Jeremy Hunt’s budget contained several measures to encourage the “economically inactive” back into work and to help parents struggling with sky-high childcare costs.
There were also several changes that spell particularly good news for higher earners.
But a lot of the measures that will have the biggest impact, starting from next month, are plans that have already been announced, such as the freezing of personal income tax thresholds until 2028.
Known as fiscal drag, this will quietly suck many more Britons into paying income tax and push others into paying a higher rate, raising billions for the government.
It is also fair to point out that about 21 million people are getting a “pay rise” of about 10% next month: pensioners, universal credit recipients and workers on the minimum or living wage.
What’s happening with pensions?
The chancellor announced a huge boost to the amounts that higher earners – from doctors to multimillionaires – can stash away for their retirement while enjoying the full tax benefits.
The government argues it was forced to act because the cap on tax-free pensions has led many professionals including NHS consultants and GPs to take early retirement, and there have been predictions that more and more older public and private sector employees would change their behaviour or retire early to avoid being clobbered by penalties.
To address this, Hunt announced big changes to the main pension allowances. The lifetime allowance limits how much you can build up in pension benefits over your lifetime while still enjoying the full tax benefits, with anything over subject to a tax charge.
It applies to all personal and workplace pensions, but excludes the state pension, and was due to be frozen at its current level of £1,073,100 until 2026.
Hunt has ripped that up and, instead of increasing it to £1.8m – as had been rumoured – he removed the lifetime allowance charge from 6 April this year, before abolishing it completely in a future finance bill.
At the moment, if you have built up more than the allowance, there is tax to pay on the excess. The penalty is 55% if you take the excess as a lump sum.
Growing numbers of older people in generous defined benefit pension schemes (including many higher earners in the public sector) were bumping up against the £1.1m allowance, or were worried they soon would.
At the moment, someone with a defined benefit pension would trigger the lifetime allowance tax penalty once their annual pension income hits about £53,000, capturing some higher-earning public sector workers in the late stage of their careers.
There is also the annual allowance, which determines the most you can save in your pension pot(s) in a single tax year before you have to pay tax. This was £40,000, but has been increased to £60,000 from 6 April this year. However, that is a still far cry from its 2010-11 level of £255,000.
Hunt also tackled another quirk in the system which could put some older people off going back to work.
At the moment, someone aged 55-plus who takes money out of their defined contribution pension pot can trigger something called the money purchase annual allowance (MPAA), which slashes how much they can subsequently pay in to just £4,000 a year.
This particularly impacts people who have taken early retirement but – perhaps because of the cost of living crisis – would now like to start doing some work again, and want to be able to take advantage of the opportunity to keep saving into a pension.
There had been calls for the MPAA to be upped to £10,000 a year – the level at which it was first set in 2015 – and this is what Hunt did.
What’s happening with childcare?
There were a number of measures designed to help with the ruinously high cost of childcare.
The chancellor offered 30 hours of free childcare for children over nine months old, though this support is being phased in. The Treasury said that “every single eligible working parent of under-fives” will get this support by September 2025 – well into the next parliament.
Parents eligible for help through universal credit will be given childcare funding upfront – at the moment they only get the money back after the childcare actually happens.
Meanwhile, the amount people can claim will increase by hundreds of pounds. Under the current universal credit system, working households can claim back up to 85% of their childcare costs up to a maximum of £646 a month for one child, or £1,108 for two or more children. These sums are now being increased to £951 and £1,630.
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What’s the latest on energy bills?
As was widely expected, Hunt bowed to pressure and decided not to reduce the financial help given to households with paying their energy bills.
The government’s energy price guarantee scheme – which for the time being has replaced the Ofgem energy price cap – currently limits average annual costs to £2,500, but this was due to rise to £3,000 a year from 1 April.
However, Hunt announced that the current rate is being extended for a further three months until the end of June, which the government said would save the average family a further £160.
Another bit of good news is that prepayment meter customers will now no longer be charged more to receive their energy than people who pay by methods such as direct debit.
Has anything changed on income tax?
No, there was nothing new on this. However, in 2021, the government froze personal tax thresholds for four years – a move branded a stealth tax by some – and in November last year Hunt went even further by prolonging this deep freeze for a further two years, meaning no change in thresholds until 2028.
There were no further changes to this in the budget but, over time, the frozen thresholds will drag more low-income households into paying basic-rate tax (which kicks in at £12,570) and those with earnings nearing £50,000 into the higher 40% rate (which kicks in at £50,270) – thereby raising billions for the Treasury.
Last November, Hunt also lowered the £150,000 threshold at which Britons start paying the 45p top rate of income tax to £125,140, and this will take effect from 6 April this year. The government has said this will pull 232,000 people into the top rate, and that for someone earning £150,000-plus, the average “cash loss” they will suffer in 2023-24 is £1,256.
Who else will benefit?
There are 5.9 million people on universal credit, and their payments will go up by 10.1% from April.
The 12.6 million people who receive the basic or new state pension are also getting 10.1%. That lifts the new full amounts to £156.20 a week (up from £141.85) and £203.85 (up from £185.15) respectively.
Meanwhile, the “national living wage” for those aged 23-plus goes up by 9.7%: from £9.50 an hour to £10.42. Younger workers will see what they get go up by either 9.7% or 10.9%, depending on their age. About 2.5 million workers receive the national living wage or the national minimum wage.
Is there any other help on the cost of living?
The government has already announced that millions of the lowest-income households across the UK will get up to £1,350 in 2023-24 to help with the cost of living.
A new £900 payment for more than 8 million eligible means-tested benefits claimants, including those on universal credit, pension credit and tax credits, will go direct to bank accounts in three instalments between this spring and spring 2024.
There is also a separate £150 for more than 6 million disabled people, which will be paid in the summer, and £300 for more than 8 million pensioners, which they will get next winter.
