A Statement to distract from moving parts under the surface?

For many generations, the UK government has spent more than it has collected in taxes; the financial gap being met by government borrowing. In itself, borrowing is not a bad thing, but unsustainable borrowing can be extremely bad, and the backdrop to this Spring Statement is that the cost of servicing the UK national debt has risen to over £105bn each year, from around £30bn prior to Covid-19. This issue is not unique to the UK; governments around the globe face similar issues, but are addressing them in different ways.

It will not be an easy task for UK plc, as latest figures from the OECD, the Bank of England, and the Office for Budget Responsibility (OBR) show that inflation remains stubbornly above the 2% target, and that UK GDP is already lagging behind the forecasts that Chancellor of the Exchequer Rachel Reeves presented in the Autumn; now forecast to be only 1% for 2025 compared to the 2% figure given six months ago. Interest rates remain higher now than was forecast last year too, and the latest OBR figures suggested that the Chancellor was on course to breach her own financial headroom test before the end of the parliament. So, what is there to do?

Having reasserted at the start of her speech that there would be no announcements on new taxes (albeit a fleeting reference to more powers for HMRC to tackle tax evasion), Reeves’s statement focused on public spending changes, and followed on from the Secretary for Work and Pensions’ announcement last week around welfare spending.

Overall, the latest announcements confirmed estimates to save the government around £4.8bn from the welfare budget alone. However, there are numerous moving parts under the surface, leading to several caveats to success of her measures. These measures are already proving unpopular in some camps and regions, both inside and outside of the government. So will we see a watering down of the measures?

As always, there were some re-announcements: the abolition of NHS England, spending on overseas aid being redirected to the defence budget, and around £2bn of annual reductions to the costs of the Civil Service payroll. The latter of these is to be assisted by a new £3.25bn transformation fund for the public sector, providing funds for additional AI technology and voluntary redundancy packages, whilst seeking more efficiency and productivity from government departments; early steps on this front have been challenging, so we wouldn’t be surprised to see further updates through the year as we move towards the next “major fiscal statement” in the Autumn.

From a financial planning perspective, the lack of new tax raising announcements is to be welcomed, as many firms and individuals are still reassessing the October Budget’s impact. That said, the size of the downgrades to growth forecasts and the amount of fiscal headroom since October alone must raise concerns that more taxation will be needed next time around, unless the measures to reduce government spending make large strides in the interim.

Here are some sensible measures to consider as we swiftly move into the new tax year:

• Fill up your ISAs and pensions early in the year (funds permitting), ahead of possible restrictions to annual or lifetime allowances in the autumn.
• Focus on the tax efficiency of your portfolios. 7IM’s Tax Optimisation Strategy is a core part of our Wealth Management Service. It’s not necessarily about minimising tax (although this may be a priority for some), but instead about giving investors more freedom to decide how and when to pay taxes, such as capital gains or income taxes, on portfolios. Is your overall wealth structure right for you?
• With interest rates and gilt yields remaining at above-target levels, should you consider annuities for longer-term income needs? Allied to forthcoming changes in pension taxation on death, this option may be attractive for some to consider (although will not be right for all and must be considered alongside advice on the wider picture).
• More generally, for those in retirement or withdrawing from their retirement pot, reassess your drawdown sources, and how to allocate funds that are not going to be needed for several years, or perhaps ever. Ask your Private Client Director about your own Retirement Income Strategy.

Overall, and as largely predicted, there were no major changes of direction announced in the Spring Forecast, but laid bare was the minimal ‘wriggle room’ in the UK finances, leading to voices of concern that tax must go higher still in years to come.

As always, please reach out to your Private Client Director or email information@7im.co.uk to discuss how the current state of play affects you.