Steve Herbert, Wellbeing & Benefits Director, Partners &, considers what today’s Budget speech means for the worlds of employment and employee benefits
Today we heard a Budget speech by the Chancellor of the Exchequer, Jeremy Hunt.
This seemingly routine fact disguises the reality that the United Kingdom has not benefited from such a statement since 27 October 2021. So, despite all those fiscal events and emergency announcements of 2022, this is the first formal UK Budget speech in almost 18 months.
Equally surprising is that Jeremy Hunt is only the second of the last five Chancellors to deliver such a statement.
So, what did today’s Budget tell us, and what does it mean for the worlds of employment and employee benefits?
Background
Firstly, we should briefly acknowledge the very difficult background of this year’s statement.
The UK has experienced three seismic economic challenges (Covid-19, Brexit, and the energy price spike) in just three years, and as a result, the nation is now facing a deep cost-of-living crisis, associated industrial unrest, and sharp increases in the cost of borrowing and mortgages.
The above all limits the Chancellor’s room for manoeuvre, as does the need to avoid a repeat of the adverse market reaction to his predecessor’s infamous “mini-budget” last September. It should also be noted that the freeze to tax allowances (which applies across many different areas of taxation) has already been announced and continues until the end of the 2025/26 tax year.
With so little leeway available, this statement was always likely to be more one of evolution than revolution. Yet the Chancellor has used what little financial wriggle room he has to focus on the need to increase the size of the UK workforce. This makes this Budget of particular interest to the nation’s HR experts.
Employment figures:
The latest employment figures were published by the Office for National Statistics (ONS) yesterday, and once again highlight the unusual nature of the current economic downturn.
Ordinarily, a recession or economic stagnation would be accompanied by rapidly increasing unemployment and reducing job vacancies. And whilst both measures are indeed gradually changing, the nation remains close to full employment.
This continuing candidate shortage is acting as a genuine headwind to growth in some key economic sectors, and the Chancellor’s focus is therefore to ease that pressure – and boost growth – by encouraging those classed by the ONS as “economically inactive” back into the British workforce.
For those not familiar with this term, the ONS define economically inactive as:
“people who are not in work, and have not been seeking or not been available for work”
The economically inactive grouping represents adults over the age of 16 who fall into one of the following groupings:
- in full-time education
- don’t need to work
- taking a career break
- have family caring responsibilities
- have an illness or condition that prevents them from working
- have taken early retirement
This is therefore a very diverse grouping, and it follows that there is no one solution which will encourage all these disparate groups to return to the national workforce.
The Chancellor has therefore set out several distinct policies to support the different sub-sets of that economically inactive grouping back into work.
Support for Long Term Sick
The Budget speech recognised that many of those classed as economically inactive would like to work, but are prevented from doing so by illness, injury, or disability. The loss of state benefits when taking up employment is also a major concern.
White papers are promised to address these issues shortly, with the key aim of widening access to occupational health facilities, and a further objective is to separate benefits entitlement for disabled people from the requirement not to be in work.
Overall, these efforts will be welcomed by employers and candidates alike, but it will be interesting to see the detail of these proposals, and in particular their expected implementation dates.
Support for working parents
The costs of childcare are often cited as a very real challenge to (predominately) women returning to the workplace. Indeed, a report by the Organisation for Economic Co-operation and Development (OECD) has placed UK childcare costs in the top three across Europe.
It follows that many parents – particularly those likely to be at the lower end of the income spectrum – are often unable to financially justify a return to work.
This challenge has been recognised by the Chancellor, and he has today announced improvements to the childcare support for those families, and in particular the extension of free childcare places to children aged from nine months to three years where all adults in the household are working at least 16 hours per week.
The Chancellor also looked to loosen the “supply side” of childcare, by lifting the ratio of children per childcare professional, encouraging more people into childcare, and extending wraparound care for school-age children by September 2026.
These measures will certainly help many working families and are likely to be welcomed by all.
Yet effective communication of these improvements will still be required to encourage more working parents back to work. Employers can help with this issue by perhaps signposting their workers and potential job candidates to these new elements of support, and also highlighting other areas of state support such as the (often overlooked) financial support available via Tax-Free Childcare.
Pension savings
Another major employment headwind has been the number of workers who retired earlier than expected as a result of the pandemic. The exact numbers in this grouping are still not known, but it is believed that many might yet be tempted back to work. This would be particularly beneficial in sectors such as healthcare where there is an urgent need for skilled and experienced employees to help tackle those lengthy NHS waiting lists.
Yet the challenge for many is that the taxation rules around pension schemes prevent some older workers from augmenting their pension pots, and in other cases will actively penalise those returning to work by inadvertently breaching their maximum tax-free pension savings allowances.
The Chancellor has therefore announced two very significant changes to pension tax reliefs* from 6th April 2023:
- An increase to the annual allowance for pension contributions from £40,000 per year to £60,000 per year
AND
- The complete removal of the Pensions Lifetime Allowance from April 2024 (with the removal of the Lifetime Allowance charge from April 2023).
Of course, these significant changes extend beyond those returning to the workplace, and will benefit existing workers too. Employers should therefore take the time to communicate these improvements to their workers.
In the short term these changes will mostly benefit older and/or highly paid employees, but over time they will have a wider impact on pension savers.
These changes should also simplify some of the choices for employers who have previously had to implement sometimes complex and expensive higher-earner strategies where the previous tax-advantaged pension maximums were being exceeded. It also removes a niggling concern for employers around the Pensions Lifetime Allowance being accidentally exceeded by the payment of a Group Life Assurance claim.
It follows that this should be a policy that will be welcomed by employers, employees, and indeed the pension industry.
Other measures
The Chancellor has also announced some other key measures that will help employees manage their finances through the continuing economic downturn.
The continuation of state support for energy prices for a further three months is likely to be welcome to most consumers, although many working families will still face an effective cost increase in April as the government’s £400 winter fuel support comes to an end.
Another measure – the continued freeze on fuel duty – will similarly help avoid motoring costs from rising sharply.
Overall, the Budget presents a welcome package of measures from an employment perspective, and this should help at least some sectors recruit from that hard-to-reach pool of economically inactive talent.
There will doubtless be more detail and clarification arising on some of the above issues as the detail of the proposals are examined. For the full Budget speech transcript please follow this link.
Steve Herbert is Wellbeing & Benefits Director at Partners&
*Please speak to your pension adviser for full details of these reliefs and how they work in practice
