AJ Bell press comment – 21 December 2022
Looking ahead to 2023, AJ Bell experts Tom Selby, Laura Suter and Rachel Vahey preview some of the key personal finance changes to look out for next year:
- Rail Fares increase
- Chancellor Jeremy Hunt to deliver spring Budget
- Additional Rate of Income Tax lowered to £125,140 & other thresholds frozen
- Minimum wage increases to £10.42
- Dividends and CGT allowances are cut
- Average energy bills rise to £3,000
- New Cost of Living support payments are introduced
- Council tax increases of 5%
- Government review of workforce participation
- State pension increases see full flat-rate state pension pass £10,000
- Government state pension age review
- City regulator reviews Advice and guidance
Rail fares increase (March) – Laura Suter, head of personal finance:
“Usually rail fares rise on the first day of the new year, bringing misery to commuters in a cash-strapped month. However, this year the Government has delayed the fare increases from January until March, to give commuters a bit more breathing space before ticket prices are hiked.
“Planning ahead is difficult, however, as the Government still hasn’t confirmed what the increase will be. Annual increases are normally based on July’s RPI inflation figure, which was 12.3%. But all the Government will reveal is that it will be lower than this.
“The Government faces the difficult balancing act of hiking prices sufficiently, without putting off commuters by increasing fares too much. It is worth remembering Government regulation only covers around half of all tickets, including season tickets, so rail passengers using other tickets could still see whopping, inflationary-level increases.”
Spring Budget (likely in March) – Tom Selby, head of retirement policy:
“While it only feels like five minutes ago that the chancellor delivered a series of painful revenue raising measures at his Autumn Statement, we will likely have another major fiscal event, namely the Budget, in March 2023.
“As sure as night follows day, it is inevitable the weeks preceding that Budget will be filled with rumour and speculation about potential tax policy, including pensions taxation. It is important savers and retirees resist acting on this speculation and instead focus squarely on their long-term goals.
“Indeed, the respected Institute of Fiscal Studies has already produced a paper calling for radical reform of the tax treatment of pensions on death, suggesting both inheritance tax (IHT) and income tax could be applied to bequeathed retirement pots.
“The tax treatment of pensions on death is undoubtedly generous and, given how tight finances are at the Treasury, it would be no surprise if this came under the microscope ahead of next year’s Budget.
“If there were to be reform in this area, one of the big questions would be whether those who have contributed to a pension or made spending decisions in retirement based on the current system would be protected. Without protection, the immediate moving of the tax goalposts would risk turning a sensible financial decision into one that costs people tens of thousands of pounds in tax.
“However, creating a new protection regime – as we have seen when the lifetime allowance has been cut previously – would layer additional complexity onto an already complex system and limit the amount of cash such a move would raise.”
Additional rate income tax threshold lowered (April) – Laura Suter, head of personal finance:
“From April those earning more than £125,140 will face a higher tax bill thanks to chancellor Jeremy Hunt. The rate at which the 45% rate of income tax kicks in will be lowered from the current £150,000 down to £125,140. The move means that someone earning £150,000 a year will pay almost £1,250 a year extra in tax – putting an extra 2% on their total tax bill.
“On top of this all taxpayers are seeing a deep freeze on their income tax bands, meaning that more will be pushed into the next tax bracket. The amount you can earn within each income tax band would normally increase with inflation at the start of each tax year, but the Government has frozen them until 2028. It means that anyone who gets a payrise could be hit with a higher tax rate, as well as potentially losing certain allowances, such as child benefit or their personal allowance. Putting money into pensions, or using other salary sacrifice plans, is one way to help keep tax bills down and retain allowances, but for some that’s not financially viable.”
Minimum wage rises (April) – Laura Suter, head of personal finance:
“April will bring good news for those on the lowest pay, as the minimum wage will increase by 9.7% giving a payrise of £1,677 for someone who is full time on the minimum wage*. The rates of minimum wage vary depending on your age and whether you’re an apprentice, but for those over the age of 23 it will increase from £9.50 an hour now to £10.42 an hour from April. For 18-20 year-olds the rate will rise from £6.83 to £7.49.”
*Adult age over 23 working a 35 hour week
Dividend and Capital Gains Tax allowances cut (April) – Laura Suter, head of personal finance:
“Investors and company directors will be hit with higher tax rates from April, as the Government slashes the tax-free dividend and capital gains tax allowance. It means the amount of dividend income you can receive before paying tax will be cut from £2,000 to £1,000, while the tax-free amount for capital gains will be chopped from £12,300 to £6,000.
“The move means that a higher-rate taxpayer taking home more than £2,000 in dividends each year will pay £338 a year more in tax. It will also drag more people into the taxman’s reach, with many of those receiving between £1,000 and £2,000 a year in dividends paying the tax for the first time.
“A higher-rate taxpayer banking a capital gain at the current limit of £12,300 will pay £1,260 a year more in tax thanks to the cut in the CGT allowance. This rises to £1,764 for someone locking in gains on a second home, thanks to the higher rate of capital gains tax on property. The move means that investors will pay an extra £25 million in tax from April.
“Anyone with capital gains allowance remaining this year should consider banking gains up to their allowance and potentially using a Bed and ISA service to move that investment into their ISA. Alternatively, they could transfer the assets to their spouse to use their allowance.”
Average fuel bill rises to £3,000 (April) – Laura Suter, head of personal finance:
“Everyone faces higher energy bills from April, as the Government cuts the help on offer to households. The Energy Price Guarantee currently caps the rate we pay per unit of energy at a level which means the average household’s bill is £2,500. From April those rates per unit of energy will rise, taking the average bill to £3,000 – although in reality lots of people will pay far more if their energy use is above average.
“On top of this, the Government hasn’t said it will be providing the universal £400 off energy bills that it has handed out to every household this winter. It is also not repeating the £150 council tax rebate that was given at the start of 2022 to those in properties Bands A to D. It means that the average household will face an extra £1,050 a year in energy costs from April – on top of the existing leap in prices*. Most households have already exhausted their energy-saving measures, so there’s little ability to reduce the bills further by cutting usage.”
*Assuming they aren’t eligible for the Cost-of-Living payments, see below.
Most council tax to rise by 5% (April) – Laura Suter, head of personal finance:
“Councils have a new freedom to hike council tax by bigger amounts – and it looks like most will be using it. In the Autumn Statement chancellor Jeremy Hunt said that councils could increase rates by up to 5% without seeking a referendum – an increase on the current 2% limit. Most local authorities are already struggling with funding and so are expected to hike rates up to the 5% limit. Some have already revealed they will be making the 5% increase, while others are waiting for confirmation of the central Government funding they’ll receive before making a decision.
“If rates increase by 5% it means the average Band D property in the UK will pay £2,064 a year for council tax – an increase of almost £100 on 2022’s bills.”
State pension & benefits increase (April) – Tom Selby, head of retirement policy:
“With inflation ripping through household budgets, pensioners and those in receipt of working-age benefits will at least enjoy a bumper boost to their incomes next year.
“For 2023 pensions and benefits will be uprated by 10.1%, in line the September 2022 CPI figure.
“As a result, the full flat-rate state pension will rise to over £10,000 a year for the first time, while the basic state pension, paid to those who reached state pension age before 6 April 2016, will increase to over £8,000 a year.
“Although it looks like this Government will stick with the ‘triple-lock’ state pension promise for the rest of this Parliament, it remains unclear how the main political parties will address the question of state pension increases over the longer-term ahead of the next election.
“Ditching the triple-lock would undoubtedly be controversial, but it also has to happen at some point – otherwise the state pension will increase in real terms indefinitely.”
What will the state pension be worth in 2023/24?
The full flat-rate state pension, paid to those reaching state pension age from 6 April 2016, will increase from £185.15 per week to £203.85 per week (£10,600.20 per year) from April next year.
The basic state pension, paid to those who reached state pension age before 6 April 2016, will increase from £141.85 per week to £156.20 per week (£8,122.40 per year).
New cost-of-living payments (likely Summer 2023) – Laura Suter, head of personal finance
“Anyone eligible for the cost-of-living payments this year will also get a payout next year, with some getting a bigger handout. Those on Universal Credit and certain other benefits will receive £900 to help with the cost of living, an increase on 2022’s £650 payment.
“Pensioners and those on disability benefits will get the same as this year, getting £300 and £150 respectively. Some people will be eligible for all three payments, meaning the maximum you can claim is £1,350.
“The Government hasn’t confirmed when it will make the payments or how people can expect to receive them. But it’s likely they will follow 2022’s playbook, with the first payments coming in the summer followed by more in the autumn and winter. To be eligible you have to be claiming certain benefits, so make sure you’re getting all the Government support you’re entitled to so you’re in line for these additional payments.”
Review of older people in work (‘early’ 2023) – Tom Selby, head of retirement policy:
“The labour market has been one of the major challenges facing the Government in 2022. Chancellor Jeremy Hunt noted in his Autumn Statement speech that employment levels failing to return to pre-pandemic levels was ‘bad for businesses who cannot fill vacancies and bad for people missing out on the opportunity to do well for themselves and their families’.
“In response, the Department for Work and Pensions is reviewing issues holding back workforce participation, with conclusions expected early in 2023. A major focus of this review will inevitably be older workers.
“Over the last three years there has been a huge decline in older workers in the labour market following COVID lockdowns, with many choosing to take earlier retirement. Although in recent months there has been a slight decrease in ‘economically inactive’ people age 50-64 (see chart), and the number of people saying they aren’t working because they are retired has dropped as surging inflation forces more older back into part-time or full-time work.
“There are still impediments to returning to work for older people. For example, pension tax rules mean those who have accessed taxable income flexibly from their retirement pot see their annual allowance slashed from £40,000 to £4,000. Increasing this ‘money purchase annual allowance’ would improve incentives for older workers who have accessed their pension to return to the workplace and continue building their pension pot.”
Source: Employment in the UK - Office for National Statistics (ons.gov.uk)
State pension age review (early 2023) – Tom Selby, head of retirement policy:
“Jeremy Hunt’s Autumn Statement brought generally good news on the state pension. However, the state pension age review flagged by the chancellor at the despatch box could yet prove to be a painful sting in the tail.
“The review, due to be published early next year, will determine when future retirees can expect to receive their state pension. Recent data* suggests life expectancy improvements have stalled (see charts), which some will argue means state pension age increases should be scaled back – or even cancelled altogether.
“But those downward shifts in life expectancy projections, in part a result of the pandemic, come after decades of rapidly rising longevity. During that period, the state pension age of women has risen by six years – mostly to make it equal with the men’s state pension age – while for men it has risen by just one year.
“In reality, younger savers need to prepare for a world where the state provides less of their retirement income than it has done historically. Indeed, it would not be surprising if those in their 20s and 30s today have to wait until their 70th birthday or beyond to receive the state pension.”
*National life tables – life expectancy in the UK - Office for National Statistics (ons.gov.uk)
Could state pension age reach 70?
“Prime Minister Rishi Sunak and his chancellor risk being caught between the devil and the deep blue sea when it comes to state pension age increases. A dramatic acceleration of existing plans would risk electoral oblivion, while pushing back planned rises could cost the Exchequer tens of billions of pounds.
“Maintaining the current proportion of the population living up to and beyond state pension age would require an increase in the state pension age to 68 by 2034, 69 by 2038 and 70 by 2042, according to the International Longevity Centre, a highly respected think-tank.
“On-the-other-hand, ensuring one third of adult life is spent in receipt of the state pension would push back the planned increase to age 67 to 2040 – but cost the Treasury billions of pounds.
“Given these challenges, the easiest move both politically and fiscally may be to stick to the existing timetable.”
Source: AJ Bell analysis of ONS data – Expectation of life, principal projection, UK - Office for National Statistics (ons.gov.uk)
“People today can choose to buy an investment product with or without advice. Getting advice means you receive a personal recommendation on the best course of action, based on a review of your individual circumstances. Normally this is done via a face-to-face meeting with a financial adviser, and it ensures you have a financial plan which is very deliberately designed around your needs and objectives. However, it comes with additional costs to cover the time and expertise of the financial adviser.
“The second option is to go down the DIY route, where you choose the investment products – the funds and shares to invest in – as well as how much you pay in. Although financial services providers can help you understand the rules and the choices you face, these important decisions ultimately rest with you.
“But these there is no middle ground. Advice is too expensive for many people, while providers offering a DIY service are nervous about over-stepping the regulatory boundary and being seen as telling the customer what to do. The FCA – the City regulator – wants to rectify this by introducing new rules allowing financial services firms to give simplified, lower cost advice to people opening a stocks and shares ISA. Likewise, it plans to review the gap between advised and DIY investing next year to see whether more can be done to create support for consumers caught in the middle.
“Over the long-term this could be a big boost for people who want help investing but aren’t quite sure where to turn today. However, the devil is in the detail and providers will have to wait for clarification next year from regulators before they can even begin to build services in this area.”