With the UK economy on the brink of recession, UK Chancellor of the Exchequer Jeremy Hunt must tread a tightrope between reviving Conservative Party popularity in time for the elections in 2024 and not fuelling inflation. He is due to update lawmakers on the government's fiscal policy on 22 November.

Hunt has to find a way for the Tories to recover after losing seats in parliamentary by-elections – with large majorities overturned in most cases (apart from the Uxbridge vote, where expansion by London's Labour mayor of a tax on certain internal combustion cars proved unpopular in the outer boroughs).

In a briefing note, Quilter, the UK wealth manager, said the Autumn budget is expected to focus on reducing inflation and delivering growth. Hunt has made it clear that tax cuts are off the agenda but that does not mean that other tax changes will be.

Furthermore, the general consensus is that any moves to bring forward plans to unfreeze the various personal tax allowances and thresholds would impact the £52 billion ($63 billion) a year tax increase that they bring, plunging the UK further into the red.

This leaves Hunt with his hands tied, but Quilter thinks that there are some policies he could tweak which would not only be crowd pleasing but could help simplify the saving and retirement landscape in the UK.

Quilter experts outline here their views on what Hunt should tackle in his Autumn Statement.

Simplify the ISA regime
Despite reports that the government could add another ISA, Shaun Moore, tax and financial planning expert at Quilter, said that a fairly easy and uncostly measure would be to simplify the Individual Savings Accounts (ISAs) regime.

“The primary purpose of ISAs is their ability to encourage savings among the masses. The existing framework and plethora of different types of ISAs presents a challenge to many potential savers who end up being turned off from the whole process completely,” he said.

“Simplifying ISAs and amalgamating the cash and stocks and share ISA within a single ISA would help to reduce the complexity,” he added. “By offering a unified product for both cash and stock savings, the reformed ISA could nudge individuals towards exploring investment opportunities, without being deterred by the risk that some find intimidating associated with stocks and shares,” Moore continued.

“A merged ISA would also help give savers more flexibility and encourage savers make more efficient use of their £20,000 ISA allowance. At the heart of all these tweaks is the need to increase public awareness and make saving simple and accessible,” he said.

“However, rumours surrounding the introduction of an additional allowance specifically for investing in British equities would further complicate the ISA landscape,” he said. “Without knowing any detail, questions arise around the mechanics of this allowance – what happens at the point of divestment and the implications of investing in other areas after the initial investment,” he continued. “There are already existing challenges round non-qualifying investments in the ISA regime introducing even more will add more complexity. The new allowance could inadvertently introduce more questions and confusion rather than promoting a culture of saving and investing,” he said.

Raise the high-income child benefit cap to £65,000
“The cost of living in the UK has risen drastically since the introduction of the high-income child benefit cap in 2013,” Moore said. “This cap has been waiting for a decade for a refresh and now, absurdly, catches some basic-rate taxpayers, as well as failing to take into account the impact of inflation over this period,” he continued.

“What £50,000 could buy in the past is not the same as what it can buy today. In fact, £50,000 in today’s terms would be £66,660 according to the Bank of England. This threshold therefore needs to be adjusted to £65,000 at the very least, as a matter of urgency, to acknowledge the increasing costs families face and ensure that the benefit better reflects contemporary financial realities,” he said.

“Another big criticism of the current static threshold is it can act as a disincentive for individuals to earn more if they are close to the £50,000 threshold. By raising the threshold it would reduce this ‘benefit trap’ and encourage individuals to advance in their careers without the fear of losing essential financial support,” he added.

Simplify inheritance tax – increase the nil rate band
“It is no surprise that reports of a potential cut and even eventual abolishment of inheritance tax (IHT) have been swirling in recent weeks as something the Chancellor might pull out of his hat to drum up support from core voters,” Moore said. “While this is certainly an area ripe for reform, any changes to IHT must be properly consulted on to ensure there are no unintended consequences,” he continued. 

“Increasing the nil rate band to £500,000 and £1 million for married couples would be a relatively straightforward option that would help to slow the increasing numbers of people getting caught in the IHT net,” he said. “It could be accompanied by the removal of the residence nil rate band, given it is fiendishly complex and favours married households, which is not reflective of the modern society we live in,” Moore said.

“The government could also look at simply lowering the headline rate of 40 per cent. This could be lowered to a 30 per cent or 20 per cent rate, with the latter aligning to the chargeable lifetime transfer regime. This, alongside the removal of many of the available exemptions available, would be sensible and help to simplify IHT,” he said.

Nevertheless, Moore highlighted that Britain’s finances are not looking on a sure footing and the revenue generated from IHT is set to reach a record £8 billion this year. “While it is not a huge generator of Treasury revenue, IHT is playing an increasingly significant role in the UK's economic framework,” Moore continued.

“As the government navigates the tightrope of public approval and fiscal responsibility, abolishing this revenue source altogether will create a fiscal hole that needs to be filled. The answer might be just as unpalatable and those calling for IHT to be completely scrapped may need to be careful what they wish for as it opens the door to new kinds of wealth taxes under future governments,” Moore said. 

The comments highlight how IHT, which more citizens are now paying because house values have risen while thresholds haven't, is politically controversial. See other wealth managers' views here on cutting or even axing the inheritance tax. 

Increase annual IHT gifting exemption to £11,000
“The government should also look carefully at gifting rules, especially amidst the cost-of-living crisis which disproportionately impacts the young and could better encourage the flow of wealth down generations,” he said. “People could be given the option to make larger gifts each year rather than the current £3,000 limit and have them be immediately exempt from inheritance tax."

“Gifting laws are currently frozen in time, after being set in 1981 and [have] not changed since. Had the allowance tracked inflation, it would be permissible to gift nearly £11,000 per tax year according to the Bank of England’s inflation calculator,” Moore continued.

“Given the allowance has been unchanged for more than 40 years and considering the economic backdrop, it would be wise to change this and give a well needed carrot to a public who have suffered a lot of stick,” he said. Even if the various allowances are not uprated to help increase the amount of people making lifetime gifts, all the allowances could be amalgamated into one annual relief at a rate that better reflects current inflation,” Moore said. 

Overhaul the triple lock
“The new Tory slogan is “long-term decisions for a brighter future” and in that vein while it is a potentially difficult and unpalatable policy to reform, decisively deciding how to sustainably set the state pension for the long term would provide a solid proof point for Prime Minister Rishi Sunak’s new ethos,” Jon Greer, head of retirement policy at Quilter, continued

The "triple lock" system, introduced in the UK in 2010, guarantees that the state pension will rise each year by the highest of three measurements: average earnings growth, the Consumer Prices Index (CPI) inflation rate, or 2.5 per cent. “While it has played an important role in protecting pensioners from inflation and ensuring that their income doesn't fall behind that of the working-age population, there are also valid arguments that it simply is not sustainable over the long term,” Greer said. “Therefore, reforming the triple lock would fit nicely with Sunak’s new found ethos of taking difficult decisions for the long-term prosperity of the country,” Greer said.

“At some point, whichever party is in government, needs to face up to the fact that we need to look at the policy and replace it with something that can help ensure future generations can have access to a state pension that is of a meaningful value and is sustainable and fair,” Greer said.

“The triple lock can be financially unpredictable as we have seen over the past few years where soaring inflation and wage growth has triggered a significant state pension uprating,” he added. “Pegging pensions to a fixed percentage of average earnings provides is a more predictable and sustainable model. Tying pensions to a percentage of average earnings, means that the state pension would rise in line with the prosperity of the country. If the nation prospers and average earnings increase, so too would pensions. Conversely, if the country faces economic challenges and average earnings stagnate or decrease, pensions would reflect this. This ensures a fair distribution of economic prosperity (or challenges) across generations,” he continued.

“For budgetary planning, having a more predictable system would be also beneficial,” he said. “While average earnings can fluctuate, they might do so less dramatically than inflation, making it easier for governments to plan for future pension costs,” Greer concluded.