Get ready for a ‘cruel summer of speculation’ ahead of the Budget

The Spending Review was chancellor Rachel Reeves’ last scheduled foray into the national limelight before the Budget in the autumn, and attention will now turn to what tax rises might be in the post.

It’s not the Spending Review itself which will fan the flames of speculation, but the expansion of the Winter Fuel Allowance, which the government reckons will cost £1.25 billion.

However, it’s not entirely clear whether this includes the cost of the uptake of Pension Credit driven by the government’s previous policy, and the OBR is yet to rule its thumb over the forecast.

The means-testing of the Winter Fuel Allowance at £35,000 creates more complication in the tax system, sitting in the same boat as the withdrawal of child benefit, childcare, and the tax-free personal allowance once you hit a certain level of annual income.

This is all because politicians are terrified of confronting the public with a rise in the rate of income tax, preferring instead to create these strange trap doors for people in arbitrary income brackets.

What could happen next?

Whether the chancellor will now have to raise more money in this year’s Budget, and how much that will be, won’t be clear until nearer the time.

There’s a lot of economic data to unfold between now and the Budget, and better than expected economic growth, or looser monetary policy, could ride to the rescue. But equally, the fiscal position could deteriorate before the Budget, leaving an even bigger black hole to be filled by tax rises or welfare cuts.

Rachel Reeves will also have to find some money to continue the freeze on fuel duty, unless she wants to be the first chancellor since 2011 to hike the tax.

What about pensions?

Amid growing fiscal pressure, there’s a real risk that pensions tax reform speculation, especially around tax-free cash and tax relief, will return to the headlines.

Rather than let uncertainty rattle savers, the chancellor should take pre-emptive action and introduce a Pensions Tax Lock, ruling out changes to tax-free cash or pension tax relief for the rest of this Parliament.

A firm commitment would offer investors the confidence to plan for the long term and give real momentum to the retail investing revolution Rachel Reeves says she wants to champion.

What about ISAs?

Reform is also on the cards for ISAs. The government signalled in the Spring Statement that it’s reviewing the current system, and Labour has pledged to simplify ISAs while encouraging wider use of Stocks and Shares ISAs.

Some have floated the idea of cutting Cash ISA allowances to push people into investing, but this risks alienating savers. It would save some money for the Treasury though, so it may find its way into the Budget.

Instead of penalising caution, ministers should focus on smart, simple reforms that empower people to invest with confidence. In particular, the ISA system is overdue a cleanup.

Since their introduction in 1999, ISAs have been a huge success, but over time successive tweaks have made them more complex and simplifying the ISA landscape would lower the psychological barrier to investing.