Hunt's Spring Budget may have a few surprises in store

Two at the UK level (if you include the Autumn Statement), and a Scottish Budget that took place just before Christmas on December 19. As the first big government event of 2024, we now have the Spring Budget to look forward to on March 6, where the Chancellor will seek to make his mark in this most important of election years.

While Jeremy Hunt’s announcements are intended for the whole of the UK, the Scottish Budget focusses on devolved powers, including the important matter of Scottish rates of income tax and the earnings bands they apply to. Back in December, Shona Robison, Deputy First Minister and Cabinet Secretary for Finance, made the big announcement that these would be changing from April 6 this year, with implications for higher earners across the country.

Instead of five tax bands, there will now be six, with the introduction of a new ‘Advanced’ rate tax band of 45% on earnings between £75,001 and £125,140 a year. At the same time, the ‘Top’ rate increases from 47% to 48% on annual earnings above £125,140. These are big changes for Scotland’s top 5% earners, with Robison claiming it will generate an extra £1.5 billion for Scotland’s public finances in 2024.

For those directly affected, believed to be around 154,000 people, the news of an income tax increase may not seem favourable on an individual level. However, the positive implications for their pension may be more appreciated by their future self.

In the UK, pension savers, no matter where they live, get tax relief at their highest marginal rate on any pension contributions they personally pay. This means that Scottish residents earning above £75,001 will get tax relief on some or all of their pension contributions at 45%, helping them to save more into their pensions.

As we move closer to the UK Spring Budget, this acts as an important reminder that pension policy isn’t a devolved issue, with anything announced by the Chancellor affecting pension savers living in Scotland too.

If we look back at 2023, we had a raft of unexpected pension announcements to contend with. The biggest surprise; the abolishment of the lifetime allowance of £1,073,100. This is the maximum that can be saved in an individual’s pension over their lifetime without attracting a tax charge. Although it’s not actually going entirely, as it’s being replaced with something new called the Lump Sum and Death Benefit Allowance of the same amount.

The Chancellor also announced an increase in the pension annual allowance from £40,000 to £60,000 a year – the maximum that can be saved in a pension (including personal and employer pension contributions) without attracting a tax charge.

The annual allowance for those who had flexibly accessed their pension has also increased to £10,000, up from £4,000. This should also help those who are returning to work, having previously retired, to rebuild their pensions.

Another surprise move announced in November’s Autumn Statement was a 2% cut in National Insurance contributions for employees, down from 12% to 10%. As NI contributions are also not a devolved matter, Scottish residents will have automatically benefitted from this when it came into effect on January 6. And the self-employed will also be seeing reductions in their NI contributions from April. Cuts in NI contributions don’t affect pension tax relief.

With so many changes already lined up for when the new tax year begins, it can be easy to forget that the Spring UK Budget may introduce new changes. This is expected to be the current Chancellor’s last Budget before the UK’s General Election, and in an attempt to earn favour with the public, it’s entirely possible that Jeremy Hunt may decide to pull another rabbit out of the hat.

So, can we expect anything new for pensions and savings, and what could it mean for Scottish savers?

First and foremost, there is speculation that the Chancellor may announce income tax cuts as a way of appealing to voters ahead of the General Election.

As we’ve discussed, income tax rates and thresholds fall under devolved powers in Scotland. So, if Hunt does make cuts to rates or increases tax thresholds, Scottish residents will not benefit from these unless the Scottish Government chooses to follow suit. However, this is highly unlikely, having only recently announced the aforementioned April income tax changes for higher earners.

On the other hand, the annual personal allowance of £12,570 – the first band of income on which you do not need to pay tax – does fall under the remit of the UK Government. As a result, the Chancellor could seek to curry public favour by increasing the annual personal allowance from £12,570 to, say, £13,000, with any changes made in Westminster also benefitting Scottish residents. In fact, everyone would benefit from this to some extent, reducing the proportion of income we all pay tax on and possibly freeing up more money to save into a pension or other savings products.

If the UK Government goes ahead with this, more people would be taken out from paying tax altogether too – including many pensioners, as long as their total income, State Pension included, is below the new annual personal allowance.

Alternatively, the Chancellor could make further cuts to NI rates, which would apply across the whole of the UK. The recent 2% cut in NI rates, along with any further cuts, could affect the future funding of that State Pension. An ageing population, combined with the triple lock mechanism that will see an 8.5% increase to the State Pension from April, means that the cost of State Pensions is rising sharply.

However, the latest revelation that the UK fell into a recession during the last quarter of 2023, along with current economic UK forecast, means hopes of a cut in income tax or National Insurance rates may now be much less likely.

Another change tipped for March is an increase to the personal savings allowance. Currently, basic rate taxpayers can get up to £1,000 of interest from bank and building society accounts and not have to pay tax on it. For higher rate taxpayers, it’s £500. As interest rates are much higher compared to two years ago, more people are tipping over the cap and facing tax charges. The Government could try to mitigate this by increasing the thresholds, which Scottish savers would benefit from.

Of course, in a big flourish, the Chancellor may not rely solely on tweaking existing policies, instead choosing to announce something completely new.

In particular, there’s speculation that the Chancellor may launch a tax-free ‘British Stocks and Shares ISA’, investing only in UK company shares. As well as creating an alternative savings vehicle for all UK residents, the new product would align with the Government’s ongoing ‘For Growth’ agenda by directing more money into UK equities.

With such a politically charged year ahead of us, it will be interesting to see what the Chancellor has in store for pension savers in the upcoming Spring Budget. As we reflect on the recent Budgets and look ahead to future scenarios, it’s evident that significant developments have taken place and there is potentially much more yet to unfold.

Kate Smith is head of pensions at Aegon UK, the Edinburgh-based pension and investment solutions provider