What should savers and investors expect from the Spring Statement?

The chancellor’s Spring Statement will be announced on 26 March, but the economic picture the Office for Budget Responsibility (OBR) paints is expected to be grim, with fears of stagnation looming and the spectre of rising defence costs as Donald Trump’s US government retreats from Europe further threatening to strain the public purse.

Against such a challenging backdrop, there is a growing expectation that tough measures are in the offing, with reports that the welfare budget could be significantly squeezed and Government departmental spending slashed – despite the chancellor’s insistence there would be no return to austerity. Loosening the fiscal rules around borrowing could provide some leeway, although the government has insisted these remain cast-iron and chancellor Rachel Reeves will doubtless be nervous about the potential kickback from bond markets given what happened to Liz Truss and Kwasi Kwarteng in 2022.

Borrowers and cash investors will be looking for any hint that expectations for interest rates might shift upwards when the statement lands. Given the government’s insistence this won’t be a formal Budget, coupled with the commitment not to raise income tax rates, national insurance or VAT, it remains unlikely any game-changing personal tax changes will be on the cards. However, there is still room for Reeves to bring forward policy announcements ahead of the formal Budget later in 2025.

Is ISA reform on the cards?

Speculation about the future of Cash ISAs simply won’t go away, in part fuelled by comments made by Reeves and her fellow Treasury minister Emma Reynolds. While there may be some economic logic to restricting Cash ISA allowances, this would be hugely unpopular and unlikely to deliver material economic benefits to the UK. It would also fly in the face of Labour’s pre-election commitment to ISA simplification, as paring back Cash ISA allowances would presumably lead to restricting transfers from Stocks and shares ISAs to Cash ISAs to prevent people gaming the system.

Any reforms are likely to be delayed beyond this Spring Statement. But any changes to ISAs should focus squarely on genuine simplification, with the central aim of encouraging more people to invest for the long term. Simplifying the range of options and introducing better help for investors through the introduction of Targeted Support is the best way to achieve this goal.

Rather than chopping and changing ISA allowances to meet short-term political ends, the government should carry out a broad review of the ISA landscape to make sure it is fit for purpose. The Lifetime ISA should be considered as part of any review, with obvious potential improvements to the product including reducing the government-imposed early withdrawal charge from 25% to 20%; increasing the maximum property purchase price to reflect house price inflation; and considering ditching the age restrictions to make the product more appealing to self-employed retirement savers.

‘Pensions Tax Lock’ an opportunity

While the Spring Statement has, so far at least, mercifully not led to the usual pre-Budget speculation about the future of pensions tax-free cash and broader retirement savings incentives, those rumours will no doubt once again surface ahead of the main Budget later this year.

Rather than waiting for that to happen, the chancellor should use her Spring Statement to commit to a Pensions Tax Lock, ruling out changes to tax-free cash or tax relief for at least the rest of this Parliament. This would provide savers and investors with the stability needed to plan for the long term and could form part of the retail investing revolution Reeves says she is intent on fostering in the UK.

A deeper personal tax thresholds freeze?

The weather might be warming up a bit but Brits will no doubt be nervous the chancellor could extend the deep freeze on tax thresholds introduced in the wake of the Covid-19 pandemic. The freeze on allowances is due to end in 2028 but in light of the fiscal straitjacket Reeves finds herself in, extending this to 2030 could raise some much-needed cash for the Exchequer. As people’s wages rise and they find themselves dragged into higher tax brackets, the incentives associated with pensions become more attractive, with 40% tax relief available for higher-rate taxpayers versus 20% for basic-rate taxpayers.

Whether or not the government does extend the period of frozen allowances, the combination of static tax thresholds and the state pension triple-lock pledge means that the full ‘new’ state pension will be subject to income tax in the next few years. The Treasury may be comfortable giving with one hand through state pension increases while taking with the other via income tax, but it also leaves the door open for the Conservatives to accuse the government of hitting pensioners with a ‘retirement tax’.

Rethink pensions and inheritance tax (IHT)?

Reeves’ proposals at the October Budget to bring unspent pensions into the IHT net from April 2027 will have a massive impact on the loved ones of pension savers, who will find themselves hit by additional complexity and facing inevitable delays on payment of benefits.

The finance industry has been calling for a pragmatic pivot to a simpler method of taxing unspent pensions on death, such as a flat rate or by using the income tax system. AJ Bell joined forces with three other major UK platforms to make this case in a letter to the chancellor in January, when the formal consultation period ended. Given there were reportedly hundreds of responses to the proposals – not only from the pensions industry and worried citizens, but also accountants and taxation technicians – the Spring Statement may come too soon for the chancellor to give detailed feedback. She could, however, use the opportunity to give an indication of whether she is willing to consider doing things differently, or if the Treasury is committed to its IHT plans.

An upgrade to workplace pensions?

The government’s workplace pensions agenda has been squarely on the so-called ‘Mansion House’ reforms aimed at consolidation and driving greater levels of investment in the UK economy. However, the second stage of its Pensions Review, focused on adequacy, has yet to materialise and Reeves could provide an update on the government’s thinking in the Spring Statement.

There are significant challenges to overcome here, principally how and when to scale up minimum automatic enrolment contributions from 8% of ‘qualifying earnings.’ Having already significantly hiked costs on employers in her October Budget and with the government focused on delivering improved economic growth numbers, there is every chance this particular reform will find its way into the political long grass.

Stamp duty revisited?

Levying 0.5% stamp duty on UK shares is completely at odds with the government’s stated aim of encouraging greater levels of retail investing in the UK. If Reeves wants to put the country’s money where her mouth is when it comes to backing Britain, she could do away with this obvious disincentive for investors to buy UK companies. Doing this would see the Treasury forgo several billions pounds a year in tax revenue, however, and the optics of slashing welfare payments while also cutting taxes for investors may be too difficult for a Labour government to navigate.