The Chancellor’s fiscal update this month could include several policy announcements that would affect household finances, according to experts
Rachel Reeves’s Spring Statement will take place on Wednesday 26 March, giving MPs an update on the financial health of the country for the year ahead.
Before last year’s Budget, Labour committed to delivering one “major fiscal event” a year, meaning a large number of policy announcements – tax and spending changes – were not expected at March’s event.
But the shifting economic landscape means that experts now believe that the Chancellor could be forced into making some changes in order to meet the Government’s self-imposed “fiscal rules”.
Below, we run through some of the changes Reeves could make in three weeks’ time.
‘Stealth tax’ extension
The previous government froze the threshold at which people start paying tax – known as the personal allowance – at £12,570.
It also froze the higher and additional rate tax thresholds while the additional rate threshold was cut in 2023 from £150,000 to £125,140.
The thresholds were frozen until 2028, which means that over time, as earnings rise, more people end up paying tax, or paying more tax than they otherwise would have.
In October, Reeves ruled out extending the threshold freeze beyond 2028, but financial experts think she may have to revisit this.
Jason Hollands, managing editor at Bestinvest by Evenlyn Partners, said: “If we see any moves on tax, watch out for a further extension to the freeze on personal allowances and thresholds beyond 2028.
“The multi-year freeze on allowances, such as the annual tax-free personal allowance and the threshold at which higher rate tax is paid, is a form of stealth tax that operates by fiscal drag – the process by which millions more people are pulled into the higher rates of tax as wages rise over time.”
The Institute for Fiscal Studies (IFS) said in a report this week: “A further threshold freeze would be a stealthy and arbitrary means of raising revenue, but it is – not unrelatedly – a tax rise that recent governments have proved willing and able to implement, and so may be judged as credible.
“Other tax rises are of course possible.”
If frozen thresholds remain, there are concerns that in the next couple of years state pensioners will have to start paying income tax even if they have no other forms of income.
ISA changes announced
There have been rumours for months that the Government is considering making changes to ISAs in the Spring Statement.
Savers get a £20,000 ISA allowance each year, which they can put into stocks and shares or cash savings. The interest or gains they make are then free from tax.
There have been suggestions that the cash-form of the account could be scaled back with previous rumours it could even be scrapped altogether – although this is now viewed as very unlikely.
The aim behind this would be to encourage more people to invest in stocks and shares, which could boost growth in the UK.
Nimesh Shah, CEO at accountancy firm Blick Rothenberg, said: “There are strong rumours that Rachel Reeves will reduce the cash ISA limit to £4,000.”
Experts however have said that a change to the ISA limit is unlikely to come in immediately for the 2025-26 tax year.
Tom Selby, director of public policy at AJ Bell, said: “They could still lay the groundwork for ISA reform – for example by announcing a review focused on simplification and, inevitably, raising the question of whether the cash ISA allowance should be cut from £20,000.”
Banks and building societies have criticised the proposals, arguing many savers will not feel confident enough to invest and, as a result, there could be some damage to bank balances.
Cash accounts are also seen as much less risky than stocks and shares and are considered more suitable for older people or those who are likely to require rapid access to their money.
There has also been a suggestion that Reeves could scrap the application for new lifetime ISAs. There are already arguments for this as people can only buy a property worth up to £450,000 with the ISA, a limit that has remained the same since 2017.
Many argue it is impossible to buy a home for this price, especially in cities.
Pension tax changes
The lead-up to last autumn’s Budget was filled with speculation that there could be changes to the ways tax relief on pensions worked.
At the moment, people receive tax relief when they pay into a pension at their marginal rate, but there were suggestions this could be changed to a flat rate, which might hit higher-rate taxpayers.
In the end, the only major change to pension taxes at the Budget was the announcement that pensions would become subject to inheritance tax, when currently they are not.
Selby said that reform in the area in the spring “was not beyond the realms of possibility” but that he thought major changes, such as introducing a flat rate of tax relief or cutting back tax-free cash allowances was unlikely.
He said: “Neither would raise significant sums immediately and would cause huge rows with the public sector.”
He said there could be an update on the plans to bring pensions into the scope of inheritance tax.
“There has been pretty much universal condemnation of the proposed approach, and industry has presented alternative reforms to the government, including applying a flat tax on death and using the income tax system,” he explained.
Robert Salter, director at Blick Rothenberg, also said the Government could consider reducing the 25 per cent tax-free pension lump sum.
Currently, on retirement, you can usually take up to 25 per cent of the amount built up in any pension as a tax-free lump sum.
However, any change could prove highly controversial, as the allowance is well understood, and as it is recognised that people need to be saving more for retirement, and such a move could damage trust in the system.
Pensions review update
One of Labour’s election manifesto pledges was a detailed pensions review, with an interim report on the first part of this – looking at investment – published last year.
The second part of the report was supposed to look at adequacy, so this was expected to address things like auto-enrolment into pensions and possible changes to this.
At the moment, people pay a minimum of 5 per cent of qualifying earnings into a pension under auto-enrolment, with their employer contributing an extra 3 per cent, but a review would likely look at whether this should be increased.
Selby said: “Things have also gone very quiet on the second part of the pensions review, which was supposed to focus on adequacy.
“It is possible the chancellor will kick-start that process, although hiking contributions – and therefore costs on employers – doesn’t feel like an immediate priority given the pressure on government to deliver economic growth.”
Spending cuts
Cuts to public spending are another way that the Government could meet its fiscal rules – a set of boundaries on debt and borrowing that signal to markets that politicians are being responsible with the public finances.
“If Reeves prioritises the fiscal rules and breaks her commitment to a single annual fiscal event then she faces a stark choice between her promise not to come back with a further round of tax rises and her promise of no return to austerity,” said Bee Boileau, research economist at the IFS.
According to the IFS, the Government could seek savings from non-public service budgets, such as welfare budgets.
Labour politicians have consistently said that current welfare spending is unsustainable.
In January, Work and Pensions Secretary Liz Kendall said the UK welfare budget must be put on a “more sustainable course”.
She said: “We’re going to get the benefits bill on a more sustainable course – and it has to be, we cannot accept these costs of failure, failure for individuals, failure for businesses and failure for the economy.
Widening the scope of VAT
One thing Reeves could do, according to Salter, is potentially add VAT on private school fees for nurseries or university education – or it could be imposed on private healthcare.
He says this is because universities and nurseries are typically privately run charities or for-profit institutions – so broadly akin to private schools.
