What can we expect from Budget 2024?

Scheduled for Wednesday 6 March, the Spring Budget 2024 is Jeremy Hunt’s last opportunity to make significant tax changes before the general election. Speculation is now growing about the direction he will take.

Without doubt, the biggest headline would be to announce a cut in tax for working people, either via a reduction in the main rates of income tax or national insurance, or by unfreezing the level at which people start paying tax.

A reduction in the main rate of income tax would certainly be an attractive measure. As well as starting to cut taxes from their current historic high, this would have the real political benefit of being easy to understand, and therefore easy to communicate to an electorate eager for anything that will help with cost-of-living concerns.

However, perhaps a more meaningful but less intuitive measure to explain would be to deal with ‘fiscal drag’.

This is the phenomenon where tax allowances do not keep pace with inflation, thereby ‘dragging’ more lower-paid people into paying tax.

This has meant that millions of working people are now paying income tax at both 20 per cent and the higher rate of 40 per cent. Estimates vary, but the consensus is that the additional tax take from freezing allowances dwarfs any giveaway that would be achieved via a small reduction in headline tax rates.

What I would like to see in the Budget, therefore, is personal allowances and tax bands being realigned to inflation.

To illustrate how significant this measure might be, had the main personal income tax allowance kept up with inflation since it was frozen in 2019 at £12,570, it would now stand at around £16,000. That’s more than £3,000 for every single person earning £16,000 or more who is now subject to tax at 20 per cent.

So, it’s easy to see how the current policy of freezing allowances has contributed to the UK suffering the highest rate of tax in 70 years – surely not a sustainable place to be, even given the economic headwinds we face.

But the chancellor faces numerous challenges. The tough economic climate, evidenced by the fact the UK fell into a technical recession in the final quarter of 2023, gives him little room for manoeuvre.

He has already warned against expecting too much of a tax giveaway in the forthcoming Budget.

However, with Labour so far ahead in the polls, and with the Conservatives reeling from heavy defeats in two recent by-elections, it may be too tempting for Mr Hunt not to have one final roll of the dice and announce a headline-grabbing tax cut.

Continuing with possible tax cuts, one other area that has been gaining more attention recently is inheritance tax.

It’s roundly despised, even though it only impacts around four per cent of estates. However, given that it raises only around £6bn of tax per year, speculation has been growing that changes could be announced.

This could include an increase in the annual nil rate band from the current level of £325,000, where it’s been stuck since 2008 – another example of fiscal drag.

Or it could even involve its abolition entirely.

A bold move, but perhaps the tax-cutting headline Mr Hunt needs?

When it comes to north west businesses, one theme we hear consistently is the desire for fiscal stability.

Recent reductions in national insurance rates, together with regular increases to employer-funded national minimum wage levels, all require additional focus for cost-modelling purposes.

Likewise, businesses need to pick through the raft of detailed guidance notes to fully understand the impact of budget measures on them.

Of course, it’s difficult to expect too much certainty around tax, particularly now given the ever-changing UK economic landscape, the demands on the public purse and the proximity of the March Budget to a general election.

However, anything that Mr Hunt can do to stabilise the economy and simplify the business tax environment will be welcomed.

If you need assistance following the unveiling of the Spring Budget 2024, reach out to us at imagine@hurst.co.uk.