Budget 2023 for pensions and families: Lifetime tax-free pension allowance scrapped and free childcare boost in ‘back to work’ budget
Jeremy Hunt has abolished the lifetime tax-free pensions allowance and introduced free childcare for youngsters under three in a budget aimed at getting people back to work.
The chancellor announced his budget plans on Wednesday to get older people back in work and to help parents, mainly women, who cannot afford to go back to work due to high childcare costs.
For older people – who he said he preferred to describe as “experienced” – Mr Hunt has increased the annual tax-free pension allowance and abolished the Lifetime Allowance.
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The changes to pensions are:
• Annual tax-free pension savings allowance increased by 50% from £40,000 to £60,000
• Lifetime Allowance on pension savings scrapped so people will now be allowed to put aside as much as they can in their private scheme without being taxed (currently a £1m threshold)
Read more on the budget:
Budget live: Hunt announces ‘crowd pleasers’ – as pension and childcare changes go further than expected
The key points of Chancellor Jeremy Hunt’s speech
There will be no tax-free limit on private pensions
On childcare, Mr Hunt announced:
• Ratios of two-year-olds to staff at nurseries can be increased from 1:4 to 1:5 – this is optional
• Parents on Universal Credit who are moving into work will have their childcare costs paid upfront by the government
• The maximum Universal Credit parents can claim will be increased to £951 for one child and £1,630 for two children – an increase of almost 50%
• Schools and local authorities will be funded to increase wraparound care so parents can have their children looked after between 8am and 6pm by September 2026
• In households where all adults work at least 16 hours, every child from nine months old to school age will get 30 hours of free childcare per week by September 2025
There will be a staggered introduction:
• 15 hours of free care a week for two-year-olds, from April 2024
• 15 hours of free child care for all children from nine months and up, from September 2024
• The free child care will not apply to those who work less than 16 hours a week, those studying or training.
The timetable for free childcare may never be realised
Jeremy Hunt’s childcare announcement is the rabbit out of a hat it was billed to be – 30 free hours for children from the age of nine months to the start of school.
But before parents of toddlers get excited about saving some of the eyewatering costs, take a look at the timetable.
Working parents of two-year-olds will get half of that – 15 subsidised hours – in a year’s time, from April 2024.
An election is expected that summer or autumn, with a deadline of January 2025.
And the full policy – including the most expensive bit, which is free hours for babies who have the highest staff-to-child ratios at one adult for every three children under two – will not be delivered until well after the election, in September 2025.
If Labour are in power then, they will need to find the money to deliver it. Their shadow education secretary Bridget Phillipson has already said Labour’s plans for a modern childcare system would not involve the “free hours” system which she says fails parents and providers.
The Office for Budget Responsibility, which provided a financial forecast alongside the budget, said the childcare changes would mean around 60,000 parents of young children would enter employment by 2027-28.
Talking at a nursery after delivering the budget, Mr Hunt admitted many more nurseries and childminders are needed to fulfil the 30 hours commitment.
“We’re willing to start it as soon as possible, but the advice we’ve had is this is such a big change in the market that it wouldn’t be possible to do it overnight,” said the chancellor.
While the Tories lauded the announcements as Mr Hunt’s “rabbit out of the hat” moment of the budget, childcare providers had a mixed reaction.
Neil Leitch, CEO of the Early Years Alliance, said changing the staff-to-child ratios is “appalling” and it is an economic decision that parents and teachers do not want.
“It’s not just about economics, children are not commodities, we’re talking about children’s lives,” he told Sky News.
He added that there is currently not enough funding for three and four-year-olds, who are entitled to some free childcare already, so this will simply place more pressure on providers.
“They should have done this a long time ago, parents are on their knees, providers are on their knees,” he said.
Jeremy Hunt visited a nursery in Battersea after delivering the budget. Pic: Rory Arnold / No 10
Joeli Brearley, founder of Pregnant then Screwed, said the campaign group is “really pleased in the significant investment” in the childcare sector as it will make “an enormous difference to parents who are really struggling to pay for those eyewatering fees”.
However, she said they are concerned about the strategy for workers who are “leaving in droves” due to being paid “appallingly badly” due to years of underfunding.
“Without the workforce, those places are impossible to deliver,” she told Sky News.
“There’s no point in rolling out free hours if we don’t ensure the providers can deliver them.”
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Mums react to free childcare news
Labour hit out at the pension plan, with Sir Keir Starmer saying: “The only permanent tax cut in the budget is for the richest 1%. How can that happen?”
He accused the Conservatives of a plan for “managed decline, Britain going backwards, the sick man of Europe once again”.
“After 13 years of Tory sticking plaster politics… working people are entitled to ask am I any better off than I was before?” he said.
“The resounding answer is ‘no’ – and they (Tories) know it.”
Mr Hunt said he had decided to make the pension changes in reaction to senior NHS clinicians saying unpredictable pension tax charges are making them leave the NHS early “just when they are needed most”.
“I have realised the issue goes wider than doctors. No one should be pushed out of the workforce for tax reasons,” he said.
The UK economy grew by 0.1% between July and September, according to the Office for National Statistics (ONS).
However, despite the small positive GDP growth recorded in the third quarter, the economy shrank by 0.1% in September, dragging down overall growth for the quarter.
The growth was also slower than what had been expected by experts and a drop from the 0.5% growth between April and June, the ONS said.
Economists polled by Reuters and the Bank of England had forecast an expansion of 0.2%, slowing from the rapid growth seen over the first half of 2024 when the economy was rebounding from last year’s shallow recession.
And the metric that Labour has said it is most focused on – the GDP per capita, or the economic output divided by the number of people in the country – also fell by 0.1%.
Reacting to the figures, Chancellor of the Exchequer Rachel Reeves said: “Improving economic growth is at the heart of everything I am seeking to achieve, which is why I am not satisfied with these numbers,” she said in response to the figures.
“At my budget, I took the difficult choices to fix the foundations and stabilise our public finances.
“Now we are going to deliver growth through investment and reform to create more jobs and more money in people’s pockets, get the NHS back on its feet, rebuild Britain and secure our borders in a decade of national renewal,” Ms Reeves added.
The sluggish services sector – which makes up the bulk of the British economy – was a particular drag on growth over the past three months. It expanded by 0.1%, cancelling out the 0.8% growth in the construction sector
The UK’s GDP for the the most recent quarter is lower than the 0.7% growth in the US and 0.4% in the Eurozone.
The figures have pushed the UK towards the bottom of the G7 growth table for the third quarter of the year.
It was expected to meet the same 0.2% growth figures reported in Germany and Japan – but fell below that after a slow September.
The pound remained stable following the news, hovering around $1.267. The FTSE 100, meanwhile, opened the day down by 0.4%.
The Bank of England last week predicted that Ms Reeves’s first budget as chancellor will increase inflation by up to half a percentage point over the next two years, contributing to a slower decline in interest rates than previously thought.
Announcing a widely anticipated 0.25 percentage point cut in the base rate to 4.75%, the Bank’s Monetary Policy Committee (MPC) forecast that inflation will return “sustainably” to its target of 2% in the first half of 2027, a year later than at its last meeting.
The Bank’s quarterly report found Ms Reeves’s £70bn package of tax and borrowing measures will place upward pressure on prices, as well as delivering a three-quarter point increase to GDP next year.
Business
Chancellor’s Mansion House speech vows to rip up red tape – saying post-financial crash rules went ‘too far’
Chancellor Rachel Reeves has criticised post-financial crash regulation, saying it has “gone too far” – setting a course for cutting red tape in her first speech to Britain’s most important gathering of financiers and business leaders.
Increased rules on lenders that followed the 2008 crisis have had “unintended consequences”, Ms Reeves will say in her Mansion House address to industry and the City of London’s lord mayor.
“The UK has been regulating for risk, but not regulating for growth,” she will say.
It cannot be taken for granted that the UK will remain a global financial centre, she is expected to add.
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It’s anticipated Ms Reeves will on Thursday announce “growth-focused remits” for financial regulators and next year publish the first strategy for financial services growth and competitiveness.
Rachel Reeves
Bank governor to point out ‘consequences’ of Brexit
Also at the Mansion House dinner the governor of the Bank of England Andrew Bailey will say the UK economy is bigger than we think because we’re not measuring it properly.
A new measure to be used by the Office for National Statistics (ONS) – which will include the value of data – will probably be “worth a per cent or two on GDP”. GDP is a key way of tracking economic growth and counts the value of everything produced.
Brexit has reduced the level of goods coming into the UK, Mr Bailey will also say, and the government must be alert to and welcome opportunities to rebuild relations.
Mr Bailey will caveat he takes no position on “Brexit per se” but does have to point out its consequences.
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Bailey: Inflation expected to rise
In what appears to be a reference to the debate around UK immigration policy, Mr Bailey will also say the UK’s ageing population means there are fewer workers, which should be included in the discussion.
The greying labour force “makes the productivity and investment issue all the more important”.
“I will also say this: when we think about broad policy on labour supply, the economic arguments must feature in the debate,” he’s due to add.
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The exact numbers of people at work are unknown in part due to fewer people answering the phone when the ONS call.
Mr Bailey described this as “a substantial problem”.
He will say: “I do struggle to explain when my fellow [central bank] governors ask me why the British are particularly bad at this. The Bank, alongside other users, including the Treasury, continue to engage with the ONS on efforts to tackle these problems and improve the quality of UK labour market data.”
Business
Reeves has welcome support from Bank’s governor as she goes for growth and seeks to woo City
When Gordon Brown delivered his first Mansion House speech as chancellor he caused a stir by doing so in a lounge suit, rather than the white tie and tails demanded by convention.
Some 27 years later Rachel Reeves is the first chancellor who would have not drawn a second glance had they addressed the City establishment in a dress.
As the first woman in the 800-year history of her office, Ms Reeves’s tenure will be littered with reminders of her significance, but few will be as symbolic as a dinner that is a fixture of the financial calendar.
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Her host at Mansion House, asset manager Alastair King, is the 694th man out of 696 Lord Mayors of London. The other guest speaker, Bank of England governor Andrew Bailey, leads an institution that is yet to be entrusted to a woman.
Ms Reeves’s speech indicates she wants to lean away from convention in policy as well as in person.
By committing to tilting financial regulation in favour of growth rather than risk aversion, she is going against the grain of the post-financial crash environment.
“This sector is the crown jewel in our economy,” she will tell her audience – many of whom will have been central players in the 2007-08 collapse.
Sending a message that they will be less tightly bound in future is not natural territory for a Labour chancellor.
Her motivation may be more practical than political. A tax-and-spend budget that hit business harder than forewarned has put her economic program on notice and she badly needs the growth elements to deliver.
Rachel Reeves on budget day. Pic: PA
Her plans to consolidate local authority pension schemes so they might match the investing power of their Canadian and Australian counterparts is part of the same theme.
Infrastructure investment is central to Reeves’s plan and these steps, universally welcomed, could unlock the private sector funding required to make it happen.
Bank governor frank on Brexit and growth
If the jury is out in a business financial community absorbing £25bn in tax rises, she has welcome support from Mr Bailey.
He is expected to deliver some home truths about the economic inheritance in plainer language than central bankers sometimes manage.
Britain’s growth potential, he says, “is not a good story”. He describes the labour market as “running against us” in the face of an ageing population.
With investment levels “particularly weak by G7 standards”, he will thank the chancellor for the pension reforms intended to unlock capital investment.
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Governor warns inflation expected to rise
He is frank about Brexit too, more so than the chancellor has dared.
While studiously offering no view on the central issue, Mr Bailey says leaving the EU had slowed the UK’s potential for growth, and that the government should “welcome opportunities to rebuild relations”.
There is a more coded warning too about the risks of protectionism, which is perhaps more likely with Donald Trump in the White House.
“Amid threats to economic security, let’s please remember the importance of openness,” the Bank governor will say.
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All that is welcome for Ms Reeves.
Already a groundbreaking chancellor, she is aiming for a political and economic legacy that extends beyond her gender and the dress code.
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