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Budget 2023: Jeremy Hunt scraps life-time pension allowance as he says UK will avoid recession

Chancellor of the Exchequer Jeremy Hunt delivering his Budget to the House of Commons in London. Picture date: Wednesday March 15, 2023.
Chancellor Jeremy Hunt delivered his 'budget for growth' as he abolished pensions lifetime allowance. Photo: PA/Alamy

Chancellor Jeremy Hunt has said the UK economy is "proving the doubters wrong" as he delivers his Spring budget.

From help with energy bills, childcare and fuel prices to decisions on corporate tax and pensions, Hunt has set out his tax and spending plans for the years ahead.

The Office for Budget Responsibility (OBR) has released its forecast for the economy, Hunt said. Due to "changing international factors and measures I take", he said, the UK "will not now enter technical recession this year".

The rate of price rises, or inflation, is forecast to fall from 10.7% in 2022 to 2.9% by the end of 2023, according to the OBR.

Energy price guarantee to remain at £2,500 for next three months

The government announced that its energy bill support scheme will be extended for another three months.

"I can confirm we will bring their charges in line with comparable direct debit charges under a Conservative government," Hunt said.

Typical household energy bills were scheduled to rise to £3,000 a year from April, but calls were made for the government to retain its current level of support with a cap of £2,500.

Fuel poverty campaigners said the number of households struggling to afford bills could rise from 6.7 million to 8.4 million as a result of the April rise.

The government has now decided to hold the scheme at the same level for another three months, saving a typical household £160. This will cost the UK between £3bn and £4bn.

Read more: Childcare, pensions, tax, benefits — the key takeaways from Jeremy Hunt's statement

And, for the first time, households that use energy pre-payment meters will no longer pay more for their energy than those on direct debits.

According to the Treasury, those on prepayment meters pay more on average compared to direct debit customers due energy companies passing the extra costs of managing prepayment meters on to users.

This will come to an end from July, through updates to the Energy Price Guarantee scheme, “saving four million families £45 a year from July,” according to the Treasury.

However, a separate voucher scheme, which sends £66 per month to every household, is still due to come to an end this month. This Energy Bills Support Scheme (EBSS) saved households £400 on their energy bills last winter.

The chancellor also says that he has listened to representations from East Devon, North Cornwall, Combe Valley and Central Suffolk and North Ipswich about the risk to community facilities, especially swimming pools, caused by high costs.

"Today I am providing a £63m fund to keep public leisure centres and pools afloat," he says.

Draught drinks in pubs to be taxed less

Draught relief will be increased from 1 August – meaning draught drinks will be 11p cheaper than supermarket equivalents.

Hunt said the draught relief announcement is only possible due to Brexit, and is part of a new "Brexit pubs guarantee". He added that the Windsor Framework means this will also apply to pubs in Northern Ireland.

"British ale may be warm, but the duty on a pint is frozen," the chancellor joked.

Fuel duty

On fuel duty, Hunt said: “Because inflation remains high, I have decided now is not the right time to uprate fuel duty with inflation or increase the duty.

“So here’s what I am going to do: for a further 12 months I’m going to maintain the 5p cut and I’m going to freeze fuel duty too. That saves the average driver £100 next year and around £200 since the 5p cut was introduced.”

Read more: Budget: Pound soars as Jeremy Hunt says recession threat is over

It has been 12 years now that fuel duty has been frozen, and Hunt pointed out to Labour that they have never voted in favour of the measure.

"Our energy price guarantee, fuel duty and duty on a pint all frozen in today’s budget. That doesn't just help families. It helps the economy too," Hunt said.

Watch: Jeremy Hunt announces big extension of free childcare in Spring Budget 2023

UK businesses and corporation tax

Hunt has unveiled a new capital allowances regime for businesses, to offset a sharp rise in corporation tax and the end of a £25bn “super-deduction” tax break for investment.

Next month, corporation tax will increase from 19% to 25% on profits over £250,000 – bringing in around £12bn per year to the Treasury, according to government projections. This will kick in from 6 April.

The tax rise will hit businesses with profits of more than £250,000. Companies with profits between £50,000 and £250,000 will get marginal relief.

For those with profits of less than £50,000, there will be no change. These businesses will continue to pay corporation tax at 19%.

A three-year policy of “full expensing” for businesses will mean every pound a company invests in IT equipment, plant or machinery can be deducted “in full and immediately” from taxable profits.

Hunt said only 10% of businesses would pay the full rate and anticipated that his new "full capital expensing" policy was equivalent of a corporation tax cut worth an average of £9bn a year.

Read more: Budget 2023: UK will not enter recession, OBR forecasts

He told the Commons it would lead to a 3% increase in business investment a year and without it, the UK would have "fallen down international league tables for tax competitiveness".

Small or medium-sized businesses will be able to claim a credit worth £27 for every £100 they spend if they spends 40% or more of their total expenditure on research and development, the chancellor revealed.

Pensions

Hunt will abolish the lifetime allowance limit on pensions in a bid to encourage more workers back into the workforce, particularly doctors.

The chancellor said the move would stop over 8% of NHS doctors from receiving a tax charge, which previously stood at £1m. The pensions annual tax-free allowance will also rise by 50% from £40,000 to £60,000.

Hunt told the Commons: "I have listened to the concerns of many senior NHS clinicians who say unpredictable pension tax charges are making them leave the NHS just when they are needed most.

"The NHS is our biggest employer, and we will shortly publish the long-term workforce plan I promised in the Autumn Statement. But ahead of that I do not want any doctor to retire early because of the way pension taxes work."

He added: "As chancellor I have realised the issue goes wider than doctors. No one should be pushed out of the workforce for tax reasons. So today I will increase the pensions annual tax-free allowance by 50% from £40,000 to £60,000. Some have also asked me to increase the Lifetime Allowance from its £1m limit. But I have decided not to do that.

"Instead I will go further and abolish the Lifetime Allowance altogether."

Childcare support

The Spring budget has increased the maximum amount parents in receipt of universal credit can claim for childcare by “several hundred pounds”, the Treasury says.

The maximum universal credit childcare allowance has been frozen at £646 per month per child for years.

Costs will also start being paid out upfront, rather than in arrears, as part of a bid to help get people back into the workforce.

The chancellor announced 30 hours of free childcare for all under-5s from the moment maternity care ends, where eligible, under a policy estimated to cost £4bn.

Read more: FTSE lower as Jeremy Hunt unveils UK's 'budget of growth'

Hunt said: "I today announce that in eligible households where all adults are working at least 16 hours, we will introduce 30 hours of free childcare not just for three- and four-year-olds, but for every single child over the age of nine months.

"The 30 hours offer will now start from the moment maternity or paternity leave ends. It's a package worth on average £6,500 every year for a family with a two-year-old child using 35 hours of childcare every week and reduces their childcare costs by nearly 60pc. Because it is such a large reform, we will introduce it in stages to ensure there is enough supply in the market.

"Working parents of two-year-olds will be able to access 15 hours of free care from April 2024, helping around half a million parents.

"From September 2024, that 15 hours will be extended to all children from 9 months up, meaning a total of nearly one million parents will be eligible. And from September 2025 every single working parent of under 5s will have access to 30 hours free childcare per week."

The chancellor also increased funding for the existing programme of free childcare for three-year-olds.

Full-time fees for a child under two at nursery reached an average of £269 a week last year, about £14,000 annually.

12 new Investment Zones

Hunt has also announced 12 new Investment Zones. They will be spread across the West Midlands, Greater Manchester, the North East, South Yorkshire, West Yorkshire, East Midlands, Teesside and Liverpool.

There will also be at least one in each of Scotland, Wales and Northern Ireland.

Total of £11bn to be added to defence budget

The chancellor also confirmed the government would add £11bn to the defence budget over the next five years.

Hunt said: “Today, following representations from our persuasive defence secretary, I confirm that we will add a total of £11bn to our defence budget over the next five years and it will be nearly 2.25% of GDP by 2025.

“We were the first large European country to commit to 2% of GDP for defence and will raise that to 2.5% as soon as fiscal and economic circumstances allow.”

Money for potholes

Local councils are set to receive £200m to fix potholes. The extra cash will be given directly to local authorities, meaning it is more likely to be used on minor urban and rural routes.

Hunt also said the government will invest £200m in local regeneration projects around England.

He laid out a further £161m for mayoral combined authorities and Greater London, while £400m will be available for new "levelling up partnerships" in areas like Redcar, Cleveland and Blackburn.

Analysts digest 'boring' budget

Victoria Scholar, head of investment, Interactive Investor said: "Hunt wanted today’s Budget to be boring, but markets are anything but that. Today’s sell-off across equities with sharp declines in the banking sector have overshadowed the impact from the Treasury’s fiscal plans for spending and taxation."

She added: "Despite attempts by the chancellor to paint a rosy picture with improved figures on growth and inflation, the strain in the financial sector is yet another headwind to contend with. The market turmoil and the economic fallout are paving the way for a much smaller chance of a rate hike from the Bank of England this month. Interest rate futures are now pricing in a 60% chance the central bank opts for no change at its next monetary policy committee meeting.

Read more: Budget 2023: UK house prices to fall by 10%, OBR predicts

After business rates being barely mentioned in the chancellor's Budget, Shevaun Haviland, director general of the British Chambers of Commerce, said: "The plans for full capital expensing are also a step in a right direction to offset the rise in corporation tax, but the jury is out on how much it will help businesses compared to the Super Deduction scheme.

"Almost half of businesses have told us they will struggle to pay their energy bills from April, and they cannot invest when they are fighting to survive. There is little in today’s announcement that will provide comfort to these firms." The government also failed to reform business rates which we have repeatedly called for. If the UK’s innovative growth industries are to remain competitive on the world stage, then government must shift the dial further on investment, both within the UK and from overseas."

Jeevun Sandher, head of economics at the New Economics Foundation, said: "Increasing the pension lifetime allowance is a massive giveaway to already very wealthy people. If the chancellor hopes this will help older people remain in work, it’s completely divorced from reality.

"Only around 1% of workers saved more than the old annual allowance and just 10% were hit by the lifetime limit of £1.1m. Increasing the annual and lifetime allowances won’t do much to help the vast majority of us save for retirement.

"One group that are supposed to benefit from these tax changes are the GPs and NHS consultants who were forced to retire early due to pension limits. But this group is far more affected by the annual than the lifetime allowance, which is still far below its 2010 level."

Read more: Homeowners saving around £500 a year compared to renters

Laith Khalaf, head of investment analysis at AJ Bell, said: “This is a Hollywood or bust Budget, providing some broad-based crowd pleasers ahead of an election next year, but sailing very close to the wind with the public finances. Any small adverse changes to the forecast, or unforeseen economic shocks, could see the chancellor scrambling to meet his target to have debt falling as a percentage of GDP in five years’ time, which would likely mean tax rises or public spending cuts in the medium term.

"The Exchequer has left itself just £6.5bn of headroom, the smallest any chancellor has had since the OBR was created in 2010, which the watchdog reckons leaves him with a 52% chance of meeting his primary fiscal target. Jeremy Hunt will therefore have both his fingers and toes crossed that this coin toss lands in his favour."

Gerry Myton, head of Indirect Tax at HW Fisher, commented: “In a boost for the pub sector after three incredibly tough years, the chancellor has announced a freeze in the duty rate applicable to draught beer from 1 August 2023.

"This will mean that the duty rate on draught products in pubs will be about 11p lower than the applicable rate for a draught product in a supermarket. Hopefully, the trade in all parts of the UK will pass this saving to the customer”

Watch: Key points from Jeremy Hunt's Spring Budget 2023

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