Income tax predictions for spring budget – check what statement could mean for you | Personal Finance | Finance

As the Spring Budget announcement for the next fiscal year draws nearer, tax cuts “appear likely” in a last bid to win over voters for the upcoming General Election.

But with little room for giveaways, Chancellor Jeremy Hunt may be limited to “one big ticket item” in reductions.

The National Insurance rate was reduced from 12 percent to 10 percent after Mr Hunt’s Autumn Statement last November in a move that has reportedly benefitted some 27 million workers. Some analysts anticipate further possible changes to this tax in the upcoming Budget.

Others predict Mr Hunt may prioritise adjustments to income tax brackets. These brackets have been frozen until 2028, drawing widespread criticism for their imposition of a stealth tax.

A stealth tax refers to a tax increase implemented subtly or indirectly, making it less noticeable to taxpayers. This can include freezing tax thresholds or failing to adjust them for inflation, leading people to pay higher taxes over time without a clear announcement of a tax increase.

Following reports that the UK economy slipped into recession in the second half of 2023, Mr Hunt has been urged to prioritise some form of tax cut to give workers a boost, but what are the odds weighing towards?

Colin Graham, head of tax policy at PwC UK said: “Having cautioned that there may be limited room for tax cuts, the Chancellor has not closed the door entirely, adding that he would look at cuts if he believes they will grow the economy faster and for the long term.”

If any wiggle room can be found, Mr Graham said: “The urge to have something eye-catching will prove difficult to resist and is most likely to be focused on personal finances or possibly on the housing market.”

From National Insurance to income tax cuts, experts share their latest predictions for Mr Hunt’s Spring Budget on March 6.

Income Tax

Sam Dewes, tax partner at HW Fisher said: “The Chancellor does not have a huge amount of headroom for giveaways, so may be restricted to one big ticket item or a number of smaller changes.

“Either way, he will be looking for the right kind of headlines with an election campaign on the horizon. Rumours continue that we’ll see a one percent reduction in the basic rate of Income Tax.

He added: “While it would be an expensive move, it stands to benefit a large amount of the working population – and potential voters. Inheritance tax cuts have also been on the Chancellor’s radar.”

Christine Cairns, tax partner at PwC UK echoed the suggestion that a one percent cut “seems likely”, despite the estimated cost of £6billion to implement. Ms Cairns said: “The Chancellor has a difficult balancing act in looking to appeal to voters through tax cuts and increased incentives while keeping the books as balanced as possible.”

She noted that, in an election year, any broader tax rises are most likely off the table but there could still be targeted increases or tightening of reliefs to free up money for use elsewhere.

Ms Cairns continued: “The IMF has recently warned against cutting taxes so that public borrowing can be curbed, but the Chancellor will no doubt be tempted by the ‘feel good’ factor that a reduction in income tax rates would bring.

“A two percent cut has been speculated but due to the tight public purse and potential fear of undermining the Bank of England’s efforts to curb inflation, a one percent cut seems more likely, with even this estimated to cost £6billion.”

The Chancellor may instead consider increasing the basic rate band, personal allowance, or personal savings allowance.

Mr Dewes said: “More people are starting to understand fiscal drag and the impact it is having. For example, the number of taxpayers paying 40 percent income tax has increased by more than 40 percent in the past three years.

“This includes individuals working in professions where they would not expect to be subject to a higher rate of tax. Increasing the allowances would ensure that fewer people are dragged into the requirement to submit tax returns at a time when HMRC is already struggling to deal with this administrative burden.”

According to Chris Etherington, tax partner at RSM UK, if the basic rate personal allowance (£12,570) and higher rate threshold (£50,270) increased in line with inflation, they should currently exceed £15,000 and £60,000, respectively.

Mr Etherington said: “Income tax cuts appear likely and could be delivered by increasing the personal allowance and/or basic rate tax band, or by reducing the basic rate.

“A personal allowance increase would be most beneficial to those with lower incomes, reducing the amount on which tax is payable whilst providing no benefit to the highest earners who have no such entitlement.

“Comparatively, a reduced basic rate or increased basic rate band would provide greater benefit to higher earners, with increases to income tax thresholds likely mirrored in NICs thresholds, which have been aligned since April 2022.”

National Insurance

Alternatively, Sian Steele, head of tax at Evelyn Partners, a professional services and wealth management group said another National Insurance cut is “emerging as the frontrunner” for a big Budget tax announcement.

This would enable the Government to present the tax cut as focused towards incentivising work, more so than a move on income tax, which would benefit a wider range of the population – including pensioners.

One report predicted a further penny off class 1 NICs, to follow the 2p cut that was announced in the Autumn Statement and enacted in the New Year.

Ms Steele said: “It’s thought that would cost about £5billion, as opposed to a possible £7billion for a penny off the basic rate of income tax.”

High Income Child Benefit Charge

Ms Cairns noted that addressing “cliff edge” measures, such as the High Income Child Benefit charge or withdrawing the personal allowance could be eye-catching and work towards simplifying some aspects of the tax system as an “added bonus.”

Child benefit, which is currently worth £21.80 per week (over £1,100 a year) for the first child and £14.45 a week (over £751 a year) for each subsequent one, was a universal payment to families with children until January 2013.

Since then, taxpayers with adjusted income of over £50,000 a year are required to pay back some or all of their child benefit under the High Income Child Benefit charge.

The charge only applies to the higher earner in a couple, and they have to be earning £50,000 or over. So, for example, if both partners earn £49,000, they can keep all of their child benefit, whereas a couple where one person earns above £50,000 will start to lose it.

Chris Campbell CA, head of tax at ICAS weighed in: “We hope the Chancellor at least increases the High-Income Child Benefit Charge (HICBC) threshold, which has remained at £50,000 since it was introduced in January 2013, but would welcome much wider reform.”

HICBC is often seen as an unfair tax charge, as it can put added strain on single-parent households and households where one taxpayer has income above £50,000 and the other adult in the household has a low income.

Mr Campbell said: “A single parent with an income of £60,000 would have all their child benefit withdrawn through HICBC. However, a two-adult household with a higher overall household income would receive full child benefit, as long as neither taxpayer has an individual income of more than £50,000.

“An increase in the threshold would address what has been a stealth tax on middle-income earners – as wage inflation since 2013 has brought more taxpayers into HICBC – could have a significant and positive impact on struggling families’ finances.”

Mr Hunt will announce the Spring Budget at around midday on Wednesday, March 6.