Autumn statement November 2023

Chancellor Jeremy Hunt has delivered his autumn statement, in which he announced measures that aim to help grow the economy and reduce some tax rates for businesses and households.

Whereas Hunt’s previous autumn statement a year ago was very much about reassuring the markets and demonstrating fiscal responsibility, the focus this time around was on promoting growth while reducing taxes in a “responsible” way. Compared with a year ago – when his predecessor’s mini-budget had triggered turmoil in financial markets and a spike in borrowing costs – the economic backdrop has become more stable. Inflation has more than halved¹ yet remains well above the Bank of England’s target and is expected to remain higher for longer than previously anticipated.

The key announcements² included reductions to National Insurance and a permanent extension of the ‘full expensing’ regime for businesses. Other measures included raising the National Living Wage from £10.42 to £11.44 per hour, freezing alcohol duty, increasing the state pension to £221.20 a week in 2024/25, and reforms to ISAs.

There were also pledges to speed up planning applications, extend financial incentives for investment zones, and invest an additional £500m in artificial intelligence. To encourage investment in UK high-growth companies, new investment vehicles will be introduced, including a ‘growth fund’ within the British Business Bank.

Here, we highlight the key announcements, before giving the views of Guy Foster, our Chief Strategist, on the implications for the UK economy and investors.

National Insurance reduced

Hunt announced that the employee National Insurance (NI) rate will fall by two percentage points from 6 January 2024. This follows a topsy-turvy couple of years for NI. In April 2022, prime minister Rishi Sunak (then chancellor) raised NI by 1.25 percentage points, but this decision was reversed by Kwasi Kwarteng in the mini-budget of September 2022. Currently, employees pay NI at 12% on earnings over £12,570 and at 2% on earnings over £50,270. Today’s announcement will see the headline rate lowered to 10%, resulting in employees saving up to £754 in NI contributions each year.

For self-employed people, flat-rate Class 2 NI contributions will be abolished, while the Class 4 NI rate will fall from 9% to 8% from April 2024. Hunt said these changes would save the average self-employed person £350 per year.

ISAs simplified

From April 2024, individuals will be allowed to open and pay into multiple ISAs of the same type in a single tax year. Someone could, for example, open two investment (stocks and shares) ISAs or two cash ISAs. This could enable them to try out different providers or open a new cash ISA as soon as a new deal becomes available. It will also be possible to make partial transfers between ISA providers, even if the money was paid into an ISA in the current tax year.

The ISA allowance will remain at £20,000 for 2024/25 and the Junior ISA allowance will remain at £9,000.

Workplace pension ‘pot for life’

The government will consult on allowing employees to nominate the pension scheme that their employer pays into – similar to the approach taken by countries such as Australia. Hunt said this would enable employees to have one “pension pot for life”. Currently, employers automatically enrol new staff into a pension scheme chosen by the company, which can result in people accumulating multiple different pension pots throughout their career. Having one pot may make it easier to keep track of pension savings.

Business tax rates cut

In a welcome move for businesses, Hunt announced that the three-year tax break known as ‘full expensing’, which was due to expire in March 2026, will be made permanent. Full expensing allows companies to deduct the full cost of qualifying plant or machinery from their taxable profits in the year of purchase. It is equivalent to a tax saving of up to 25p for every £1 spent.

Meanwhile, the small business multiplier will be frozen for another year, as will business rates relief for retail, hospitality and leisure businesses.

Income tax thresholds still frozen

As expected, Hunt did not make any changes to income tax thresholds. The personal allowance (the amount you can earn each year before you start paying income tax) and the higher-rate income tax threshold for those in England, Wales and Northern Ireland will therefore remain at £12,570 and £50,270, respectively. The additional-rate income tax threshold will remain at £125,140 after it was cut from £150,000 in April 2023.

The personal allowance and higher-rate income tax threshold haven’t been increased since April 2021³ and are due to remain frozen until 2028. This could see more people drifting into higher tax bands because of inflation and paying a much bigger tax bill as a result. Our analysis shows that an individual who earned £50,000 in 2021, and whose income rises in line with actual and forecast consumer price index (CPI) inflation⁴, could see their income tax bill rise from £7,486 to £15,094 by 2028.

One way to potentially reduce your income tax bill is to save into a pension. If your salary and/or bonus means you cross into a higher tax band, making a personal pension contribution could mean your adjusted net income falls below the threshold, potentially avoiding higher or additional-rate tax.

Inheritance tax unchanged

There was speculation that Hunt might reduce the rate of inheritance tax (IHT), increase the IHT nil-rate band, or even scrap IHT altogether. In the end, however, these rumours did not come to fruition. The rate of IHT will remain at 40%, while the IHT nil-rate band and residence nil-rate band will remain at £325,000 and £175,000, respectively. This is in line with Hunt’s previous decision to freeze IHT allowances until 2028.

The ongoing freeze means individuals can continue to pass on up to £325,000 free from IHT when they die, plus up to £175,000 if they pass on their main residence to their direct descendants (and therefore qualify for the residence nil-rate band).

The IHT nil-rate band has been set at £325,000 since 2009, which means families will have missed out on almost 20 years of inflation-linked increases by 2028. The residence nil-rate band was last increased in April 2020. Frozen allowances and rising house prices have resulted in IHT receipts more than doubling over the past decade, from just over £3bn in 2012/13 to £7.1bn in 2022/23⁵. This underscores the importance of planning ahead and getting financial advice.

Economic growth forecasts cut

The autumn statement was accompanied by the Office for Budget Responsibility’s (OBR) economic and fiscal outlook⁶, which gave a mixed review of the UK economy.

Borrowing was £19.8bn lower than expected in the first half of the current financial year, and gross domestic product (GDP) is now forecast to expand by 0.6% this year, rather than contracting by 0.2%. The next two years are expected to be more muted, with GDP growing by 0.7% in 2024 and 1.4% in 2025, down from previous estimates of 1.8% and 2.5%, respectively. Inflation isn’t expected to return to the Bank of England’s 2% target until the second quarter of 2025 – more than a year later than previously forecast. House prices could fall by 4.7% next year as interest rates remain higher for longer.

High inflation means real household disposable income per person is forecast to be 3.5% lower in 2024/25 than their pre-pandemic level. This is half the peak-to-trough fall expected in March, but still represents the largest reduction in real living standards since comparable records began in the 1950s.

Guy Foster, our Chief Strategist, shares his views on how the announcements could affect the economy and investors.

From beers to benefits, borrowing and Barbie, the chancellor’s autumn statement covered a lot – 110 measures in fact. With an election on the horizon, Hunt faced the difficult task of trying to balance the government’s objectives of stimulating the economy and cutting taxes, while keeping inflation under control.

There are two reasons to think that the cuts to National Insurance will provide a relatively small boost to consumer spending. The first is that they come against a background of ‘fiscal drag’ – the freezing of tax thresholds at a time when prices and wages are rising. The second is that people are feeling the impact of high interest rates.

Stimulating the economy over the long term requires a boost to its supply capacity and there were plenty of policies aiming to do this. The most notable was the full expensing of capital expenditure. This incentive will increase investment, although having been in place on a temporary basis and in differing forms since the pandemic, some businesses will have brought forward investment to take advantage of the tax break. There will be further increases to investment from this permanent measure, but they will accrue over many years and the benefits derived from increased investment take even longer to crystalise. 

Despite falling inflation, borrowing and debt, the public finances remain in poor shape. Markets were a little disappointed that borrowing hadn’t fallen more, but compared with the high volatility caused by former prime minister Liz Truss’ policies, this is perhaps a cause for celebration this time around.

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¹ Office for National Statistics: consumer price inflation, October 2023
² Autumn statement 2023
³ HMRC: rates of income tax
⁴ Based on Office for National Statistics data up until 13/10/23 and thereafter inferred by inflation swaps (LSEG Datastream)
⁵ HMRC: IHT receipts
⁶ OBR: economic and fiscal outlook, November 2023

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