means of passing on assets, tax efficiently, to the next generation because they help ensure that gifts are used in a responsible way. Trusts can only be accessed at a certain time or for a particular reason,” she adds.

Increasing numbers of families are: around 48% more in the past decade are deliberately using Potentially Exempt Transfers (PETs). These are gifts of unlimited value that become IHT-free if the person lives seven years after giving them. Around 6,610 families gave away money this way to reduce their IHT liability in 2019/20, up from the 4,500 families in 2009/10.

You can read more about how to reduce your IHT bill.

Inheritance tax (IHT) receipts totalled £1.2bn in April and May — the first two months of the current 2023/24 tax year – according to government data published today.

The figure is £100m more than the figure recorded in the same period last year.

The new numbers come amid the Office of Budget Responsibility’s forecasts that £38bn will be raised over the next five years from IHT, with receipts rising to a hefty £8.4bn in the 2027/28 tax year as fiscal drag pulls more people into the IHT net. 

It comes amid new data that shows that a significant number of high net worth individuals are failing to plan ahead, with 28% of those with investable assets of £250,000 not putting measures in place to deal with IHT, according to the latest Saltus Wealth Index Report.

Inheritance tax bands frozen 

Chancellor Jeremy Hunt confirmed the threshold for inheritance tax (IHT) would be frozen until April 2028 in his Autumn Statement last year, despite double-digit inflation. 

IHT has become “a real hot potato” in recent weeks, says Laura Hayward from wealth management firm Evelyn Partners, with pressure on the government to get rid of the tax.

“However, it’s important to remember that no decisions have been announced as of yet and while this debate bubbles away more families are being dragged into paying IHT,” she said.

Hayward added: “Today’s fresh data release from HMRC shows the extent to which the Treasury is continuing to benefit from ever increasing IHT receipts. What’s more, given inflationary growth of asset values coupled with frozen allowances, as things stand the cash cow that is IHT looks set to be very lucrative for the Treasury for many years to come.” 

How can you minimise your inheritance tax bill?

“Families should use this update from HMRC as a reminder to take a close look at their tax planning with a professional adviser to ensure they don’t pay more tax than they need to,” said Hayward.

Increasing numbers of families are: around 48% more in the past decade are deliberately using Potentially Exempt Transfers (PETs). These are gifts of unlimited value that become IHT-free if the person lives seven years after giving them. Around 6,610 families gave away money this way to reduce their IHT liability in 2019/20, up from the 4,500 families in 2009/10.

• Make use of the annual gift allowance of up to £3,000 per tax year - this will not be subject to IHT even if you do die within seven years. And if you didn’t use the allowance last year, you can combine it and pass on £6,000. Wedding gifts of £5,000 to children and £2,500 to grandchildren are also protected from IHT.
• Make regular gifts from surplus income of unlimited value - as long as they’re from excess income and don’t affect your personal standard of living.
• Set up a trust. Many people choose to make gifts in trust so that the money can only be accessed at a certain time or for a particular reason. Life insurance can also be set up in a trust, so that the money can be accessed immediately to pay an inheritance tax bill.
• Donate to charity. If you donate at least 10% of your estate to charity, you could benefit from a 4% discount on your IHT rate, lowering it from 40% to 36%. 

You can read more about how to reduce your IHT bill.

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Inheritance tax (IHT) receipts totalled £1.2bn in the first two months of the tax year, according to government data published today.

This is £100m more than the same period last year.

The new figures come amid the Office of Budget Responsibility’s forecasts that £38bn will be raised over the next five years from IHT, with receipts rising to a hefty £8.4bn in the 2027/28 tax year as fiscal drag pulls more people into the IHT net.  

Inheritance tax bands frozen  

Chancellor Jeremy Hunt confirmed the threshold for inheritance tax (IHT) would be frozen until April 2028 in his Autumn Statement last year, despite double-digit inflation. 

IHT has become “a real hot potato” in recent weeks, says Laura Hayward from wealth management firm Evelyn Partners, with pressure on the government to get rid of the tax.

“However, it’s important to remember that no decisions have been announced as of yet and while this debate bubbles away more families are being dragged into paying IHT,” she said.

Hayward added: “Today’s fresh data release from HMRC shows the extent to which the Treasury is continuing to benefit from ever increasing IHT receipts. What’s more, given inflationary growth of asset values coupled with frozen allowances, as things stand the cash cow that is IHT looks set to be very lucrative for the Treasury for many years to come.” 

How can you minimise your inheritance tax bill? 

A third (32%) of UK adults over the age of 55 - 16.4 million people - are unaware of whether or not their families could be left to pay a tax bill when they pass away, according to research from financial planning experts abrdn.

Worryingly, three in ten (29%) over 55s don’t think their wealth is large enough to need advice on inheritance tax. 

Yet, when asked to value their current wealth, individuals estimated on average they would have a total of £354,000 in assets – which is above the inheritance tax threshold of £325,000 and is double for married couples. In London, the average estimation jumped to £556,999. 

And 70% of the over 55s surveyed admitted they don’t know how to reduce inheritance tax bills for their loved ones.

Shona Lowe, financial planning expert at abrdn, said: “It’s a human instinct to want to pass on as much as you can to your loved ones and understanding the rules around inheritance tax can help you reduce, or even get rid of, that tax bill. Whether that’s using gift allowances which allow an individual to pass on money to loved ones, establishing a trust or making use of business relief the ‘right’ way depends entirely on your individual circumstances.”

She added: “Navigating inheritance tax can be complicated and daunting but it’s a reality of life for more and more people so it’s something to grasp and talk about with loved ones. Our latest research found people feel more comfortable talking about their health problems and politics, than money. But, the sooner you kickstart the inheritance tax conversation, whether that’s with family, friends or a financial adviser, the better.”

Here are three strategies you might be able to use to lower your IHT bill, although it’s always important to discuss your options with a financial advisor:.

• Make use of the annual gift allowance of up to £3,000 per tax year - this will not be subject to IHT even if you do die within seven years. And if you didn’t use the allowance last year, you can combine it and pass on £6,000. Wedding gifts of £5,000 to children and £2,500 to grandchildren are also protected from IHT. 
• Set up a trust. Many people choose to make gifts in trust so that the money can only be accessed at a certain time or for a particular reason. Life insurance can also be set up in a trust, so that the money can be accessed immediately to pay an inheritance tax bill.
• Donate to charity. If you donate at least 10% of your estate to charity, you could benefit from a 4% discount on your IHT rate, lowering it from 40% to 36%.   

You can read more about how to reduce your IHT bill. 

Prime minister Rishi Sunak is mulling a cut to inheritance tax (IHT) rates ahead of the next general election, according to reports, in a move that could see fewer people paying the unpopular levy.

As it stands, the standard IHT rate is 40%, payable on parts of the estate that exceed the £325,000 threshold.

But, reports suggest that the government is seeking to potentially reduce the headline rate payable or even raise the £325,000 threshold at which the tax is currently paid, according to reports by Bloomberg.

It reported ministers saying the proposal could be a “pre-election giveaway”, designed to galvanise support from potential voters.

YouGov found that 63% of people support the inheritance tax threshold being upped - a move backed by 77% of Conservative voters.

The Treasury did not confirm or deny the rumours, saying it was unable to comment on speculation around tax changes outside of fiscal events.

Chancellor Jeremy Hunt froze the IHT threshold for two years in the latest Autumn Statement. But, since the £325,000 IHT threshold for individuals was set in 2009, it would be no surprise if this went up.

It’s a policy move that has been touted previously. Former prime minister Liz Truss pledged to oversee a review of IHT during the Conservative leadership contest in August last year - plans which did not materialise.

Who pays IHT?

The number of people who actually pay inheritance tax is very small, but every year more people fund themselves dragged into the net. According to the latest government statistics, only 3.76% of deaths in the tax year 2019 to 2020 resulted in an IHT charge - a total of 23,000 deaths. IHT receipts received by HMRC during the financial year 2021 to 2022 hit £6.1 billion.

In March, the Office for Budget Responsibility (OBR) upped the Treasury’s forecast for its IHT intake, projecting £45bn in inflows over the next six years - an increase of £2.9bn compared to the OBR’s previous statement in November.

The OBR forecasts that by 2027/28, 6.7% of deaths will trigger an IHT charge.

What is the IHT rate?

Inheritance tax is currently charged at 40% of a person’s estate above a tax-free allowance, but a reduced rate of 36% is triggered should the deceased leave a minimum of 10% of their assets to charity in their will.

You also don’t need to pay IHT if you leave your estate – or everything above the £325,000 threshold – to your spouse, civil partner, a charity or community amateur sports club.

Those with children or grandchildren that leave the family home to them benefit from what is known as a residence nil-rate band, which boosts the £325,000 allowance to £500,000. This means a couple could leave up to £1m IHT-free to their kids or grandchildren.

Can I reduce my IHT bill?

There are several ways to cut your IHT bill by gifting, which includes:

• Gifting up to £3,000 each year. This is called the ‘annual exemption’ and if you didn’t use your allowance last tax year you can also carry this allowance forward – so, you can make £6,000 as a gift.
• You are allowed to make gifts of up to £250 to as many people as you like if you haven’t made any larger gift to that person
• Each year the rules allow you to give a lump sum to someone getting married or starting a civil partnership. For children, you can give £5,000, for grandchildren and great-grandchildren the allowance is £2,500 and then £1,000 to anyone else.

We explain how to reduce your IHT bill by gifting in detail in our article on how to reduce your IHT bill by gifting.

There are a number of other ways reduce your IHT bill, but these can sometimes be complicated and it is always worth speaking to a financial planner to make sure your loved ones do not pay any more tax than they have to.

The Bank of England (BoE) has raised its base rate by 0.25% to 4.25%, its highest level since October 2008.

The central bank was widely expected to hike rates today following a surprise jump in inflation to 10.4% as announced by the Office for National Statistics yesterday.

Still, the rate-setting Monetary Policy Committee (MPC) faced a difficult balancing act going into their meeting today.

The collapse of Silicon Valley Bank and Credit Suisse has caused turmoil in the banking sector, leading some analysts to predict the BoE would pause hikes to reassure markets.

But it seems the BoE believes the fight against inflation is more important as it runs over five times ahead of the central bank’s 2% target.

“No one could say the Bank of England’s decision to raise the base rate to 4.25% was unexpected,” says Emma-Lou Montgomery, associate director for personal investing at Fidelity International

“The surprise jump in UK inflation to a 45-year high of 10.4% in February, while an 11th-hour shock, only reinforced expectations that the BoE would have no choice but to raise interest rates again.

“The Bank of England also had no choice but to acknowledge that inflation is firmly in the driving seat, with concerns over the global banking crisis set aside in favour of tackling a troubling spike in the cost of living,” said Montgomery.

The BoE’s hike follows the Federal Reserve, which hiked interest rates by 0.25% yesterday.

We’ll be updating this page throughout the day with all the latest news and comment on the Bank of England’s latest move, so stay tuned.

Why is the Bank of England raising interest rates?

The CPI inflation rate was expected to continue to slow in February, with analysts projecting a figure of 9.9%. However, the rate came in much hotter than expected at 10.4%.

Food inflation is running at 18.2%, its highest-ever level. Rising prices at restaurants and hotels also increased 12.1% year-on-year in February.

The BoE is attempting to get inflation under control by hiking interest rates, and encouraging savers to put money away and not spend it.

But while savings accounts now offer some of the best rates in years, higher borrowing costs are projected to weigh on economic growth.

The 0.25% hike is gentler than the past two 0.50% hikes and the 0.75% increase last November. And “with the decision from the nine-strong Monetary Policy Committee split - with seven favouring a 0.25% increase and two wanting no rate hike at all - it signals some trepidation about pushing ahead with a rate rise amid the uncertainty,” says Alice Haine, personal finance analyst at Bestinvest.

The Office for Budget Responsibility (OBR) expects the UK economy to shrink by 0.2% this year, although it no longer expects the UK to enter a recession in 2023.

Furthermore, the International Monetary Fund expects the UK to be the only G7 economy to shrink in 2023.

The OBR also expects the rate of inflation to fall to 2.9% by the end of the year, but right now the forecast seems optimistic, and the latest data from the ONS shows the path there is far from straightforward.

The bank also acknowledged the economic impact of the failure of SVB and Credit Suisse, adding it would issue a full assessment in its next update in May. Still, it said the UK banking system “maintained robust capital and strong liquidity positions and was well placed to continue supporting the economy”.

Will the Bank of England continue to raise interest rates?

“Whether this is the end of the rate hiking cycle is unclear, but thankfully, the outlook from here is not entirely bleak,” continues Haine.

“The UK narrowly avoided a recession last year and is expected to do the same in 2023. In addition, both the BoE and the Office for Budget Responsibility expect inflation to slide as a result of easing wage growth and falling energy prices.”

Following the chaos caused by the mini-Budget last September, analysts were expecting rates to rise to as much as 6%, but now analysts now estimate rates will peak at 4.5%.

Andrew Bailey, the BoE’s governor, has said that even though inflation had started to fall the Bank couldn’t afford to take its foot off the pedal and risk a return to the levels of inflation seen in the 1970s. Two MPC members voted to maintain the rate at 4%.

Encouragingly, the BoE said it expected inflation to fall sharply over the coming months as energy prices decline, which could signal an end to the rate hikes in the near term.

However, the Bank said “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required”, so at this point, it’s still a waiting game.

What do rising interest rates mean for you?

Rising interest rates increase the cost of borrowing, meaning mortgage rates are likely to rise in the coming weeks.

“A rise to base rate will come as disappointing news to borrowers who are not locked into a fixed rate mortgage, as their monthly repayments may rise in the coming months amid a cost of living crisis,” says Rachel Springall, finance expert at Moneyfactscompare.co.uk.

But borrowers looking to refinance “might be pleased to see that fixed-rate mortgages have fallen since the tail end of 2022 and that it is currently cheaper on average to lock into a five-year fixed rate over a two-year fixed deal”, says Springall.

“The incentive to fix is clear from the continued rise to the average Standard Variable Rate (SVR), which is now above 7%, a level not breached since 2008,” Springall adds. “A rate rise of 0.25% on the current average SVR of 7.12% would add approximately £772* onto total repayments over two years.”

However, affordability will remain an issue for first-time buyers. “With this most recent increase in the base interest rate, the cost of borrowing remains much higher than previous years,” says Kellie Steed, mortgage expert at Uswitch. “Buyers who are not yet on the property ladder will need sizable deposits in order to access the most favourable interest rates.”

“It's possible that first-time homebuyers will find it more affordable to purchase a home towards the end of 2023 because both house prices and fixed mortgage rates are anticipated to continue falling throughout the year,” adds Steed.

The property market has been slowing down for months due to rising rates. Most house price indexes show house prices have been falling over the last few months.

The latest data from HMRC showed property transactions are down by nearly 20%, and the OBR expects prices will fall 10% by 2024.

And it's not just mortgages they're becoming more expensive. All rates on types of borrowing, from car finance to credit cards, are likely to rise following the BoE's announcement.

“While unsecured borrowing such as a personal or car loan is not typically impacted by an interest rate rise because the terms of the finance have already been agreed, those with credit card debt or an overdraft could see their rates change if their lender passes on the rise in borrowing costs,” says Haine.

As for savers, even though they have been enjoying better rates on savings accounts, higher interest rates don’t always translate into higher savings rates.

“It could take months for the increase in interest rates to trickle through to savers – if at all,” says Myron Jobson, senior personal finance analyst at interactive investor. “The acceleration in the frequency of rate rises has meant that some savings providers may still be catching up to past base rate rises.”

If inflation does fall to 2.9% as the OBR has predicted, the savings rate increase cycle could be “nearing its end”, says Jobson.

“But there is still plenty of uncertainty, and inflation could remain stubbornly higher for longer,” continues Jobson. “While you might get a better rate in the near future, there are no guarantees – and an uptick in savings rates could mean the difference between pennies and hundreds of pounds depending on how much you have to save.”

The UK property market had a rocky start to 2023, but a rise in asking prices shows the sector remains resilient despite tough economic conditions. We look at what is happening to house prices now.

Online estate agent Rightmove’s latest house price index showed the average price of a property coming to the market was up 0.8%, or £2,906, in March, largely due to a jump in the price of large homes.

But this is slightly lower than the average monthly rise of 1% seen in March over the last 20 years as sellers take discounts on their properties.

The average price of a property coming to the market is now £365,357.

The cooling effects of a high interest rate environment and the cost of living crisis are still reflected in the data. Annual house price growth has eased to 3% from 3.9% the month before, and new seller asking prices are now £5,800 below October’s peak as the market returns to its pre-pandemic activity levels.

Top-of-the-ladder homes boost average asking price

Larger, top-of-the-ladder homes boosted the average asking price thanks to a 1.2% monthly price jump, but sales for these larger homes were down 10% from the same period in 2019.

Second-stepper homes saw a more modest 0.4% rise in asking prices, but sales are down 13% from the same period in 2019.

Meanwhile first-time buyer type properties, those with two bedrooms and fewer, are taking longer to recover. Sales agreed are 4% behind the same period in 2019, and 18% behind last year’s peak.

Prices for these properties are down £500 from the peak. But affordability is stretched for first-time buyers struggling to save for deposits due to record-high rents, and mortgage rates remain far higher than they were two years ago, so this sector of the market could take longer to recover.

How have house prices changed regionally?

House prices are up in every region in the UK, except for London and the East of England where they are down 0.1% and 0.2% respectively. They are still 2.5% and 1.8% higher year-on-year.

The average price tag of a home in London is £680,806 and £415,836 in the east of England.

The North East saw the biggest monthly change, with prices jumping 2.5% from February and 4.7% year-on-year. The average home in the region costs £184,000.

Wales and the South West saw monthly increases of 2%, with the average homes costing £256,596 and £385,171 respectively.

The South East, East Midlands and the North West saw monthly price growth of 1.2%, 1.4% and 1.1% respectively. The West Midlands and Yorkshire and Humber saw more modest growth of 0.2% and 0.6% respectively.

Where will UK property prices go next?

The Office for Budget Responsibility (OBR) expects house prices will fall by 10% by 2024 due to low consumer confidence, the squeeze on real incomes due to inflation and the expectation of mortgage rate rises.

Other house price indexes believe the property market is headed for a downturn. The Royal Institution of Chartered Surveyors (RICS) reported new buyer demand remains depressed, and Nationwide reported house prices saw their biggest dip since 2012 last month.

But RICS also said the market appears to be stabilising, and the data from Rightmove is also encouraging. The housing market is turning out to be more resilient than previously thought despite several headwinds.

House prices rose rapidly throughout the pandemic, and the latest dips in prices seem to reflect a return to a normal pace of growth rather than an all out crash.

But plenty of uncertainty remains and prices could have much further to go.

Mortgage rates have begun to fall – currently the average rate for a 15% deposit five-year fixed mortgage is 4.65%, down from 4.75% last month and 5.89% in October, according to Rightmove’s calculations.

But this is still significantly higher than the 2.48% rates available this time last year.

“Lower mortgage rates may well be persuading more people to dip their toe back into the property market, which in turn could mean price falls aren’t as brutal as had been expected,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.

“However, demand remains fragile, and given the uncertainty over the trajectory of the mortgage market, this is not a time to get carried away.”

The Office for Budget Responsibility (OBR) predicts UK house prices are set to slump this year.

House prices have been under pressure for the past six months, and now the OBR believes prices could fall as much as 10% by 2024, that’s from their fourth quarter 2022 high.

The agency was projecting a 9% decline last year, but it has upped its projection as “low consumer confidence, the squeeze on real incomes and the expectation of mortgage rate rises” weigh on the property market.

The watchdog estimates the average property price will fall to £262,700 next year, down from an all-time high of £291,700 in the final quarter of 2022.

The OBR also expects property transactions to drop by 20% compared to their peak in the fourth quarter of 2022.

Property prices have begun to fall

Data from other house price indexes support the OBR’s projections that house prices are coming under pressure.

The latest report from the Royal Institute of Chartered Surveyors (RICS) showed that while new buyer enquiries rebounded in February from multi-year lows, they remain depressed.

Meanwhile, Nationwide reported house prices saw their biggest dip since 2012 in February.

Where next for mortgage rates?

High financing costs are one of the reasons why the property market is cooling.

As the Bank of England has hiked interest rates to try and control inflation, mortgage rates have climbed to their highest levels in recent memory.

Mortgage rates hit a peak of 6.65% in September. The average two- and five-year fixed rates are currently around 5%.

And it’s not just new buyers that are suffering. Homeowners with outstanding mortgages are also expected to see much higher borrowing costs in the near future.

The OBR now estimates rates for outstanding mortgages will reach 3.8% in 2024 before climbing back up to 4.2% in early 2027 – two times higher than what they were at the end of 2021.

While these projections are brighter forecast than the forecast the OBR published in November, when it expected rates to peak at 5% in 2024, they still imply the cost of borrowing is going to rise substantially over the coming years. This will almost certainly have an impact on UK house prices.

The Chancellor, Jeremy Hunt, has delivered his first budget today against a mixed outlook for the UK economy.

Billed as a ‘growth budget’, Hunt’s focus has been on getting the UK back to work.

Incentives to encourage workers to return are sorely needed as the UK economy has seen one of the slowest recoveries from the pandemic, among the group of OECD nations.

According to the latest data, the economy is still 0.2% smaller than it was in February 2020, when the pandemic started to move around the world.

Economists have blamed the high number of inactive workers in the economy for this sluggish recovery. High levels of long-term sickness, coupled with early retirement among those over 50, have been singled out as key contributors to the economy’s sluggish performance.

Hunt wants to encourage workers back into the workforce by changing pension allowances, improving access to childcare and devoting more money to training.

However, the Chancellor does not have much fiscal room for manoeuvre. The office for budget responsibility (OBR) has warned that the country's borrowing is running at unsustainably high levels, and the government will either have to reduce spending or increase tax collection to balance the books.

Initial projections suggest that the country will only hit the Chancellor’s target of debt as a percentage of GDP falling, by the end of the next Parliament.

Here’s a round-up of the most important changes and what they mean for your finances.

Stay tuned as we’ll be updating this page throughout the day with more details from the announcement…

Economic outlook

According to the Office for Budget Responsibility (OBR) the country is no longer on track to plunge into a recession this year.

The OBR now expects the economy to contract by 0.2% this year, with unemployment expected to rise only modestly as a result. GDP growth is expected to return in 2024 and for the next five years.

"After this year the UK economy will grow in every single year of the forecast period: by 1.8% in 2024; 2.5% in 2025; 2.1% in 2026; and 1.9% in 2027,” said Hunt.

The OBR also expects inflation will fall to 2.9% by the end of 2023. Underlying debt is forecast to start falling in 2027/28. The deficit is set to fall every year over the next five years to 1.7% of GDP by 2027/28. Thanks to these growth forecasts, the overall tax burden is expected to be slightly lower than previous projections, although it’s still high by historic standards.

Energy Price Guarantee

One of the announcements made before Hunt stood up to deliver his speech is that the Energy Price Guarantee (EPG) will be held at its current rate of £2,500 until July 2023. Hunt was planning to let the energy subsidy rise by 20% on 1 April. However, he will now keep it at the current support level for another three months amid sliding energy prices. Wholesale energy prices have dropped by around 50% since October.

See our article for details on what the EPG extension means for energy bills.

“High energy bills are one of the biggest worries for families, which is why we’re maintaining the Energy Price Guarantee at its current level. With energy bills set to fall from July onwards, this temporary change will bridge the gap and ease the pressure on families, while also helping to lower inflation too,” Hunt said in a pre-Budget statement this morning.

Childcare

In another swift move to get more people back into work, Hunt has also extended free childcare to all children over nine months - it previously only kicked in when a child turns three.

A report this month from Coram Family & Childcare found childcare costs have shot up by 5.6% in the last 12 months; a part-time place for a child under age two costs on average around £148 a week.

Though the extension of free childcare is welcome for parents, there is still an issue around the availability of childcare, which has been declining - only 57% of local authorities have enough childcare places available for children under two, down from 72% in 2021. Only 59% report having enough childcare available for parents working full time, down from 68% last year, according to Coram’s report.

To that end, Hunt also announced more funding for schools to provide wraparound care for school-age children, incentive payments of £600 for childminders joining the profession and an increase in the funding to nurseries of £204 million from this September rising to £288 million next year, an increase of 30%.

"The extension of free childcare announced in today’s Budget is welcome news for working parents. These measures will go some way to help prevent women in particular from dropping out of the workforce to care for children," explains Alice Haine, Personal Finance Analyst at Bestinvest.

"Up to 30 hours of free weekly childcare for all one and two-year-olds – an extension to the current scheme for three and four-year-olds - offers a lifeline to working mothers who want to ensure a return to work makes financial sense. However, the support will be rolled out slowly so not everyone can instantly access the full 30 hours plus it will generally only apply within term time and to households where both parents work. However, on a positive note, from September 2025 every working parent with a child aged over nine months and under the age of five will be able to access up to 30 hours of free childcare per week."

Pension reforms

As part of his plan to get people back to work, Hunt said he’s hiking the pensions annual tax-free allowance from £40,000 to £60,000.

What’s more, the Chancellor has also decided to abolish the Lifetime Allowance - previously set at £1.07 million. Prior to the budget, there was speculation he’d hike the allowance to £1.8 million, but this goes much further.

He also confirmed that the Money Purchase Annual Allowance – the amount that someone can continue to contribute to a flexible money purchase pension once benefits have been taken - will be increased from £4,000 to £10,000.

However, there was a nasty surprise buried in budget notes regarding the tax-free lump sum. This sum is going to be frozen at £268,275, equivalent to 25% of the current lifetime allowance, and frozen thereafter.

Still, Hunt's changes are a boost for pension savers. As Jason Hollands, Managing Director of Bestinvest, the online investment platform says, “The scrapping of the lifetime allowance will mean that those who have halted pension savings entirely - for example because they took out fixed protection to preserve access to earlier lifetime allowances of £1.25 million or £1.5 million - are now in a position to potentially recommence pension contributions, at a time when more of their earnings are likely to be subject to the higher rates of tax."

"But in doing so they need to carefully consider whether this will mean forgoing access to a larger tax-free lump sum. For someone in that position who has not contributed to pensions for several years and whose adjusted earnings are below the level at which the horrendously complicated and punitive tapered pension allowance regime kicks in, they could potentially subscribe up to £180,000 in pensions next year. This could be achieved by using the new, larger £60,000 gross annual allowance and then mopping up unused allowances of £40,000 for each of the previous three years under pensions ‘carry forward’ rules. This is therefore an opportunity for some both to provide a massive boost to their retirement pots, and to take shelter from higher taxes."

Fuel and beer duty changes

As was widely expected, Hunt also postponed the 11p rise in fuel duty and extended last year's 5p a litre cut.

And amid a wide-ranging shakeup of alcohol duty changes, the government has "extended" the "generosity" of Draught Relief so the duty on an average pint of beer served in pubs will not increase this year. The duty on a pint from the pub will be up to 11p lower than supermarkets.

“Duties are one area where the government can raise or cut prices at a stroke, so it’s heartening to see they have stepped in on behalf of drivers. Frankly, after such a long freeze of fuel duty it would have been a surprise if they rose prices right now," notes Sarah Coles, head of personal finance, Hargreaves Lansdown.

"The tax on alcohol will rise 10.1% in August, but there will be a separate rule for draft beers in pubs, which will mean the duty on draft pints is 11p lower than in supermarkets. There’s also the hope that the delay in rising duty will protect the nation’s drinkers while inflation is so high, and only kick in when it has started to fall back."

Stimulating growth through investment

While Hunt didn't scrap the planned corporation tax hike as some businesses and MPs had hoped he might, he did unveil a range of tax changes for businesses to encourage investment,

These include full expensing, allowing companies to deduct 100% of the cost of certain plant and machinery from their profits before tax. This will be in place from 1 April 2023 to 31 March 2026.

The government has also introduced a 50% first-year allowance. This allows businesses to deduct 50% of the cost of other plant and machinery, known as special rate assets, from profits during the year of purchase.

A new R&D scheme for 20,000 SMEs was also published for R&D "intensive businesses." Eligible loss-making companies will be able to claim £27 from HMRC for every £100 of R&D investment.

Alongside these schemes, Hunt also announced billions of pounds in new funding for AI and supercomputer research as well as an additional £11 billion for the armed forces, taking the UK's total spending on defence to 2.25% of GDP by 2025.

One in five taxpayers will be paying higher-rate income tax by 2027, according to a leading thinktank.

The Institute for Fiscal Studies (IFS) says that many teachers, nurses and electricians are among the one in five taxpayers who will be paying the 40% tax rate (levied on those with an income between £50,271 to £150,000) because of a six-year freeze on thresholds implemented by Chancellor Jeremy Hunt and ‘fiscal drag’.

It means there will be 2.1 million more higher rate taxpayers and 350,000 additional-rate taxpayers in five years' time, according to the Office for Budget Responsibility (OBR).

In total 7.8 million people are projected to be paying income tax at 40% or above by 2027-28.

This represents a “seismic shift” and around a quadrupling of the share of adults paying higher rates since the early 1990s, said the IFS.

In 1991-92, 3.5% of UK adults (1.6 million) paid the 40% higher rate of income tax. By 2022–23, 11% (6.1 million) were paying higher rates, the report added.

It shows that over recent decades, higher rates of income tax have gone from being reserved only for the richest to something that a far more substantial proportion of the population can expect to encounter.

The report predicted: “By 2027–28, more than one in eight nurses, one in six machinists and fitters, one in five electricians and one in four teachers are set to be higher-rate taxpayers.

“Among police officers, architects and surveyors, and legal professionals, we also see significant increases in the share paying higher-rate tax over time, with almost half of the latter two groups expected to be paying higher-rate tax in 2027-28.”

What is fiscal drag?

Wage growth is currently 6.7%, according to the Office for National Statistics. Due to the freeze on tax bands, many workers will find themselves ‘dragged’ into a higher tax band, even though they have not had a proper pay rise that leaves them better off in real terms. This is known as ‘fiscal drag’.

Calculations by Quilter show that if wage growth averages 5% per year for the next four years but income tax thresholds remain frozen, then someone earning £50,000 today will be £2,643 worse off in the 2027-28 tax year, and in total be £6,463 poorer over the four-year period.

Rachael Griffin, tax and financial planning expert at Quilter, says “High inflation means that despite someone receiving a pay rise they may not feel wealthier as their buying power remains the same - however, their salaries will be taxed much more.”

“Freezing income tax bands is a form of stealth tax as you’ll end up paying considerably more tax during the time bands are frozen, which will be on top of higher energy and food costs.”

How can I avoid fiscal drag?

Unfortunately, fiscal drag affects us all – even if you don’t change your tax band. That’s because as your pay rises with inflation, more and more of your pay packet is taxed and your overall tax burden increases.

However, prudent financial planning can help lessen the impact. Using an ISA can shelter your savings and investments from the taxman and ensure you don’t pay unnecessary tax. Using a pension can turbo-charge a retirement nest egg thanks to the power of tax relief. We also have plenty of tips on how to reduce a potential inheritance tax bill.

You may be able to take advantage of tax breaks too, like the marriage allowance. This is where one person in the couple has an income below the personal allowance (£12,570), and by transferring part of the allowance, the couple can save up to £252 in a tax year.

If a pay rise means your salary has just tipped into a higher tax band, you could use salary sacrifice to lower it.

Griffin explains: “One option might be to make additional pension contributions via salary sacrifice essentially lowering the taxable portion of your salary and potentially reducing it under the higher rate of tax threshold.”

You can also scrutinise expenses whatever your employment status. “If you’re self-employed, ensure you’re claiming for all those allowed by HMRC as a result of your work,” say Justin Modray of Candid Financial Advice.

Contributions from Katie Binn

It pays to be prepared and make a note of the important dates in 2023 that could affect your finances. From self-assessment deadlines and tax changes to the energy price guarantee and the state pension increase, here are the key dates you need to know.

31 January – Self-assessment tax deadline

People who have to file self-assessment tax returns must do so by 31 January. It’s also the deadline to pay any tax owed from that return.

It doesn’t end there, either. Self-employed workers are also required to pay a payment on account – this is an advance payment towards your next tax bill, based on your previous tax liabilities. The first payment must be made by 31 January.

Remember, payments to HMRC can take a few days, so complete your tax return a few days ahead of the 31 January deadline.

March – The Budget

Every year we have at least one big Budget statement delivered by the chancellor, when he or she runs through the financial forecasts for the year ahead as well as any proposed changes to the tax system.

The Budget is usually delivered in March. The Office for Budget Responsibility has been asked to prepare a forecast by 15 March to accompany the Budget, meaning the Budget could be held on this date or shortly afterwards.

5 March: Rail fares rise

Like last year, the government is freezing rail fares for January and February, meaning fares will officially rise on 5 March 2023.

While the cost of train tickets is usually pegged to inflation, the government has said fare increases for 2023 will be capped at 5.9% – 6.4 percentage points below July 2022’s retail prices index - to help people with the cost of living.

31 March – End of Help to Buy

The Help to Buy scheme involves property buyers gaining an equity loan to supplement their deposit when purchasing a new-build property.

Buyers had to apply for that loan by 31 October 2022, but have until 31 March 2023 to complete the purchase of the property. Homebuyers are expected to have the keys to their home by 6pm.

1 April ‒ Energy Price Guarantee rises

One of the measures brought in by Liz Truss’s short-lived government was to support households with soaring energy price bills with the Energy Price Guarantee. This froze the unit cost of gas and electricity, meaning the average typical household bill comes to around £2,500 a year - the more you use, the more you pay.

On 1 April 2023, the guarantee will rise to a higher level, meaning the average typical household will have to pay around £3,000 for their annual energy bill. This guarantee will be in place until April 2024. You can read more about energy prices in our article will energy prices fall in 2023?

Though there is little you can do about the energy price, there are things you can do to keep energy costs low, which we explain in our article.

1 April – Changes to household bills

Changes will take place to a host of household bills from the start of April.

For example, many broadband and mobile phone providers impose price increases each year that are tied to the rate of inflation. These increases occur even if you are mid-contract.

If you are at the end of your contract, now is a good time to shop around and lock in a new deal.

Water bills are also due to change from April. Annual water bills are divided into 12 monthly payments, with the new prices beginning from the start of April. Many households will see their water bills fall next year, as water firms have failed to meet targets imposed by Ofwat, the water regulator, on issues such as pollution and water supply interruptions.

However, other factors like inflation, could mean water bills rise significantly, depending on your water supplier.

You can't change your water provider to get a cheaper water deal, but you could potentially be better off using a meter instead, depending on the size of your house and the number of people living in it. Use the calculator from Ofwat to see if you are better off with a meter.

And then there is council tax. We don’t yet know the scale of the increases to council tax, however last year’s Budget included the detail that councils will be able to raise tax by 3% - plus another 2% for social care – without holding a referendum. With rising social care costs and other financial pressures, many local authorities are likely to raise council tax as much as they possibly can.

1 April: National Living wage and minimum wage rise takes effect

Chancellor Jeremy Hunt announced in November that the National Living Wage for workers aged 23 and over would increase by 9.7% from £9.50 to £10.42 an hour. The rates for those aged under 23, and apprentices, will also rise too.

5 April – End of the tax year

The 2022-2023 tax year ends on 5 April, so if you’re planning to utilise your entire annual ISA allowance, the full £20,000 will need to have been paid into your accounts by this date. This also includes junior ISAs, which come with a separate annual allowance of £9,000 per tax year.

Anyone wanting to pay extra into their pension should also try and do this before 5 April. Most people can contribute up to £40,000 to their pension pot each tax year and benefit from tax relief. However, those with an annual income – including salary, and income from savings and investments – of more than £200,000, or those who earn less than £40,000 a year, have a lower pension allowance.

To find out how the pension allowances work, and for information about how to “carry forward” unused allowances into the next tax year, take a look at this article.

6 April – New tax year: pensions and benefits

The start of the next tax year is 6 April, and this is a date when increases to various state benefits and tax reliefs will kick in.

For example, the state pension and pension credit will both rise by 10.1% while universal credit will increase by the same percentage.

6 April – New tax year: tax changes

In his inaugural Autumn Budget, chancellor Jeremy Hunt made several tax changes, which will hit high earners and investors. He reduced the threshold at which the top 45p rate of income tax becomes payable from £150,000 to £125,140. This will take effect from 6 April, 2023.

Hunt is also planning to eliminate the dividend tax-free allowance, which currently stands at £2,000 a year.

This will fall to £1,000 on 6 April, and then £500 for the 2024-2025 tax year. The tax rates on dividend income remain unchanged.

Meanwhile, the threshold for paying capital gains tax will be more than halved from £12,300 to £6,000 for the 2023-2024 tax year. It will be cut again to £3,000 in the 2024-2025 tax year.

31 July – Second payment on account

The second and final payment on account for the 2022-2023 tax year will have to be paid by self-employed people by the end of July.

31 July - Deadline to use up non-barcoded stamps

Customers have until 31 July to use up any non-barcoded 1st and 2nd class stamps before they become worthless. The deadline affects “everyday” stamps featuring the late Queen’s profile; themed, commemorative and Christmas stamps that don’t have a barcode can still be used after this date.

The previous cut-off was 31 January 2023, but Royal Mail said it recognised that customers needed more time to use up their non-barcoded stamps. If you don’t manage to use the stamps, they can be swapped for barcoded stamps of the same value, free of charge.

Bear in mind that Royal Mail is still advertising a date of 31 January to use up the stamps. However, it explained to MoneyWeek: “The official deadline remains January 31. But from this date we have introduced a six-month period of grace for anyone sending non-barcoded stamps. So during this time non-barcoded stamps can be sent as usual.”

16 August – July inflation announcement

The inflation figure for July is important as it is used to set the increase in rail fares, which will take place from the start of 2024.

5 October – Deadline to register for self-assessment

If you’re new to self-assessment, this is the deadline to register with HMRC. This applies if you’re self-employed or a sole trader, not self-employed, or registering a partner or partnership.

18 October: September inflation announcement

The figure for September is also really important, as it is used when calculating changes to benefits, the state pension and tax credits.

For example, the triple lock means that each year the state pension increases by the largest of the following three figures: 2.5%, the rate of inflation, or the rate of earnings growth.

It’s the September inflation figure that is used in this comparison.

31 October: Postal self-assessment deadline

Some taxpayers opt to file their self-assessment by post rather than online.

If you choose to do this, you have an earlier deadline of 31 October.

November: Autumn Statement

Effectively a mini Budget, the Autumn Statement is another big statement from the chancellor. It is usually delivered in November.

31 December: End of mortgage guarantee scheme

Launched in April 2021, the mortgage guarantee scheme was due to expire at the end of 2022. However, the Treasury has confirmed that it will now run until 31 December 2023 amid concerns that falling house prices and an upcoming recession will reduce the number of low-deposit mortgage deals.

The scheme is designed to help first-time buyers get on the property ladder with just a 5% deposit. It has already helped 24,000 households, giving people with a deposit of less than 10% the chance to buy a house up to the value of £600,000.

Additional contributions from Ruth Emery

The word ‘recession’ is feared by many. It brings up worries about job losses, repossessions, and financial struggle. Most people know that recession broadly means “bad times for the economy”, but its strict definition is a bit more complicated.

A technical recession can be defined as when the economy has negative GDP growth for at least two consecutive quarters (six months).

The last time the UK was in a technical recession was in late 2023. That may come as a shock to some in the UK who have felt like the economy has been poor for some time.

While it is true that the economy has not been growing very much recently, the UK is not in recession as quarterly GDP growth has not turned negative for quite some time.

However, more commentators are now warning that the UK is at risk of a recession due to the economic shock of the Iran war, which is set to hit growth and send inflation soaring again.

This will be particularly frustrating for the government, as the latest GDP statistics showed that the economy grew by 0.6% in the first quarter of 2026 after years of weak growth.

What is a recession and how is one measured?

A recession is a situation where a country’s economy contracts (shrinks) instead of grows over two consecutive quarters.

Economic growth is widely calculated by gross domestic product (GDP), an internationally recognised yardstick that aims to measure the size and health of a country's economy in a way that can be compared to other nations.

In the UK it is reported monthly by the ONS, the official statistics body.

In simple terms, GDP is calculated by adding together total consumption, investment, government spending and net exports. For more detailed information on how the metric is calculated, read our GDP guide.

The ONS performs this calculation every month by sending out surveys to thousands of consumers and businesses. It also uses government spending data.

It then works out whether GDP has increased or decreased in a given period of time. If GDP grows, it suggests more money is moving around the economy and the country is likely to be getting richer. But, when GDP falls, it tends to mean the reverse is true.

As such, when GDP decreases to the extent that the country drops into a recession, it usually leads to higher unemployment, lower spending across the economy and a drop in business activity. In short, life gets harder for individuals and businesses alike.

Why is a recession bad news for the economy?

In the orthodox view of economics, recessions are bad news. This is because they usually lead to less spending in the economy by individuals and businesses.

With less money moving around and fewer purchases being made, firms will likely see declining sales. That means firms will have less money to spend on things like hiring new staff or investing in better technology.

If bad enough, firms may decide to lay off some of their existing staff or end up going out of business. This can have a downward spiral effect on the rest of the economy.

As companies lay more people off, unemployment rises. As fewer people have jobs, spending falls. And as spending falls, companies see their revenues decline and have to cut costs.

Just the possible indication of a recession can send a chill through the business community. Few firms want to commit to large investments if they expect demand is set to drop.

Lower spending also has an impact on the public finances. For example, with lower revenues, businesses will pay less tax, and with higher unemployment, individuals will also pay less tax.

Smaller tax revenues mean the government has to either cut back on spending (impose austerity measures) or borrow more money to fund public services.

When was the UK last in a recession?

The UK was last in a recession in late 2023, and it lasted exactly two quarters. GDP growth fell by 0.1% in the third quarter of the year and another 0.3% in the fourth.

Thankfully, the economy quickly recovered in the first quarter of 2024 when the economy grew by 0.7% and 0.6% in the second quarter.

The reason some people may feel like we are currently in a recession is because the economy has not grown very much since that economic recovery in 2024.

In 2025, the UK economy grew by just 0.1% in Q2 and 0.2% in Q3 and Q4. That incredibly slow growth means that while the economy is not shrinking, it is certainly not expanding very quickly.

With slow growth sweeping the country, commentators are regularly warning that the UK is on the brink of recession. Meanwhile, high inflation and unemployment are also stoking fears that we could enter an era of ‘stagflation’.

Although recessions are spoken about quite frequently, they are actually a relatively rare occurrence. Over the last 50 years, the UK has seen an average of just over one per decade, although these have varied widely in their depth, longevity, and cause.

For example, in the 21st century, the UK saw the ‘Great Recession’ in 2008 during the great financial crisis, which lasted five quarters and took years to recover from, and the Covid-19 recession in 2020 which lasted just two quarters.

House price growth is beginning to stall. The latest data from the Office for National Statistics showed prices stayed the same between August and September 2022, and while they grew 9.5% year-on-year this is a marked increase from the 13.1% and 15.2% we saw in August and July, respectively.

In addition, data from HMRC showed that while UK residential transactions in October 2022 were 29% higher than the same time last year, they were 3% lower than the month before.

HMRC also warns year-on-year comparisons should be “treated with caution” because there was significant forestalling activity” in September 2021, meaning some transactions that would have been expected October 2021 were made in September and affected data for the following month. HMRC also said transactions are at a similar level as they were before the pandemic.

All of this data was also collected before the mini-Budget chaos, which spiked borrowing rates. It also doesn’t account for 6% mortgage rates, so it might be months before we know the true effect of this on the property market. In the longer term the market will also have to contend with the changes announced to stamp duty cuts by chancellor Jeremy Hunt in his autumn Budget.

However so far the data concurs – UK house price growth is slowing down, which could make buyers question whether now is the best time to buy a house.

How are house prices faring in London?

Analysis by Bloomberg News of data from UK Land Registry in the 12 months through July showed the east London borough of Barking and Dagenham is the only remaining London borough where house prices in the resale market have increased by double digits.

The 10% increase could be because of the opening of a new train station over the summer, which connects the borough to central London. The average price for an existing home in Barking and Dagenham was over £377,000, compared to £341,900 a year before.

Data from online real estate platform Rightmove showed overall average asking prices in London fell by almost 1.9%, or nearly £13,000, in October compared to the year before.

“The plethora of predictions about what might happen to prices next year comes at a time when much is still uncertain, but what is certain is that the exceptional price growth of the last two years is unsustainable against the economic headwinds and growing affordability constraints,” said Tim Bannister, Rightmove’s director of property science. “The frenzied market of the past two years has turned into a more normal market more abruptly and less smoothly than we were expecting.”

What will happen to house prices?

The Office for Budget Responsibility (OBR) said it expects house prices to fall for the next two years, predicting a drop of 9% between now and autumn 2024.

The cost of a mortgage, however, is likely to remain high. Currently rates are just above 6% – the highest since the financial crisis. These, coupled with the recession, will push prices down. Check our guide for the best remortgaging deals for November 2022.

However the OBR predicts there will still be an increase of 10.7% in house prices this year, followed by a decrease of 1.2% in 2023 and one of 5.7% in 2024.

After this the OBR expects prices to rise again, by 1.2% in 2025, 3% in 2026 and 3.5% in 2027.

However the OBR highlighted the uncertainty of these predictions, especially after the changes to stamp duty announced in chancellor Jeremy Hunt’s autumn Budget. The cuts announced by Kwasi Kwarteng when he was chancellor will come to an end on 31 March 2025.

Hunt said the reduction would remain to “support the housing market and the hundreds of thousands of jobs and businesses which rely on it” but there are still significant changes in the pipeline.

The threshold at which stamp duty is payable will double from £125,000 to £250,000. For first time buyers it will rise from £300,000 to £425,000.

The end to stamp duty cuts will undoubtedly affect the housing market. We saw a stamp duty cut throughout the pandemic, which contributed to the increase in prices over the last couple of years.

“Property buyers will have been thrown into a quandary by the announcement that the stamp duty cut will be reversed in 2025,” said Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, “This could be a useful short-term boost to the market. By moving from an open-ended stamp duty cut to a limited opportunity, it could hurry through more sales, and help to keep the market ticking over until March 2025.

“But this may not be the best outcome for buyers. Right now, the market is sending out every possible signal that they might want to hang fire, because we could be reaching the peak, but the desire to save tax could force them to buy sooner than they otherwise would, and expose them to the risk of property price drops.

“Meanwhile, if they decide to hold on for the bottom, they could end up rushing for the end of the stamp duty break along with so many others that they end up paying over the odds.”

When we talk about government spending and the public finances, we often hear the word ‘deficit’ being used. But what is a deficit, and why does it matter?

What is a budget deficit?

Traditionally, when a government needs money, it can get it in two ways: it can raise the money through taxation, or it can borrow the money in financial markets, by issuing government bonds (known as gilts in the UK).

If a government spends more money in a given year than it raises through tax revenues, that means it is running a deficit. In other words, the deficit is the government’s annual overspend.

The “national debt”, on the other hand, is the total overspend. So when a government runs a deficit, it’s adding to the national debt. When it runs a surplus (that is, it raises more in taxes than it spends), it’s reducing the national debt.

Both the deficit and the national debt are often expressed as percentages of GDP. Generally speaking, borrowing money is seen as more sustainable when the deficit is low as a percentage of GDP.

The latest figures from the Office of Budget Responsibility (OBR) suggest that the UK budget deficit is going to hit 7.1% of GDP in the 2022/23 tax year, the seventh year of the past 15 where the budget deficit has been above 7% of GDP.

Why does a large deficit matter?

In theory, the main risk of a country running too big a deficit for too long, is that markets will start charging more for the country to borrow. In extreme cases, investors might shun the currency too, causing it to crash in value.

And that’s just what happened earlier this year when Lizz Truss and Kwasi Kwarteng unveiled their economic plan for the country.

They hoped to stimulate growth by slashing taxes and ramping up infrastructure spending, but the markets didn’t like the sound of the unfunded tax cuts. The resulting chaos nearly lead to the collapse of the UK’s financial system (the Bank of England had to step into stabilise markets) and ultimately cost Truss and Kwarteng their jobs.

Still, in practice, many countries have been running large deficits since the 2008 financial crisis, and yet borrowing costs have mostly fallen since then.

That has led to a situation where, increasingly, some economists have been questioning whether deficits matter at all.

Can the government just print more money?

Proponents of Modern Monetary Theory (MMT for short) argue that as long as a country controls its own currency – which for example, the UK and the US do, but Italy doesn’t – then the government can never run out of money.

It need not tax or borrow, it can simply print what it needs. As a result, governments can spend what they want, for as long as inflation remains under control.

As interest rates (and inflation) have jumped over the past year, MMT is being tested to destruction, and as we’ve seen in the UK, while governments might want to keep spending, it’s not clear if the markets will let them.

Jeremy Hunt will announce his first Autumn Statement on Thursday, 17 November.

The new chancellor is preparing to make “difficult decisions” to repair the country’s £50bn fiscal black hole, and has already warned that “everyone will pay more taxes”.

The Autumn Statement replaces the “medium-term fiscal plan” that was supposed to be announced on 31 October.

Instead of setting out a scary Budget on Halloween, the chancellor is now widely expected to turn his Autumn Statement into a “Frozen Statement”, with a range of tax allowances frozen as part of a stealth tax raid.

It means that a toxic combination of inflation, investment gains, and house price and wage growth, will push millions more taxpayers into higher tax brackets; some may even start paying certain taxes for the first time. Workers, investors, pension savers and even grieving families could all be hit by the Frozen Statement.

Hunt previously said “decisions of eye-watering difficulty” would have to be taken to reduce government debt and calm the markets, after the chaos unleashed by Kwasi Kwarteng’s mini-Budget in September.

After the Bank of England raised interest rates to 3% – the biggest hike in decades – Hunt reiterated his warning that there was more bad news to come. He said: “Sound money and a stable economy are the best ways to deliver lower mortgage rates, more jobs and long-term growth. However, there are no easy options and we will need to take difficult decisions on tax and spending to get there.”

What will be announced in the Autumn Statement?

The chancellor will publish a forecast from the Office for Budget Responsibility (OBR), and further measures such as spending cuts and tax hikes. It will set out in detail plans to plug the "fiscal black hole" – estimated to be at least £50bn – as well as a medium-term plan to grow the economy. Hunt was supposed to deliver a smaller version of this on 31 October, but after the prime ministerial revolving door spun round once more – Liz Truss out, Rishi Sunak in – the decision was taken to delay it and transform it into a full Autumn Statement.

The Treasury has warned of tough decisions – a sentiment echoed by industry experts.

Nimesh Shah, chief executive of the accountancy firm Blick Rothenberg, says he doesn’t expect to see any “giveaways”, adding: “The tone under Jeremy Hunt [compared to Kwarteng] is very different; the government is focused on maintaining tax receipts and cutting spending in order to reduce the debt cost.”

Indeed, within just days of becoming chancellor, Hunt had taken an axe to policies designed to support households struggling with the unrelenting cost of living crisis. He scaled back the Energy Price Guarantee, shelved plans to cut a penny off the basic rate of income tax and reversed the 1.25% cut to dividend tax.

Energy Price Guarantee

Hunt announced he was scaling back the Energy Price Guarantee within weeks of taking over, but he’s yet to announce a replacement.

It looks likely he will let the subsidy scheme expire for most in April of next year, although he has pledged to protect the most vulnerable.

According to reports, the government may be considering keeping some form of the cap while also allowing energy prices to increase, reducing pressure on the public finances. While the average energy bill would still rise to an uncomfortable level for most consumers under this plan, it would stop prices spiralling out of control.

However, as the situation in global energy markets remains incredibly fluid, it's too early at this stage to say with a high level of confidence what level consumers’ bills will settle at next year.

Council tax shake up

Reports have emerged that Hunt may also look to shake up the council tax system in order to allow local authorities to raise more money from homeowners.

Under the current system local authorities are not allowed to raise council tax bills by more than 2.99% each year. That includes 1% for the social care precept and 1.99% for general council tax.

If local authorities want to raise more money they have to put the plans to a local referendum, allowing constituents to veto any proposals.

While the Conservative Party manifesto in 2019 pledged to keep the veto on large council tax rises, it appears Hunt may be looking at this avenue to help councils fund social care.

Options on the table include raising the threshold at which a referendum has to be called or scrapping the requirement for a referendum altogether.

Under Tony Blair's Labour government, inflation-busting council tax hikes were common until the coalition government changed the law to cap rises at 2.99%. Since then councils have relied on government grants to fill the gaps between spending and income.

Inheritance tax threshold could be frozen

There is speculation the chancellor will extend a freeze on the inheritance tax (IHT) threshold until April 2028 https://moneyweek.com/personal-finance/tax/inheritance-tax/605498/inheritance-tax-warning-autumn-statement.

Rishi Sunak previously froze the threshold at £325,000 until April 2026 when he was chancellor, and Hunt is expected to prolong the freeze for another two years.

Such a move would mean the tax-free allowance will have remained the same for almost two decades - since 2009 - instead of being raised in line with inflation. If it had been adjusted with rising prices, it would have increased to £464,643 (CPI), or £537,129 (RPI).

Experts say freezing the threshold could see the Treasury pocket an extra £1bn, due to more people’s estates being dragged into the IHT net.

James Green, investment director of the financial adviser deVere Group https://www.devere-group.com/, says the “covert tax increase… will soon start putting a painful squeeze on grieving families”.

He adds: “IHT is very obviously no longer just for the super wealthy, as it was originally intended. It’s impacting more and more middle-class families whose main asset is their family home.”

Pension tax breaks could be frozen – or even cut

Tory governments are fond of tinkering with pensions to raise revenue - and it’s likely Hunt will continue this tradition next week.

According to the Telegraph, the pension lifetime allowance is set to be frozen for two more years, until 2027. The lifetime allowance refers to the amount that savers can accumulate in pension pots during their lifetime without being hit with a penalty when they come to take the money out.

It currently stands at £1,073,100. Savings over that limit are taxed at 55% if the money is taken as a lump sum, or at 25% plus your marginal rate of income tax if withdrawn gradually.

Experts believe the extended freeze will catch an extra two million pension savers. The knock-on effect is that some workers, especially those in the NHS and other parts of the public sector, will simply stop paying into their pension to avoid the tax and retire early - further exacerbating shortages in those workforces.

Sean McCann, chartered financial planner at the insurer NFU Mutual, believes Hunt may also look at lowering the pension annual allowance to raise revenue. This would be simpler than changing pension tax relief.

He notes: “You can currently put up to £40,000 in a pension each tax year, but slashing that to £30,000, or even £20,000 to align with the annual ISA allowance, would save the government huge sums. However, the population is not saving enough for retirement so the government will need to tread carefully.”

What about the state pension triple lock?

The triple lock refers to the guarantee that the state pension will increase each year in line with whichever is highest out of inflation, wages or 2.5%. It is currently suspended until April 2023, but there are fears that the one-year suspension could be extended, or that the triple lock could be axed for good.

The triple lock is a key Conservative manifesto pledge, and one that Truss and Kwarteng had committed to in recent months.

However, new power duo Sunak and Hunt have offered no such assurance. Hunt said last month: “I’m very aware of how many vulnerable pensioners there are and the importance of the triple lock but [...] I’m not making any commitments on any individual policy areas [...] every decision we take will be through the prism of what matters most to the most vulnerable.”

On becoming PM, Sunak has also made no commitment to the policy.

On the other hand, it has been reported that Sunak is reluctant to scrap the pledge because pensioners are unable to boost their incomes through other means. If Hunt can raise billions using a Frozen Statement, it could mean the triple lock survives.

Pensioners received a 3.1% annual increase in April. In April 2023, if the triple lock is restored as planned, they could see their payout rise by 10.1%, due to soaring inflation.

However, if Hunt decided to scrap the triple lock and uprate state pensions by wage growth instead (5.5%) next year, pensioners would lose out on up to £442, according to the investment platform AJ Bell.

Tom Selby, head of retirement policy at AJ Bell, believes there will be some heated discussions between No.10 and the Treasury over the triple lock. “What we have here is a genuine tussle between politics and ensuring the public finances remain on a sustainable footing,” he notes.

Benefit increases to be revealed – and a boost to the National Living Wage

We should find out what is happening to benefit increases when Hunt delivers his Autumn Statement.

Benefit payments usually rise every April. Truss previously failed to commit to increasing benefits in line with inflation, and was expected to make a final decision this month.

While capping benefit increases would be an easy way to raise revenue, Sunak is said to be planning to stick with an inflation-linked rise, to ensure the government is seen as “fair and compassionate”.

Meanwhile, the chancellor is expected to announce a rise in the National Living Wage, from £9.50 an hour to about £10.40 an hour. The rise of nearly 10% would benefit around 2.5 million workers.

Income tax thresholds could be frozen for longer

Income tax thresholds are already frozen until 2026, but Hunt could announce an extension to this, possibly until 2028.

This is a stealth tax that would drag millions of people into the income tax system for the first time, or into higher tax bands.

NFU’s McCann told MoneyWeek: “It’s unlikely we’ll see an increase in the rates of income tax or VAT, as that would go against one of the key pledges of the 2019 manifesto, but there are other ways the government can raise revenue.

“If Jeremy Hunt freezes income tax thresholds, this will drag even more people into 40% and 45% tax bands over the next six years as wages increase.”

He adds: “Those who find themselves being tipped into higher rates of tax should consider paying more into their pension to reduce their taxable earnings.”

Experts say extending the income tax band freeze is “very likely”, and could save the government £5bn a year.

National Insurance could be tweaked… again

The government reversed the 1.25 percentage-point increase in National Insurance contributions (NICs), introduced by Sunak when he was chancellor, on 6 November.

But Hunt could be tempted to look again at NICs as a way of raising money to plug the fiscal hole. Fiddling with NICs rather than income tax is arguably more palatable to voters (simply because many people don’t understand it), and avoids negative headlines about income tax being raised.

Shah at Blick Rothenberg comments: “Hunt may scale back the 1.25% reversal so it only applies to basic-rate taxpayers (anyone earning less than £50,271 a year) from next April – therefore, someone earning above the higher rate would pay National Insurance at 3.25% (rather than 2%).”

He adds that the chancellor could go further, and “apply National Insurance to rental profits and capital gains” too.

Capital gains tax allowances could be frozen or lowered

According to McCann, if the chancellor wants to target those with the broadest shoulders, he could look at capital gains tax. “CGT is currently charged at 10% and 20% – plus an additional 8% if the gain is from residential property – but the Office of Tax Simplification (OTS) has previously recommended aligning the rates with income tax.

“Aligning CGT with income tax may be viewed as disincentivising enterprise, so increasing the rates to 20% and 30% and retaining the 8% surcharge on residential property would be a compromise that would still raise increased revenue for the Treasury. Most CGT comes from a small number of taxpayers who make the largest gains, and this move would help raise further money from that group.”

There are rumours that the CGT annual exemption – currently £12,300 – will be stuffed in the deep freeze as part of the Frozen Statement, instead of raising it to reflect inflation (and house price and investment growth), which normally happens each year.

McCann fears the chancellor could be more aggressive though, by slashing - rather than freezing - the allowance.

He notes: “The chancellor could reduce the CGT annual exemption of £12,300 in order to widen the net of those who pay the tax. Latest figures suggest CGT is paid by 323,000 people, but the OTS estimates that reducing that annual exemption to £5,000 would double that number.”

If we do see a tougher CGT regime announced next week, it will reinforce the case for utilising ISAs and pensions, as gains within these are not taxable. Married couples and those in civil partnerships can also transfer assets to each other to make use of both sets of CGT allowances, as well as shift a potential gain to the partner who is in a lower tax band.

Public spending could be squeezed

Hunt will be aiming to save money wherever he can, from cutting planned investments (the HS2 rail project will be reviewed, for instance) to trimming day-to-day department spending. Sunak has vowed to protect only one area of spending, the NHS, meaning other departments like welfare, education and defence could face large cuts.

The spending squeeze could also mean below-inflation pay deals for public sector workers like teachers, civil servants, police and social workers.

Remember to get your tickets for the MoneyWeek Wealth Summit hosted by Merryn Somerset Webb, on 25 November 2022! – we’ve got some brilliant speakers lined up and, given everything that’s going on, we’ll have an awful lot to talk about.

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Jeremy Hunt, the new chancellor, is set to reveal the rest of his “medium-term fiscal plan” in less than two weeks’ time, after tearing up most of his predecessor Kwasi Kwarteng’s mini-Budget.

Hunt has warned ministers that spending cuts are coming, and that “decisions of eye-watering difficulty” will have to be taken to reduce government debt and calm markets.

The chancellor has already scaled back the Energy Price Guarantee, shelved plans to cut a penny off the basic rate of income tax, reversed the 1.25% cut to dividend tax and back-tracked on changing IR35 legislation.

Experts say households should brace themselves for more bad news on 31 October, when the chancellor will publish the government’s fiscal rules alongside an Office for Budget Responsibility (OBR) forecast and further measures such as spending cuts and tax hikes.

“Given the events of the last few weeks it seems unlikely the new chancellor is going to present any ‘good news’ on taxation in the Medium-Term Fiscal Plan,” comments Adrian Lowery, financial analyst at the investing platform Bestinvest.

“The statement will reaffirm the reversals to Kwarteng’s ill-fated mini-Budget and clarify the fiscal outlook with detailed forecasts from the OBR. The focus will be on repairing the Tories’ fiscal credibility by further closing the deficit black hole that has opened up.”

Nimesh Shah, chief executive of the accountancy firm Blick Rothenberg, agrees, saying he doesn’t expect to see any “giveaways” – such as abolishing the unpopular high income child benefit charge or removing the tapered personal allowance when someone’s income reaches £100,000. “The tone under Jeremy Hunt is very different; the government is focused on maintaining tax receipts and cutting spending in order to reduce the debt cost.”

We look at what changes could be announced at the end of this month.

State pension triple lock could come under attack

There is growing speculation that the state pension triple lock could be scrapped. The triple lock – which means the state pension is guaranteed to increase each year in line with whichever is highest out of inflation, wages or 2.5% – is currently suspended until April 2023.

While Kwarteng said last month that he and the prime minister were “absolutely committed” to the triple lock, Hunt has offered no such assurance.

Yesterday he said: “I’m very aware of how many vulnerable pensioners there are and the importance of the triple lock but, as I said earlier, I’m not making any commitments on any individual policy areas, but every decision we take will be taken through the prism of what matters most to the most vulnerable.”

Pensioners received a 3.1% annual increase in April this year. Next April, if the triple lock is restored as planned, they could potentially see their payout rise by 10%, due to inflation running at a 40-year high.

If Hunt decided to scrap the triple lock for another year – or axe it completely – and uprate state pensions by wage growth instead (5.5%), pensioners would lose out on up to £430 a year, according to the investment platform AJ Bell.

“The costs associated with maintaining the triple lock next year are likely to be eye-watering – which is undoubtedly the reason the UK’s latest chancellor, Jeremy Hunt, is reluctant to commit to the policy,” says Tom Selby, head of retirement policy at AJ Bell.

“Clearly no politician wants to head towards a general election having applied a real-terms cut to pensioners’ incomes, and you would think No.10 will be fighting hard against such a measure. What we have here is a genuine tussle between politics and ensuring the public finances remain on a sustainable footing.”

According to Selby, abandoning the triple lock in favour of an earning-linked increase could save the Treasury an estimated £4bn – £5bn a year.

Another change to National Insurance?

Last month the government announced that the 1.25 percentage-point increase in National Insurance contributions (NICs), introduced by former chancellor Rishi Sunak, would be reversed on 6 November..

But Hunt could be tempted to look again at the policy as a way of raising the amount of money that flows into the Treasury’s coffers. Fiddling with NICs rather than income tax is arguably more palatable to voters (simply because many people don’t understand it), and avoids negative headlines of income tax being hiked.

Shah at Blick Rothenberg comments: “The 1.25% reversal to National Insurance is due to take effect from 6 November, but Jeremy Hunt may scale back the cut so that it only applies to basic-rate taxpayers (anyone earning less than £50,271) from next April – therefore, someone earning above the higher rate would pay National Insurance at 3.25% (rather than 2%).”

He adds that the chancellor could go further on tax increases, and “apply National Insurance to rental profits and capital gains” too.

Benefit increases could be cut

Benefits could also be in the firing line as part of Hunt’s cost-cutting spree.

The chancellor has refused to say whether benefits will rise in line with inflation, saying he will not make any “firm commitments”.

Benefit payments usually rise every April. Liz Truss has previously failed to commit to increasing benefits in line with inflation, and was expected to make a final decision by the end of November.

However, this could now be moved forward with Hunt making an announcement on 31 October instead.

Public spending could be slashed

Paul Johnson, director of the Institute for Fiscal Studies, says the chancellor will have to make “some scary decisions” on Halloween about spending cuts.

He adds: “Hunt will need to find a way of making his plans credible. That is likely to involve at least some cuts to planned investment and day-to-day spending [such as health, pensions, welfare, education and defence]. There are no easy options here.”

Speaking in parliament yesterday, Hunt refused to make commitments on defence spending, despite Truss promising to increase it to 3% of GDP by 2030 during her leadership campaign.

Only a few days after Jeremy Hunt was appointed by Liz Truss to replace her former chancellor Kwasi Kwarteng, he has torn up the new prime minister’s flagship mini-Budget.

Hunt has decided quickly to calm financial markets to try and bring some stability to a government that has been crippled by a crisis of its own making.

The mini-Budget is no more

The UK’s new chancellor had little choice but to repeal most of the measures rolled out in the Truss-Kwarteng Budget. The unfunded tax cuts unveiled caused turmoil in the financial markets, destabilising the economy and wreaking havoc on the housing market.

The Budget that was supposed to ignite the country’s growth engine has done just the opposite.

Even though two of the key pillars of the plan, the corporation tax cut and the scrapping of the 45p in the £1 additional tax rate had already been cancelled by the prime minister and her former chancellor, it was clear more had to be done.

Hunt has now scrapped virtually all of the measures in the mini-Budget apart from those too far down the line to be cancelled.

He is keeping the stamp duty band adjustments from the mini-Budget and the changes to the national insurance uplift (the health and social care levy). And he is also keeping the government’s Energy Price Guarantee, but only until April.

However, the income tax cut that was planned to take effect in April next year is now being postponed “indefinitely.” Truss had planned to cut the basic rate of income tax by a penny to 19p (Sunak had planned to bring in this change a year later in 2024).

The 1.25% cut to dividend tax is also being reversed as well as the changes to IR35 legislation. The plan to introduce a new VAT-free shopping scheme for non-UK visitors to Great Britain is also being cancelled and alcohol duties will go up next year as planned before Kwarteng’s mini-budget.

According to the Treasury’s projections, these changes will raise an additional £32bn in tax revenue, but there could be more changes to come. The Institute for Fiscal Studies (IFS), an economics think tank, believes there are “no easy options” for the government to raise money and Hunt will have to make some “scary decisions” to balance the books.

The turbulence of the past few weeks has made the situation a lot worse for policymakers.

According to economists, the government’s debt interest bill could jump to £100bn next year, thanks to inflation and higher borrowing costs. That’s twice as much as forecasts were projecting last year.

We will have to wait and see how Hunt plans to deal with these challenges when he unveils his full Budget (along with OBR forecasts this time) at the end of the month.

To help meet these challenges, the government has created a new Economic Advisory Council. This group of “leading and respected experts” will meet regularly to discuss the UK’s economic position and sentiment in the financial markets.

This seems to be another pillar of Hunt’s plan to restore market confidence in the UK. The initial list of council members includes representatives from BlackRock and J.P. Morgan, two of the largest and most influential financial institutions in the world.

What does the reversal of the Kwasi Kwarteng mini-Budget mean for you?

While the markets do seem like the mini-budget U-turns, a lot of damage has already been done to the UK economy and the country’s fiscal credibility.

Mortgage rates have jumped as lenders usually hedge their mortgage book using derivatives called swaps, the price of which is linked to gilt yields.

At one point, the UK 30-year gilt yield was trading at more than 5%, and this fed through into mortgage prices. The average two-year interest rate now stands at more than 6%.

Bond prices have come back. At the time of writing the 30-year gilt is trading with a yield of 4.4%. However, this does not mean mortgage providers will begin to cut rates. Uncertainty is the name of the game right now and mortgage providers may continue to place an uncertainty premium on rates.

One piece of good news is that the pound has recovered a good deal of its losses against other currencies over the past week.

A stronger pound not only makes foreign holidays cheaper, but also reduces the cost of imports, and, as a result, inflation. That could make life easier for consumers and reduce the need for the Bank of England to act aggressively in hiking interest rates further (increasing the cost of everything from mortgages to credit cards and business loans).

Liz Truss has been declared the next prime minister of the United Kingdom, and she’s promised to get straight to work to deal with the country’s growing list of problems.

The new PM is going to have her work cut out to deal with all the issues facing the UK today.

Spiralling energy costs, the rising cost of living, strikes, the creaking NHS and poor public finances are just a few of the tasks the leader has in her inbox.

On the campaign trail Truss promised that she would try to revitalise the economy through a range of measures.

Tax cuts, a bonfire of red tape and extra subsidies have been touted, but the PM will have to move carefully.

Public finances are in a dire position and the Office for Budget Responsibility (OBR) has already warned the country can’t really afford extra spending.

This leaves the new leader in a sticky situation. Truss may not be able to push through all the changes she’s promised, making it all the more difficult to predict what (if any) impact changes will have on individuals’ personal finances.

Still, here are some of the changes Truss and her team have proposed so far.

The good

When former chancellor Rishi Sunak announced plans to increase the rate of National Insurance by 1.25% last year, the policy was attacked for hitting taxpayers in the pocket at a time of rising bills.

Designed to tackle the Covid-induced NHS backlog and reform social care, the new levy attracted criticism from MPs across the political spectrum, and it was slammed by economists who argued that the country should not be hiking taxes as it recovered from the pandemic.

Truss has consistently said she would look to reverse the tax hike when in power. According to the Institute for Fiscal Studies (IFS), cutting the levy would boost incomes for all taxpayers, but would benefit higher-income households who have the most income from employment. Figures show the changes would benefit top earners by about £1,800 a year, and the lowest earner by about £7.

Other changes the new PM has promised to look at include the ability for couples in a marriage or civil partnership to shift any of their unused tax free allowance (£12,570 for the current tax year) to their partner. Currently, couples can only transfer 10% of their unused allowance. A cut to income tax has also been touted.

She has also thrown her support behind the pensions triple lock on the campaign trail, although whether or not the government will have the cash available to meet this commitment remains to be seen.

And as well as these personal tax and benefit proposals, there has also been some speculation that the new PM could cut VAT to 5%, following Gordon Brown’s attempt to stimulate the economy after the financial crisis.

Most importantly, Truss has already set out a plan to act on energy prices. The government is looking to cap unit prices for house holds and businesses as part of a package that could cost as much as £150bn.

The bad

The bad news is that these proposals will have to be funded somehow.

Following the pandemic, the UK’s finances are in pretty poor shape, and the prospect of borrowing more money to fund tax cuts is not going down well with the markets. The pound and government bond interest rates have spiked in recent weeks due to the threat of more spending (more on that later).

One of the ways the new PM appears to be planning for these cuts is by shrinking the size of the civil service and government payroll. This could mean job cuts. It could also mean lower pay awards for public sector workers.

There could also be a clampdown on benefit claimants. Truss wants to “fix the benefits system” to push more people into work. That could mean less “handouts” from the government.

The ugly

Policies to subsidise energy and cut taxes might go down well with voters, but they could have some severe consequences for the country in the long term.

This is where things get a bit technical and speculative, so bear with me.

The UK has a large current account deficit meaning it imports more than it exports. As a result, it relies heavily on international investors putting their money into the economy to balance the books.

Investors need to be sure they can trust the economy, government and currency for that to happen.

The problem is that large, unfunded spending plans, coupled with rising interest rates, surging inflation and a weak currency risks putting investors off (some might argue these factors have already put investors off).

Without these capital flows, the value of the pound could fall further – and for every 5% the currency falls against its major trading partners, inflation is pushed up a further 1%. Sterling has already fallen around 15% against the dollar this year, taking it close to the all-time low, just before the country was bailed out by the IMF. A crumbling currency is only adding fuel to the inflation fire.

If sterling remains under pressure, the Bank of England might be forced to push rates much higher than expected, causing more issues for the economy and increasing the cost of government debt.

To put it another way, while Truss’s plans might alleviate some of the economic pain in the near-term, they could lead to more pressure on the pound and higher interest rates. That will mean more expensive holidays, mortgages and personal borrowing. It could also lead to higher taxes in the long term.

Rishi Sunak’s Spring Statement might be described as the “jam tomorrow” Budget. Analysis from the Office for Budget Responsibility (OBR) lays bare the effect of the cost of living crisis – real household disposable incomes will fall by 2.2% on average in 2022-2023, “the largest fall in a single financial year since records began in 1956-1957”.

But the chancellor’s most eye-catching offers of support will not be immediately available. Even Sunak’s marquee announcement, an increase in the National Insurance threshold to counteract higher National Insurance rates, doesn’t take effect until three months into the new financial year. And the first cut in the basic rate of income tax in 16 years won’t be implemented until 2024 (assuming it actually happens).

In the meantime, the chancellor will be hoping he has done enough to bolster the Conservative Party’s tax-cutting credentials, potentially in time for a general election once that tax cut comes into force. That might be a tough sell, given that the OBR’s analysis suggests Sunak has so far announced tax cuts that amount to just a sixth of the value of the tax rises he has announced since moving into 11 Downing Street.

Personal tax winners and losers

Having spent months defending his plans to raise National Insurance contributions in order to fund health and social care, the chancellor pulled a rabbit out of the hat in the Spring Statement to have his cake while eating it. National Insurance rates will still increase by 1.25 percentage points from 6 April – but low and middle earners will be cushioned from the blow with a higher National Insurance threshold.

By raising the level of income at which people begin paying National Insurance contributions to £12,570 – rather than £9,880 previously planned – Sunak will leave around 70% of people better off in 2022-2023, analysis from Hargreaves Lansdown suggests, even though the increase doesn’t come into effect until July.

The tipping point, it calculates, comes for those earning between £40,000 and £50,000. For someone earning £20,000, the effect of the higher threshold will cancel out the increased contribution rate next year, ensuring they end up £267 better off than in 2021-2022. By contrast, someone earning £50,000 will be £108 worse off.

Further out, the chancellor is promising an income tax cut in 2024, when the basic rate will fall from 20% to 19%. But it’s worth remembering the chancellor said last year that income tax thresholds would be frozen until 2026; “fiscal drag” will bring more people within the reach of the higher rate of income tax, which is staying at 40%. That will undermine their basic rate of income tax savings.

Cheaper fuel

With a sharp increase in the oil price following Russia’s invasion of Ukraine, petrol and diesel prices have spiked sharply higher in recent weeks. The chancellor offered some help with only the second cut in fuel duty in the past 20 years; the reduction is 5p a litre, introduced immediately, and available for 12 months.

The RAC says the reduction will reduce the cost of filling up a typical family car by around £3.30. Motorists will welcome that, though with petrol and diesel prices up by around 40p and 50p a litre over the past year, the reduction doesn’t go very far.

Cold comfort but help to go green

The chancellor resisted calls for further measures to help households with the soaring cost of gas and electricity bills. Sunak is allocating an additional £500m to the Household Support Fund, which provides local authorities in England with funds to support vulnerable households as they see fit – but that is it.

The chancellor points out that his Energy Rebates scheme (announced in February) provides households with help via a combination of council tax rebates and discounts on electricity bills to be repaid over the next four years.

Still, there is some good news for homeowners looking to move to greener energy solutions. For the next five years, there will be no VAT to pay on products such as solar panels, electric heat pumps and insulation – currently a 5% VAT rate applies to such equipment.

No respite for pensioners

With the Office for National Statistics announcing just hours before the spring statement that inflation had risen to 6.2%, the suspension of the “triple lock” guarantee on state pensions became even more expensive for pensions.

But while inflation is expected to rise even higher in the months ahead, Sunak did not deviate from the plan to raise state pensions by only 3.1%, rather than in line with inflation, as the triple lock would normally ensure.

Still, the government has also confirmed the triple lock is not being dumped permanently – it will return in 2023.

Support for small businesses

A rise in the Employment Allowance will help small business owners who are worried about April’s rise in National Insurance rates, which apply to employers’ contributions as well as employees’. The allowance currently enables eligible employers to reduce their annual National Insurance liability by £4,000, but this will now increase to £5,000 on 6 April.

The relief is targeted at the smallest businesses – to be eligible, employers’ Class 1 National Insurance liabilities must have been less than £100,000 in the previous tax year. But for those who qualify, this is valuable support – the Federation of Small Business had previously calculated that higher National Insurance would cost the average small company more than £3,000 a year.

Tax reform ahead?

In line with his jam tomorrow theme, the chancellor announced plans to consult on an overhaul of the tax system to boost growth and productivity – he plans to announce the results of his review at the Budget later this year.

One target is simplification – there are now more than 1,000 tax reliefs and allowances, Sunak pointed out – but the government is making no promises.

And future reforms won’t necessarily save money. One big question mark concerns the future of pension tax reliefs. The income tax cut due in 2024 means basic-rate taxpayers will from then on receive even lower tax relief on private pension contributions than higher earners. Might that be an excuse for a revamp of the whole system to reduce its cost?

“When the facts change”, John Maynard Keynes is believed to have said, “I change my mind. What do you do?”

The answer from chancellor Rishi Sunak would seem to be: “just about anything so long as it cannot be described as a U-turn”.

The case for a U-turn is clear. In September, the government appeared to be faced with three crises. Firstly, the extravagant spending of the pandemic had resulted in record fiscal deficits (it had spent more than it took in in taxes – a lot more), threatening to push the national debt-to-GDP ratio through 100%.

Secondly, the media was clamouring for the funding of care for the elderly, deemed to be a “crisis” to be addressed at minimal cost to the recipients. Finally, the numbers on NHS waiting lists had grown from 2.3 million in 2009 and 4.4 million before the pandemic to over six million. The health secretary, Sajid Javid, was warning that they could reach 13 million.

Sunak duly announced a £12bn increase in National Insurance, raising it from a combined 25.8% of pay above £9,500 per year to 28.3%. This was to fund first a reduction in the NHS waiting lists, then social care.

In addition, personal tax allowances and the threshold for higher tax rates had been frozen until at least the 2025-2026 tax year, and the rate of corporation tax increased from 19% to 25%. The result was the highest tax burden for 71 years, according to the Taxpayers Alliance.

Believe it or not, the public finances are in better shape than you might think

Since September, much has changed. In February, Javid admitted that NHS waiting lists would go on rising till at least 2024. Since the extra funding would have no effect, why not postpone it until NHS management came up with a plan to justify it?

The number of elderly people living in care homes in the UK is nearly 500,000, equivalent to 4% of the population who are over 65, and 15% of the over-85s. Despite an ageing population, this number peaked at around 560,000 in the late 1990s so the central tenet of the “crisis,” that demand was and would rise remorselessly, is incorrect.

The population is ageing but the elderly are more able to look after themselves than ever before, helped by the growth of supported living (housing developments for the elderly), on-line monitoring and home visits. It is not obvious that care homes increase life expectancy of just two-and-a-half years on admission and the experience of the pandemic is unlikely to have increased demand. Was the “crisis” exaggerated?

Finally, the public finances are in better shape than the Office for Budget Responsibility (OBR) had forecast, with the 2021-2022 deficit now expected to undershoot by £20bn. This forecast was reduced in October from £234bn to £183bn and the 2025-2026 forecast from £74bn to £46bn. These are likely to be cut further.

As a result, current government debt is likely to emerge at around 95% of GDP, about 10% higher than before the pandemic. From here it is expected to fall, partly as the annual deficit falls but more due to inflation, to 83.5% next year and 80% in 2026-2027.

Despite much angst about the rising cost of servicing the national debt, inflation is eroding it rapidly. The yield on ten-year gilts is currently 1.7% and the rate of inflation is 6.2%. This means that the real burden of debt is being reduced at an annual rate of nearly £100bn.

Unsurprisingly, the falling deficit is not due to spending restraint but rising tax receipts. The OBR points to higher receipts from income tax (frozen allowances and thresholds), corporation tax (rising rates), and VAT (notably on petrol and domestic fuel), but there is more. Death duties are increasing at 20% a year, as are capital gains tax receipts, while customs duties are up 63% in the last year. Stamp duty receipts fell 19% in the pandemic year of 2020-2021 but are now soaring.

The chancellor should have ditched the National Insurance rise

This led economist Roger Bootle to argue that rescinding the announced increases in National Insurance “would be exactly the right thing to do. It makes no sense to be hitting the economy with such huge tax rises. There is no necessity for borrowing and debt to be brought down at precisely the pace that the Treasury seems to think necessary.”

But that would represent too much of a U-turn. Instead, the government is gambling that voters will be so grateful for pre-election tax cuts that they will forget the massive increases that preceded it and that they will vote for the High Tax Party in preference to the Even Higher Tax Party.

The chancellor strongly resisted calls for the 5% rate of VAT on domestic fuel to be rescinded or suspended as that would mean losing the increased receipts on higher prices. Instead, the government introduced a bizarre £150 council tax rebate and a £200 loan to be repaid over five years – or maybe not. The council tax rebate only applies to homes in the A-D bands, but it does apply to second homes.

The measures announced in the actual statement are modest. A temporary 5p cut in fuel duty is less than the extra VAT (about 7p a litre) levied on the higher pre-tax price of petrol. The rise in the National Insurance payment threshold to £12,570 (the same as for income tax) is very welcome, but does not affect the threshold for employers’ contributions. These raise employment costs and thus depress pay settlements. Ultimately it is paid for by employees.

The pledge to cut the basic rate of income tax by one penny in the pound to 19p is driven by the “no U-turns” dogma. A reversal of the increase in National Insurance would have made much more sense.

The direct implications of the measures for investors are minimal but the prospect of steadily improving public finances, a trend that is likely to continue even as economic growth slows, provides a positive backdrop for the economy, inflation and markets.

The pressure for extra spending and mis-spending will continue, notably on defence and, ad infinitum, on the NHS, but the electoral clock is ticking so the government’s priority will be cutting taxes. Investors will soon need to start worrying about the implications of a change of government in 2024. That would bring plenty of U-turns.

For all the fanfare about cheaper draught beer and sparkling wine, few will be raising a toast to last week’s Budget. Tax rises and personal-allowance freezes will leave the average household £3,000 a year worse off next year than they were at the time of the last general election, according to calculations by Hargreaves Lansdown. The already-announced health and social care levy, a 1.25% rise in national insurance that takes effect next April, plus an associated dividend-tax rise, will net the Treasury £13bn a year.

More insidious are frozen personal allowances. In April, the chancellor froze the basic-rate tax band at £12,570 and the higher-rate band at £50,270 until 2026. At a time of high inflation and strong wage growth, many earners will be sucked into higher bands over the coming years: the Office for Budget Responsibility (OBR) estimates that an extra one million taxpayers could be paying the higher rate by 2026. Several other thresholds – including the capital-gains tax (CGT) allowance, pension contributions and inheritance tax – have also been frozen. The “stealth tax raid” looks set to raise £47bn over the next five years, says Laith Khalaf of AJ Bell. Taxpayers always face “fiscal drag” – the practice of the Treasury holding tax threshold increases below the rate of wage increases. Yet these frozen thresholds amount to “fiscal drag on steroids”. The freeze means a taxpayer earning £80,000 could pay an additional £5,505 in tax over the next five years, assuming current OBR forecasts for wage growth and inflation.

There are some winners at the lower end of the income spectrum: households on universal credit will enjoy a slightly lower “taper rate” of tax on extra income, while the national living wage has been raised. A planned fuel-duty rise has been scrapped, although soaring oil prices mean motorists are unlikely to notice. Overall, the OBR says that Britain is heading for levels of taxation not seen since the 1950s.

The dogs that didn’t bark

For investors, most important were the dogs that didn’t bark. A widely discussed rise in CGT didn’t materialise, while higher-rate tax relief on pension contributions once again escaped the chopping block. The pensions lifetime allowance remains frozen at £1.073m, with the annual allowance likewise stuck at £40,000. Yet this only amounts to a reprieve, as Michael Martin of Seven Investment Management tells the Financial Times. It is difficult to “make large tax changes in the middle of a tax year”, but changes to the CGT regime “must be in the pipeline… be prepared for an announcement in March 2022, with potentially a year’s window to crystallise gains… before the higher tax rate comes in”.

With taxes only heading upwards it is crucial to use up tax-free allowances. Make the most of tax relief on pension contributions (especially for higher-rate taxpayers) and the £20,000 annual individual savings account (Isa) allowance. For assets outside of a pension or Isa wrapper, make the most of the £12,300 per person CGT allowance while it lasts, says Angela Lloyd-Read for This is Money. “Transferring assets to a spouse or civil partner, free of CGT, allows them to use their allowance too, effectively doubling the household CGT allowance for the year.”

There is one silver lining to the tax grab: improved economic forecasts from the OBR mean that the chancellor could have £25bn of spare fiscal room to play with by the end of this parliament. That war chest could eventually turn into pre-election giveaways.

Tucked in amid the Budget documents last week was a note from the Office for Budget Responsibility (OBR) that might have made homeowners shiver. The OBR noted that inflation is rising (they’re sharp-eyed like that). It also noted that in a worst-case scenario, inflation might rise to as much as 5.4% (worst-case... hmmm...).

But, long story short, one thing that might mean is a rise in interest rates. And a rise in interest rates implies more costly mortgages. Which might just imply lower house prices.

Why interest rates matter so much to house prices

There have been a fair few headlines in the last few days worrying that rising interest rates could hit house prices in the UK. What with the Bank of England all but declaring that rates will rise from their current 0.1% before Christmas, and markets getting more worried about inflation, it’s no surprise that people are a little concerned.

According to FT Adviser, September is expected to mark the low point for this mortgage cycle (with an average rate of 1.78% on new mortgages). In October, “more and more lenders started hiking their rates”.

So is this it? House-price crash time?

To be very clear, I don’t think there should be any doubt about one specific thing here: the one thing that can puncture the house price bubble (or boom, or whatever you want to call it) is higher interest rates. We’ve been through the logic of this plenty of times, but let’s do it again, because some people still don’t really seem to grasp this.

Most people buy homes using a mortgage, not cash. So the most salient point is not the absolute house price, it’s the monthly payment. So people don’t really care about the absolute house price – whether it’s £100,000 or £250,000 or whatever – they just care about what £400 or £1,000 a month or whatever will buy them right now. I mean, they might moan about the absolute house price, or gawk at how high it is, but when it comes down to it, all that matters is the monthly cost.

When the cost of borrowing (the interest rate on your mortgage) goes down, the amount you can borrow in exchange for a given monthly interest payment goes up. When the interest rate on your mortgage goes up, the amount you can borrow in exchange for a given monthly payment goes down.

So you can see why interest rates matter so much. Let’s assume a 25-year repayment mortgage. If you have £1,000 a month to spend, then at an interest rate of 3.5%, you can borrow £200,000. But if that rate goes up to 1.5%, you can borrow £250,000. If it jumps to 5.5% you can only borrow £165,000.

You can also see why this makes physical supply and demand so much less relevant to price movements. Over time, physical supply and demand will matter somewhat to prices, but if the Bank of England jacked up interest rates to 8% overnight, prices would collapse within a month, for very obvious reasons.

This is a mild oversimplification. Mortgage availability is very important too. Interest rates can be low, but banks can be reluctant to lend, as we saw in the immediate aftermath of the financial crisis. However, mortgage lending tends to be pro-cyclical. In other words, it’s harder to get a mortgage when house prices have fallen, but it gets easier as prices keep rising, and banks become ever keener to grab more business (which we’re seeing right now).

Anyway, that should make it clear why interest rates matter. The only real question is: will rates go up that sharply?

Financial repression suggests interest rates won’t rise that much

This is where I struggle a little. The fundamental problem for both financial markets and the “real” economy right now is debt. There’s too much of it. In particular, there’s too much government debt.

The easiest way for governments to repay that debt is by allowing inflation to rise faster than interest rates. That’s called “financial repression”. This suggests that while the Bank of England will talk aggressively, it will only carry a small stick. (Bear in mind that the OBR’s central forecast is for rates to rise to 0.75%, which is not a lot).

This doesn’t mean that rates will stay exactly where they are now. But it does imply somewhat that rates will not rise to the point where they cause a house price crash. Not imminently anyway. Banks in particular are at the stage in the cycle where they compete for business so they’re going to be reluctant to go too wild in terms of raising rates.

There will come a day when the political cost of inflation is higher than the political cost of recession (the last time that happened was in the early 1980s), but it is not this day.

That said, if you haven’t checked your mortgage rate in a while and you’re in position to change or lock in a longer fix without paying too much more (indeed you might find you can still pay less depending on when you last changed) it’s definitely worth doing. I imagine most of you are on top of that anyway – but if you’re not, do take a look.

Meanwhile, subscribe to MoneyWeek magazine – financial repression is going to be a big story this decade and you’ll want to make sure you’ve positioned your portfolio for it. You can get your first six issues free here.

In mid-2020, the Office for Budget Responsibility was getting nervous about UK house prices. It was forecasting that they would fall into the end of 2020 and then fall some more, to end 2021 down by 11% on the year. They weren’t alone in their pessimism (or maybe optimism – how you see this depends on whether you are a buyer or a seller). At the same time, the Centre for Economics and Business Research was forecasting a 14% fall.

They were all completely wrong. In April, the Nationwide House Price index showed prices jumping 2.1% in April alone (a 17-year high) and 7.1% over the year. The average house price is now at a record high (£238,831). Transactions are on fire: in March there were more sales than in any month since records began in 2005, with mortgage approvals running 13% higher than they were pre-pandemic in February 2020. Ask any estate agent and you’ll hear endless anecdotal evidence of a frenzied boom: more buyers registered with each estate agent than ever; viewings limited to 15 minutes; houses selling in days; first bids coming in 20% above the asking price.

So what has happened to make so many respected forecasters so spectacularly wrong? It is the usual story: fast rising demand hits limited supply. This is partly about the extension of the stamp duty holiday. This now runs until the end of June, so the race is on to buy. That has “lit a fire under buyers” already feeling some urgency to reset their lives post-pandemic, as Hargreaves Lansdown points out.

But this isn’t just about what people want (home offices, more rooms all round and outside space), it’s about what they can afford to pay. Right now they can afford to pay a lot more than a few years ago. That is partly about having hard cash for deposits. Since March last year, the UK population has added over £200bn to their savings accounts, with another £16.2bn deposited this March alone (the pre-pandemic average per month was £4bn-£5bn).

It’s also about mortgage rates being very low (under 2% on average). The house price to earnings ratio might be at an all-time high – and it is true that the last time they hit these sorts of levels (2007) they fell 20% soon after – but take out an 80% mortgage on the average house in the UK today and it will cost you around 36% of the median income, says Capital Economics. The average since the 1970s? Around 43% – with nasty peaks in 1989 and 2007 at over 60%. Houses may look very expensive, but on a monthly payment basis, they cost an awful lot less than before (in 2007 average mortgage rates were around 6%).

So what next? How long can the frenzy last? Demand may start to fall as the stamp duty holiday comes to an end (sales fell sharply after the 2008-2009 stamp duty holiday), an increase in supply appears and as lockdown fades (will we keep working from home?). But the real change will come if – when? – mortgage rates rise. They can’t fall much further – and so will soon have provided all the support they can to borrowers and hence to house prices.

We don’t expect rates to rise to keep up with inflation (they have to stay lower to erode our debt in real terms) but there will be an uptick at some point. That may not be enough to cause anything too nasty (certainly not in nominal terms) but it may mean that house prices next year aren’t much higher than they are this year.

Chancellor Rishi Sunak’s second Budget trod a fine line between helping the UK recover from the coronavirus pandemic right now, but also laying out a plan to pay back the eye-watering £355bn the government is forecast to borrow in 2020-2021.

One of the biggest money spinners was the announcement of freezing all personal tax allowances until at least April 2026. This is a classic example of “fiscal drag” (explained here in our two minute video), where tax bands do not change but the tax take increases because rising incomes push taxpayers into higher brackets.

This will increase tax bills in real (after-inflation) terms for most of us over the next few years. But of particular concern to investors is the freezing of the pensions lifetime allowance (LTA). While there’s a limit to what you can do about being dragged into a higher income tax bracket, for example, your chances of breaching the LTA are important to consider in your long-term (or not-so-long-term, depending on how close to retirement you are) financial planning.

What is the lifetime allowance?

The lifetime allowance (LTA) is the total amount an individual can save into a pension without facing a hefty tax bill. Once the LTA is hit, the excess pension amount is taxed at 25% if taken in the form of income, and 55% if taken as a lump sum.

Introduced in 2006, the LTA was initially set at £1.5m, then increased in 2012 to £1.8m. However, a series of cuts lowered it to £1m in 2016. Since then, it has increased yearly in line with inflation. However, now Sunak has frozen LTA at the existing level of £1,073,100 until 2026.

The short-term impact of the freeze will be minimal, say experts, as it was only due to rise by 0.5% this year (to £1,078,900) because inflation has been so low. But in the long term the changes could have a massive impact on peoples’ pensions.

What impact?

The policy change will see “more people potentially falling foul of a tax charge”, says Clare Moffat from insurer Royal London. Without the change, and assuming inflation-linked increases, the LTA would have risen to £1,162,300 by 2025-2026, according to a forecast from the Office for Budget Responsibility (OBR).

On other words, the LTA will be £89,200 lower than it should have been were it to increase in line with consumer price inflation (CPI). The long-term impact of the freeze, combined with the effect of the earlier reductions, will make it harder for savers to accrue enough pension to support a comfortable retirement, says Kay Ingram at LEBC Group.

While the government expects the LTA freeze to save almost £1bn by 2025-2016, Willis Tower Watson, another insurer, says the estimate doesn’t indicate how much of these savings will be derived from behavioural changes such as lower pension contributions (which means the government will have a smaller tax relief bill) or retiring early.

The LTA freeze penalises investment performance

A key criticism of the LTA in general is that it is a limit on overall pot size, not contributions. In other words, savers can end up breaching the limit and incur excess charges even if they stop contributing to their pensions, because it all depends on the investment performance of their pot.

For example, a saver who currently has £500,000 of savings in their pension pot would reach the current LTA limit in just a little over 11 years, assuming an average annual return of 7% on their investments, according to wealth manager James Hambros & Partners. With a 5% annual return it would still take less than 16 years to reach the limit, and just below 26 years with a 3% return.

For defined benefit schemes, also known as final salary schemes, as a rough guide, a saver would need to have accrued benefits worth £53,655 a year. This is because for LTA purposes, HMRC multiplies defined benefit schemes by 20 (check out our video on the difference between defined benefit and defined contribution schemes).

To be clear, this is a far more lenient approach than that applied to defined contribution schemes – right now, with interest rates where they are, in order to buy a £50,000-a-year index-linked annuity, a 65-year-old man in good health would need to pay something in the region of £2m, well ahead of the LTA.

Should you stop paying into your pension?

The natural instinct for people may be to stop paying into their pension to avoid hefty charges, but clearly that’s a mistake. Every individual’s circumstances are different, and the tax breaks associated with pensions are generally worth having. Also, in some cases, it might still make sense to save into a pension even if breaching the LTA is possible or even likely.

However, the point is that you should be aware of it and you also shouldn’t underestimate your chances of hitting the limit - particularly given that governments have clearly demonstrated over the last 20 years or more that they have no qualms about making overall pension limits less generous. It’s another reason to make sure that you are also making use of your Isa allowance. We’ll have more on the best ways to put that to use in MoneyWeek magazine later this month. If you’re not already a subscriber, get your first six issues free here.

Rishi Sunak has had an exciting first year in the role of chancellor of the exchequer. He spent most of 2020 figuring out ways to keep the UK economy afloat while various levels of lockdown came and went. On Wednesday, we got some insight into how he plans to shore up both the recovery and the public finances. So what were the biggest moves?

The government has spent a lot of money in the past year to offset the impact of Covid-19 lockdowns. That’s set to continue until at least the end of September. Sunak announced the extension of the furlough and self-employment relief schemes, VAT cuts, stamp-duty holidays (see below), business-rates relief, universal credit top-ups and various other measures, all of which added another £65bn to spending for the 2021-2022 tax year. That leaves us with overall borrowing for 2021-2022 at an estimated £234bn, according to the Office for Budget Responsibility (OBR), the independent fiscal watchdog – a far cry from the £164bn forecast in November.

The good news is that the economy is expected to rebound strongly this year and next, growing by 4% in 2021 and more than 7% in 2022. But even with a solid rebound, we’re going to be left sitting on a deficit (annual overspend) of 10.3% of GDP, a drop from 17% for 2020-2021, the current tax year, but still a lot higher than anyone would have deemed sustainable in the pre-Covid-19 era. And the national debt will eclipse 100% of GDP until at least the mid-2020s.

A U-turn on corporation tax

So what is Rishi Sunak planning to do about it? There are two main measures. Fiscal drag is the big one that will hit individuals in their pockets – see below for more on that. The other big move is on corporation tax. Under George Osborne, the Conservative plan was to make sure that corporation tax was always a good bit lower than in most other big economies. Sunak has entirely rejected that idea. Using the excuse that businesses have been helped out, and so they can be expected to pay the money back (conveniently ignoring who mandated that they be shut down in the first place), Sunak has raised the corporation tax rate from the current 19% to 25% from April 2023.

That’s more aggressive than had been expected, though it does come with a fair few exclusions. Small businesses (those with profits of below £50,000) will still pay a 19% rate, and only businesses with profits above £250,000 will pay the full 25%. Still, you could be forgiven for asking why, at a time when being more competitive is a priority for a post-Brexit Britain, the chancellor has hiked corporation tax quite so much.

Part of the answer came in the form of a significant carrot for businesses – the “super deduction”. Companies spending money on new plant and machinery in the next two years will be able to claim a 130% deduction in their tax bills. In effect, companies are being subsidised by taxpayers to splash out on new equipment. As Richard Godmon of accountancy group Menzies puts it: “This equates to a significant cash windfall for businesses and will help to bolster cash flow at a critical time”. Whether 130% is too generous or not (surely 100% would have done the job?) and whether – as a result – much of that investment will be productive or wasteful, is another question, but the chancellor may not care. Any short-term sugar rush of spending that results in higher GDP growth and even a bit of inflation is likely to be welcomed by the government regardless of the long-term impact.

In effect, what’s happened here, as Paul Dales of Capital Economics points out, is that Sunak has provided more “near-term support” for the economy than was expected, but overall he’s hoping to get the public finances back into some sort of order more quickly than anticipated with higher taxes from 2023-2024. The good news is that if the economy recovers faster than the OBR’s current gloomy forecasts expect, then maybe this is it for tax hikes.

As for the fact that we’ll be sitting on national debt of 100% of GDP for some time, this probably only matters if we’re an outlier. As long as the rest of the world is splashing out (the US certainly is) or struggling with growth, then the UK is unlikely to attract the specific attention of the “bond vigilantes” (to push gilt yields up sharply), or, for that matter, the “forex vigilantes” (to trigger a run on the pound). Before that happens, the chancellor will be hoping that inflation (note that index-linked gilts are set to remain low as a proportion of UK debt issuance) and the brutal but subtle action of fiscal drag will do much of the tidying-up job for him.

Propping up property...

Anyone invested in UK house prices rising for some time to come will have enjoyed the budget. The combination of spare cash (the majority of Brits have been saving more than normal), pent-up demand and last year’s stamp-duty suspension have been driving a sharp rise in both transactions and prices. The latter are now at record levels (again) with the average number of days it takes to sell a property down from 67 in November 2019 to a mere 49 in November 2020.

The chancellor is clearly keen to keep this going. The stamp-duty suspension on property sales up to a price of £500,000 had been supposed to run only until the end of March. However it will now move to the end of June – very nice indeed for the many people who have not yet completed on deals agreed months ago. Anyone buying at £600,000 in England will now find themselves paying a mere £5,000 in stamp duty, compared with what would have been £20,000 pre- Covid-19 and, according to the chancellor, 90% of buyers will pay no stamp duty at all under his scheme. But even on 30 June things won’t go back to normal: instead, the nil-rate band (which used to be £125,000) will be £250,000 until the end of September.

... with another scheme to bolster housing demand

However the stamp-duty news turned out to be just the beginning of Sunak’s plans to support the property market. For those who can’t produce enough of a house deposit to secure a mortgage he has come up with yet another taxpayer-sponsored support scheme. In a “new policy to stand behind home buyers”, for any would-be buyer (first-time or not) who can produce a 5% deposit the government will guarantee the remaining 95% of the loan with a participating lender.

So far these include Lloyds, NatWest, Santander, Barclays and HSBC. But given that the scheme is effectively a free-money scheme for the banks (the most they can lose on any one deal is 5%), expect all other banks to be participating before the week is up. We are not convinced we approve of this scheme . It will help more people buy in the short term. But in pushing prices up again (which it will) it also leaves them both with huge mortgages to service at a time when rates are more likely to rise than fall and with a nasty risk of finding themselves in negative equity should house prices ever revert to their mean relative to earnings. Still, the plan is unambiguously positive for housebuilders. Persimmon rose by 5% on Wednesday morning and Barratt, Taylor Wimpey and Berkeley were all up by 3%.

Guess who’s paying the bill

Anyone concerned about their tax bill going up in the near future can now take a deep breath. It won’t – or it won’t look like it is anyway. The chancellor confirmed on Wednesday that personal allowances for income tax will be raised in line with the Consumer Price Index next year to £12,570 and £50,270 and then stay there until 2026. Assuming wages rise in line with inflation this should mean that around 800,000 more people end up moving into the lower tax bracket and roughly the same number move into the higher-rate bracket.

The problem here is fiscal drag. There have been no headline rises, but as inflation climbs and thresholds do not, the share of your real income that goes to the Treasury will rise anyway. You might not mind this; perhaps you feel that we are all in this together. But a stealth rise in taxes is still a rise in taxes. Overall ,says Nigel Hatt, pensions specialist at Tilney, those earning between £60,000 and £100,000 will end up paying £680 more in tax over the four-year period beginning in 2021-2022 than they would have if allowances had continued to rise with consumer price inflation (CPI) – assuming CPI remains at 0.5%.

At the same time the thresholds for capital gains tax (CGT), inheritance tax and the pensions lifetime allowance (LTA) – which sets the amount that can be held in a tax-efficient pension wrapper – are also to be frozen. The latter is to stay at its 2020-2021 level of £1,073,100 until 2026. That is not generous. As Steven Cameron of Aegon notes, it is an amount that would typically buy an income for life for someone aged 65 of around £26,100 a year (inflation-linked and before tax). After tax that brings you to an income of £1,740 a month. It is not lap-of-luxury stuff.

This might also offer something of a shock to public-sector workers. Under the different (and outrageously generous) LTA calculations for defined-benefit pensions, they are currently able to receive a pension of £53,655 a year before hitting a level where they have to pay a surcharge. That sounds like a lot to most people, but as Cameron says “it would be interesting to see any analysis the chancellor has done over how many doctors or head teachers may be hit by this charge”.

Of more concern might be the freezing of the CGT allowance. There had been talk of the rate of CGT rising so many may feel they have had a reprieve. But a rise in the rate might at least have been accompanied by inflation indexing. Today no consideration is given to how long you have owned an asset when you sell it, and hence how much of its rise in value is real and how much is just generalised inflation. That can make CGT more of a tax on wealth than on gains.

All of the tax-raising measures here appear small and reasonable. But it’s worth looking at what they add up to. As Capital Economics’ Paul Dales points out, add the corporation-tax rise and it’s clear these tax hikes “do most of the work” in bringing public sector net borrowing down from 10.3% of our GDP next year to 3.9% in 2025-2026.

There was a lot of stuff in the Budget yesterday. With Rishi Sunak in charge, we’re back to the days when the chancellorship was an opportunity to audition for the big job – prime minister – in front of the country. So he’s not going to duck the chance to show off a bit.

But here’s what it boils down to: he’s increasing the amount he’s spending now, but with big tax hikes down the road to pay for it all. And make no mistake – these are seriously big tax hikes.

Buy now, pay later

Overall, Sunak’s approach is probably sensible: protect the recovery; pay for it later, but lay out the plans to do so now so that a) you don’t spook markets and b) you warm taxpayers up for just how tough it’ll be.

We’re going to be in semi-lockdown until near the end of June, so he’s extended all of the government support schemes – from furlough to boosted universal credit to reduced VAT – until at least the end of September. He’s also piled on extra spending for 2022.

And of course, he’s propping up the all-important housing market by extending the stamp duty holiday and offering taxpayer-backed mortgages. We’ll have more on that elsewhere on the site later today. So he’s doing his best not to screw up the recovery by pulling the rug out from under anyone right away.

He’s also trying to encourage companies to spend a load of money on investment, with a rabbit out of the hat called the “super-deduction”. This means companies get a 130% tax relief on investments in qualifying plant and machinery. What does that mean? Put simply, it’s a big incentive to pull forward any spending plans – think of it being like the stamp duty holiday, only for building factories.

So you’ve got a lot of support and encouragement over the next couple of years which should hopefully make sure that the recovery really does kick in. Indeed, the Office for Budget Responsibility (OBR), the independent fiscal watchdog, reckons that the GDP will grow by more than 7% next year.

However, from 2023 we start to pay for it. (In fact, we start to pay for it a bit earlier than that, but in a somewhat stealthy way). Corporation tax was the big headline-grabber. The corporation tax rate is going up from 2023 by six percentage points (or almost a third) from 19% to 25%. That’s a huge jump. It won’t affect companies with profits of below £50,000, and it will be tapered up to £250,000 (in other words, you won’t pay the full 25% until the £250,000 level).

However, it’s still a significant leap and it’s an interesting gamble at a time when Britain particularly wants to attract investment, not discourage it. Presumably Sunak is hoping that the super deduction will be tempting enough for companies in the meantime. (And also, at 25% it’s still not the highest rate in the world so he might well be thinking that the switching costs aren’t worth it).

But the other big money spinner comes from, well, doing nothing. All personal tax allowances are being frozen until at least April 2026. This is fiscal drag – where you collect more tax because income and asset prices go up, but your tax bands stay exactly the same.

Fiscal drag has been the secret weapon of governments for a long time – your classic “stealth” tax, and one of Gordon Brown’s favourites – yet Sunak was surprisingly upfront about it. There’s two reasons for that: one, you couldn’t get away with freezing tax bands for this long and no one noticing – he doesn’t want to be accused of being underhand. And, two, the electorate was prepped to expect a massive capital gains tax hike, or some other nasty. By comparison, this doesn’t sound too bad.

And yet it is. Fiscal drag is brutal. And you can see the impact of it when you look at the tax take as a percentage of GDP. It’s targeting levels that we haven’t seen since the 1960s. We’ll go into fiscal drag in more detail too later today. But it’s going to have a big impact on anyone close to breaching the Lifetime Allowance in their pension wrapper, for example.

Inflation would be a great help here, as long as there’s not too much

The good news here is that, while these tax hikes are massive, they are probably enough. If the economy recovers as expected, then we won’t need more tax rises in the future. And, probably, what Sunak is hoping for is that as the day gets nearer, he might actually be able to row back on some of these measures.

Why? Inflation. If the recovery is stronger or inflation higher than expected, then fiscal drag will end up raising even more money than expected for the government. And if inflation perks up but interest rates and borrowing costs stay under control, then you get to erode the debt more quickly too.

The thing is, what you have to understand about inflating away the debt is that you can’t talk about inflating away the debt. You can’t turn around and say: “This is the strategy”, because that sounds irresponsible. More importantly, it means that all the people who you’re relying on to pay the inflation bill get rattled and don’t play along.

For example, you still need to sell government bonds. Yes, if push comes to shove, the Bank of England will buy the ones you can’t get rid of (and I suspect the new mandate – where the central bank needs to help tackle climate change somehow – will come into this). But you don’t want to go down the coercion route too obviously; it’d still be nicer if you could sell them to investors.

Also, you don’t want people to start believing that inflation is the end goal. Expectations play a role in this stuff. If people expect inflation, then it becomes a self-fulfilling prophecy. And, while you want more inflation than we’ve had, you don’t want too much. You don’t want it to get out of hand, because if it does, then things start to break down, and more importantly, people stop voting for you.

So that’s the overview. Sunak is spending today in the hope that the recovery turns into a boom. He’s taxing individuals more heavily pretty much right away, but it’ll get a lot worse between now and 2026. He’s giving companies a big tax break, then taxing them a lot more from 2023 (but watch this space).

He’ll be hoping that inflation and a more powerful than forecast recovery will give him breathing space to do something positive ahead of the 2024 election. But in the meantime, if you’re an investor, the main takeaway from the budget is that you need to ensure that you’re making full use of your tax allowances – and your Isa allowance in particular – where you can get them, because they’re only getting smaller from here on in.

We’ll be covering Isas and other tax-efficient savings vehicles in more detail in a couple of issues’ time in MoneyWeek magazine. If you’re not already a subscriber, get your first six issues (plus a beginner’s guide to bitcoin) absolutely free here.

The government is preparing to announce a three month extension to the stamp duty holiday, originally meant to end on 31 March, as Rishi Sunak attempts to keep the property market growing.

Sunak will use his Budget next week to announce the change of the deadline to the end of June, says a report in The Times. If the rumours are true, an additional 300,000 property transactions could get through in England, based on previous HMRC data, says property website Rightmove. That would save buyers around £1.75bn in total. Around 80% of the 628,000 sales agreed but still currently in the legal process would pay no stamp duty.

The chancellor was under pressure by the industry to extend the stamp duty holiday, with the Building Societies Association (BSA) calling on him to taper the end of the reduction in the tax to allow those who were already in the process of buying to benefit from it. The third lockdown and an “unprecedented increase” in the number of transactions had led to increased delays in the buying process, says the BSA: “These transactions are at risk of falling through and chains collapsing, leading to disruption in the housing market and causing economic uncertainty at the time when we hope the wider economy will begin to pick up.”

The Office for Budget Responsibility predicted the housing market could face a cliff edge if the holiday came to an end on 31 March, adding house prices could drop by over 8% this year.

The extension could cost the Treasury about £1bn, says Capital Economics. And while It would prevent sales from tumbling after April, it doesn’t necessarily encourage new activity as “conveyancing delays” wouldn’t allow new transactions to take place. There’s currently a four-month gap between an offer being accepted and exchanging.

The extension could be a good thing for those who bought a house in December and were concerned they wouldn’t be able to exchange before the end of March. But, as we’ve said before, the stamp duty holiday is not necessarily saving buyers any money. And as Paul Johnson, head of the Institute of Fiscal Studies, pointed out to The Times, by extending the stamp duty holiday the government is increasing the likelihood of people expecting it to become permanent. “Whenever it’s withdrawn you risk a period of stagnation and overblown house prices as you get towards the end.”

Britain’s house price boom continues unabated. The average UK house is now worth 6.5% more than it was last November, according to the latest figures from Nationwide.

That’s the strongest pace of annual growth recorded by the building society’s house price index since the start of 2015. But what happens when the pent-up demand and stamp duty holiday are over? Let’s have a think.

This isn’t a statistical illusion – we really are in the midst of a property market boom

A house price boom is a far cry from what everyone expected when the lockdown was in full swing. In May, high street bank Lloyds – Britain’s biggest mortgage lender – warned that it expected house prices to fall by 5% this year as its central scenario, or drop by 10% if things got really bad. The best-case scenario was for a drop of 2.2%.

Now, it’s worth noting that the banks had a good incentive to “kitchen sink” the coronavirus damage. Painting as grim a picture as possible means that it’s easier to surprise on the upside in the future. By the way, this is also how we know that the banks are in much better shape now than they were in 2008.

Banks can only afford to “kitchen sink” like this when their balance sheets are in good condition. When they’re being optimistic in the face of all evidence to the contrary – that’s when you have to worry. That’s not where we are today. (That in turn is one reason why the banks represented a good “buy” earlier this year, and almost certainly still do – indeed, Jim Mellon highlighted Lloyds in his recent interview with Merryn, right before the vaccine news ignited the recent rally.)

Anyway – it’s not as if Lloyds was the only gloomy one out there. As recently as July, the Office for Budget Responsibility (Britain’s fiscal watchdog) said that the best-case scenario for house prices this year was a gain of 0.2%. The worst-case was a drop of 2.4% this year, followed by a 12% slide next. I have to admit that I felt the OBR’s spread of potential outcomes was reasonable – although I also noted that the result would probably be closer to the best-case scenario. But clearly, that scenario has already been comfortably thrashed.

Also, it’s worth noting that this is not a “narrow” market. It’s easy to assume that this is just about a small number of expensive homes swapping hands. (House price indices do attempt to factor that sort of thing in, by the way, but there’s only so much they can do.) But this is a widespread boom. It’s not just prices that are going up, it’s transactions too. In October, mortgage approvals hit their highest level since September 2007. In other words, the number of mortgages being approved has returned to levels we haven’t seen since before the big crash in 2008.

That’s pretty noteworthy. After 2008, transactions plunged and then recovered to a post-crash “new normal” that seemed to be permanently lower than the previous norm (knocking around below the 70,000 a month mark, compared to regular 100,000-plus months in the boom era). Don’t get me wrong. A lot of that is purely home loans being knocked forward from months when the market was genuinely shut. But it’s still an interesting data point.

The question is: what happens next?

If you’re buying a house to live in, don’t spend any time worrying about “the big picture"

Clearly, the stamp duty holiday has helped to bring forward demand (people buying now to beat the deadline). And clearly, the housing market freeze at the start of this year delayed demand. So right now, two big factors are driving the present surge in demand. On top of that, the underlying economy is being artificially propped up by an extended furlough scheme. That has to end at some point – although the overall impact on employment might not be as bad as many expect if the vaccine does lead to a faster recovery than might otherwise have happened.

What does that all mean? Well, Andrew Wishart at Capital Economics argues that when all this pent-up demand is exhausted and the stamp-duty holiday ends, we’ll see a mild slump in 2021. We saw something similar in 2009, when there was a stamp-duty holiday designed to prop up the market post-crash. That said though, even if house prices were to fall by 5% next year – which is what Capital Economics currently expects – that “would leave house prices marginally higher at the end of 2021 than they started 2020.”

What does all of this mean for you as an individual? Let’s park property investment for now; that’s a specialist business. If you are looking to me to tell you what to do on that front, then the one thing I can tell you is that you don’t know enough about being a landlord to pursue that particular course.

So – talking purely about a house to live in – there are really only three positions that you can be in, relative to the housing market. One – you don't own a house. Two – you own a house and want to sell it and buy a different one. Three – you own a house, and you want to sell up and rent.

In all three of those circumstances, trying to time the market is a stressful waste of energy and it should be the bottom of your list of things to care about. It’s particularly irrelevant for the last two (if you are just moving home, then what you lose on the swings you gain on the roundabouts. And if you’re stepping off the “ladder” then you’ve got your money – the worst-case scenario is merely that prices keep going up). But even if you’re a first-time buyer, it’s just not worth worrying about.

Here’s what you should be worrying about: can you afford the mortgage payments? Have you built in a reasonable margin of safety for things going wrong? Have you considered what happens if interest rates go up? Have you considered what happens if your income goes down? Is owning more practical than renting? Perhaps even more importantly: do you like the house? Can you bear to live there for the next few years? Few things can make you more miserable than living somewhere that you don’t like. And owning is a lot less flexible than renting on that front.

I know this doesn’t feel helpful. This isn’t why you read Money Morning. You want a crystal ball. But here’s the alternative: you keep saving. You keep those savings in cash, because you can’t afford the risk of a market crash demolishing your capital when you need it. And you hope for a housing market crash that somehow leaves your job and savings unscathed, so that you can take your huge deposit, top it up with a cheap home loan, and buy from a distressed seller.

You could be waiting for years. You could get there and find that you have no job. You could get there and find that your savings pile is still not big enough to secure credit during a credit crunch.

My point is this: if you’re looking for a home to live in, don’t try to second-guess house prices. You might get lucky on prices. You might not. But in the grand scheme of things, that aspect of the transaction just isn’t worth the energy. Better to spend that time focusing on how to get the best price for the house that suits you best, and making sure that an unexpected event won’t leave you regretting the decision.

What is the pensions triple lock?

The pensions triple lock is the guarantee, introduced by the coalition government in 2011, that the state pension is increased each year by either the (CPI) inflation rate, the rise in average earnings, or 2.5% – whichever of those three is the highest. The lock applies to both the “basic” state pension and the higher, flat-rate pension paid to people retiring since April 2016. This year, for example, the pension rose by 3.9% in April, in line with the rise in average earnings last year. But when the government introduced the triple lock, it did not foresee the prolonged stagnation in real earnings growth, which has meant that a guaranteed 2.5% increase has served pensioners very well compared with workers. In the ten years since the financial crisis, state pensions have increased 37% in cash terms, compared with less than 20% for average earnings. The triple lock has become part of the Tory pitch to older voters: it was reaffirmed in the party’s election manifestos in 2015, 2017 and 2019. But now, chancellor Rishi Sunak is reportedly preparing to dump it.

Why does it need unlocking?

The triple lock has been criticised for years as no longer appropriate in an age of low wage rises and growing inter-generational inequality. But now there’s a particular problem due to the wild fluctuations in wages expected as a result of the Covid-19 shutdown. Depending on the depth of the recession and the strength of the rebound, the government could be facing a massive pensions liability as wages fall but then bounce back by as much as 18% in 2021. This year, wages have “artificially” slumped as a result of the furlough scheme. But next year, they are expect to bounce back as people go back to work full-time, or are made redundant. Under the existing triple lock, pensioners will still get 2.5% next year. But in 2022 they’ll benefit from the huge bounce back in 2021 earnings. Plainly, that’s “not fair on working people”, says The Sunday Times. “The triple lock should be stood down and replaced by a double lock to give pensioners 2.5% or the inflation rate.”

What are the figures?

The latest forecasts from the Office for Budget Responsibility (OBR) suggest that average earnings will fall 7.3% in 2020, but rise by 18.3% in 2021. They reckon inflation will be 1.2% this year and 2.3% next year. Of course, these figures may turn out to be way off the mark: there is too much uncertainty about the post-Covid-19 recovery to be sure of much. However, what this scenario means for state pensions is that, with the triple lock still in place, the flat-rate pension would rise by 2.5% in 2021 and 18.3% in 2022. That’s a two-year cumulative rise of 21.3%. For the flat-rate pension received by people who have retired since April 2016, that means a jump from £175.20 a week to £212.45.

How does that compare to no triple lock?

If the state pension rose in line with the OBR’s predictions for average earnings, it would increase 9.7% over the next two years (down 7.3%, then up 18.3%). Clearly, that’s still a decent uplift. Or, if the pension rose in line with predicted inflation it would rise by just 3.5% (1.2% and then 2.3%), rising to £192.15 a week. And if the triple lock became a double lock (removing the earnings link), it would increase by 5.1% (two years of 2.5%) over the same period to £184.07. That “double-lock” scenario is what many pundits are expecting to happen – perhaps with a promise of reintroducing the full triple lock after two or three years.

What’s the effect on the public finances?

These might sound like small sums, but there are an awful lot of pensioners. The triple-lock promise “simply wasn’t designed for a world where inflation or earnings are veering so wildly from one year to the next”, says Tom Selby of AJ Bell. According to his analysis, based on previous OBR costings and its estimates for future inflation and earnings, retaining the triple lock for 2021 and 2022 would cost over £22bn more than a straight link to average earnings and £34bn more than if it were only protected in line with inflation. That’s a big chunk of money and compares to overall UK government spending of £109bn on pensioners in 2018-2019 (expected to rise to £115bn in the current year, on OBR figures).

So what will the government do?

The government has two options, says Selby. “Carry on with the state pension triple lock and create a colossal chasm in the public finances, or revisit the policy and risk the wrath of millions of pensioners.” However, any break of the triple lock is likely to kick off a new round of debate about its long-term sustainability. Rather than remove the earnings link, most previous proposals to modify it have proposed removing the 2.5% guarantee. According to the Social Market Foundation, removing that guarantee could save the government £20bn over the next five years.

Is the pensions triple lock really unfair?

Some defenders of the triple lock (such as Stephen Bush in the New Statesman) argue that attacking it on grounds of inter-generational fairness is misconceived. That’s because today’s pensioners are only going to benefit from it for a fairly short period of time. In the long run, the triple lock represents a strengthening of the state’s role in pension provision and the people who will benefit most from decades of guaranteed increases are the young. And there’s certainly a lot of ground to make up. Currently, the UK devotes a much smaller percentage of GDP to state pensions and other benefits for pensioners (around 5%) than most other advanced economies. However, the bigger picture is that the triple lock is already becoming unaffordable, given demographic trends, and Britain already has a relatively big and sophisticated private system; it makes sense to rely more on that to help ease the burden on the state over the longer term.