Rishi Sunak
Sunak's government also has to make politically contentious decisions about whether to increase welfare and pension payments in line with inflation. Image Credit: AFP

UK Chancellor of the Exchequer Jeremy Hunt will announce a major economic package on November 17 as he tries to stabilise public finances and recover credibility lost in the turmoil of Liz Truss’s ill-fated administration.

Prime Minister Rishi Sunak’s finance minister is trying to identify 50 billion pounds ($56 billion) of spending cuts and tax increases to get debt falling as a proportion of gross domestic product over the medium-term. Though no final decisions have been taken, here’s what could happen:

Higher windfall tax on energy profits

Hunt is considering extending the UK’s windfall tax on oil and gas companies, a levy first introduced by Sunak in May when he was chancellor. Hunt is looking at a significant expansion of the tax, raising the rate to 30 per cent from 25 per cent, and extending it to 2028 from 2026. He’s also considering applying it to electricity generators, according to a person familiar with the matter.

Such a move would increase revenue from the existing tax by 50 per cent to 40 billion pounds over five years, the Times newspaper reported, citing internal government estimates, though that’s dependent on volatile energy prices.

Freeze income tax thresholds

Hunt is due to extend a current four-year freeze on income tax thresholds and allowances, which was introduced by Sunak in 2021, raising about 5 billion pounds a year by 2027-28, the Financial Times reported.

Due to high inflation, the freeze has the effect of dragging more people into the tax system or into higher tax bands, boosting revenue for the Treasury.

Increase capital gains tax

The chancellor is also weighing an increase in the headline rate of capital gains tax, a levy on profits from the sale of assets. Current rates range from 10 per cent to 28 per cent, and a one percentage-point increase in the higher rate would be worth about 145 million pounds, according to Treasury estimates. He’s also considering cutting reliefs and allowances.

Hit shareholders

The tax-free allowance for dividend income is in line to be cut, two people familiar with the matter said, a move that would hit shareholders and owner-managers of businesses. It’s currently set at 2,000 pounds, but reducing it to 1,000 pounds would raise about 455 million pounds a year, according to Treasury calculations.

Hunt is also considering a 1.25 percentage-points increase in dividend tax rates, the Financial Times reported.

Freeze foreign aid

Hunt is expected to maintain the foreign aid budget at 0.5 per cent of GDP for another two years, instead of increasing it to 0.7 per cent in 2024-25 as Sunak had previously promised. The UK had spent 0.7 per cent of GDP on foreign aid but cut the amount to 0.5 per cent during the coronavirus crisis.

The move would save 4 billion pounds a year, the Telegraph reported.

Cuts to government spending

Ministries are braced for real-terms spending cuts. The Treasury is considering pay rises of 2 per cent across the public sector in 2023-2024, meaning below-inflation increases for nurses, teachers and police officers, the Times reported.

Cuts to spending on capital projects are also in prospect. Cabinet minister Michael Gove has indicated long-term projects could be delayed or axed.

Cut the bank surcharge

Hunt and Sunak have a major decision to make about the bank surcharge, which is an 8 per cent levy on bank profits in addition to the standard corporation tax rate. As chancellor, Sunak had said he would cut the 8 per cent levy to 3 per cent, because corporation tax is due to rise from 19 per cent to 25 per cent and he didn’t want the UK’s banking sector to become uncompetitive.

Hunt is expected to stick to Sunak’s plan to cut the surcharge to 3 per cent, the Sunday Times reported, citing unidentified government officials.

Decisions on welfare, pensions

The government also has to make politically contentious decisions about whether to increase welfare and pension payments in line with inflation - currently at 10 per cent - or aligned to the lower measure of earnings growth. Opting for the latter would save 13 billion pounds, but would likely trigger a major political backlash.

Sunak and Hunt plan to reveal a stealth tax raid on pensions later this month, with the pension lifetime allowance set to be frozen for two more years, the Telegraph newspaper reported. A rise would be in line with prices delayed from 2025 to 2027, meaning two million savers now face tax charges of up to 55 per cent on their retirement funds by the end of that period, according to expert analysis.

A Saturday edition of the Telegraph said ministers have discussed reducing the rate at which income tax relief is applied to higher-rate taxpayers, from 40p to a flat rate as low as 20p. They’re also considering increasing the number of very high earners whose income tax relief is cut even further.