Simon Hoult, Chartered Financial Planner, Principal, Punter Southall Wealth, considers whether the chancellor got the balance right in last week’s budget:
This was always going to be a challenging, perhaps impossible, balancing act for the Chancellor: how to prioritise our health while stimulating the economy and raising revenue to help repair the nation’s balance sheet. And all this within a political environment that is perhaps less forgiving than a generous parliamentary majority might suggest.
“We will do whatever it takes”
Looking at some of the language used by the Chancellor, it is clear to us that the focus for now is on re-generating growth in the economy, and continuing to support individuals and businesses that have been hit particularly hard by the pandemic such as hospitality, whilst delaying the inevitable tax rises to a later day. It is apparent that the focus is on generating investment-fuelled growth and therefore jobs in the economy, to help the government finances in this way, rather than introducing immediate tax rises in the backdrop of the worst economic crisis in most of our lives. These, we feel, will come at a later time.
Other language of choice such as “I am going to level with the public” and using terms like “acute” and “profound” to describe economic damage is clearly making the point that paying back this borrowing will be a long process, and that there will need to be tax rises at some point to deal with it. The Chancellor made it clear that there will be a long road to recovery ahead that many future governments will also have to deal with.
A major omission from this budget was the mention of any new policy for financing social care. This is despite the increased pressures on this sector over the last year. This may well come to the fore in the near future, and affect taxes later down the line, but for now, it was left out of the Chancellor’s plans.
Despite this omission, the government has committed to the continuation of many assistance schemes to help those impacted by the pandemic. Furlough schemes, self-employment grants, universal credit uplift, reduced VAT rates, stamp duty holidays, and business rate holidays have all been extended as evidence of the government’s continued support.
Borrowing is at levels not seen since the two world wars, and while borrowing is cheap currently, it only needs a 1% change in interest rates to add billions to the interest costs. This needs to be managed. Higher inflation would also add significantly to borrowing costs. The Chancellor made some bold statements about government debt, stating that his corrective action will cause borrowing to fall to 4.5% of GDP in 2022/23, before falling further to 2.8% by 2025/26; time will tell whether this is actually the case.
The national debt is expected to rise to 97.1% of GDP by 2022/23 before only falling moderately over the next two years. The current budget deficit is £394 billion.
These are all scary numbers that need to be kept under control, but it will take many years to do so, with a combination of fiscal support now, and then, most likely, tax rises in the future.
The Chancellor expects that the economy will recover more quickly than was previously thought, helped by the success of the vaccination programme. In 2020, the economy shrunk by 9.9%; the forecast is for GDP growth to be 4% this year and 7.3% next year. The Chancellor expects the economy in five years’ time to be 3% smaller than it would have been had the pandemic not happened. Growth will be a focus for the short, medium and longer term, as a prosperous growing economy will raise significant revenue for the Treasury.
Let’s have a look at some of the fiscal announcements as they currently stand – although, as ever, the devil is in the detail. This is likely to take some days to fully emerge.
It had been leaked prior to the budget announcement that the Chancellor was likely to look at Corporation Tax, and so it proved. This is in fact the only increased tax rate announced. It is proposed for Corporation tax to increase from 19% to 25% from April 2023, but only on the more profitable companies, with profits in excess of £250,000. A small business rate of 19% will apply to businesses with profits of less than £50,000, and rates will taper for businesses within these profit levels. The detail has not been seen yet, but these changes are not to apply until April 2023.
As expected, allowances have been frozen, meaning that ‘fiscal drag’ will bring more taxpayers into paying tax and at a higher rate, whilst the government adheres to an election commitment of not increasing the rate of income tax.
The nil rate threshold will increase to £12,570 this year and then be frozen until April 2026. The higher rate threshold, where 40% income tax becomes payable, will increase to £50,270, and will then also freeze until April 2026.
In Scotland, the devolved government announced how it is using its powers to vary income tax payable on employment earnings in January.
Capital Gains Tax
This has been a hotly debated subject recently as this regime is currently one of the more generous, but other than freezing the annual exemption at £12,300, there were no other proposed changes at this stage – a welcome relief for investors.
Pension Taxes and Tax Relief
Freezing the Lifetime Allowance at the current level of £1,073,100 is another example of ‘fiscal drag’ by reducing the scope for tax-efficient pension savings and bringing more people into this tax trap. While pensions are still very attractive within the various allowances, they can be particularly penal where the allowances are exceeded, so careful management of this is essential. This will be frozen until at least 2025/26, when it will be reviewed.
There was, however, no mention of restricting annual contributions or the rate of tax relief that apply to pension contributions, which is very expensive to the government. This, we fear, could change in the future.
While there have been no notable changes beyond anti-abuse measures, we fully expect big changes to this complex regime during the course of the current parliament, probably as part of a wider review of capital taxes. While revenue could be significantly increased from this area, it would be fraught with political dangers. Many of the allowances have remained unchanged since 1986, so this is a tempting area for a wide-ranging update.
There is no change to the headline rate of VAT. The current reduced rate for hospitality and tourism will continue until the end of September at 5% and then at 12.5% for a further six months after that.
Again, no changes to fuel or alcohol duties to help out the hospitality sector.
The stamp duty holiday will be extended to the end of June for properties valued up to £500,000 and then to the end of September for properties up to £250,000.
Additionally, the Chancellor announced a Mortgage Guarantee Scheme in which the government will provide a guarantee to lenders across the UK who offer mortgages for people with deposits of just 5%. Buyers will have the opportunity to fix their initial rate for the first five years. Many lenders have signed up to this; only time will tell whether it helps first time buyers and the low-paid onto the ladder or will simply cause prices to rise further.
Repeating the point about incentivising growth, a number of initiatives are being introduced to give businesses tax breaks for investment in the economy and creating jobs. ‘Freeports’ are going to be created in eight locations around England, with Scotland, Wales and Northern Ireland developing their own policy on this. These will create a lower tax environment in these regions, reducing or removing tariffs that would otherwise be paid to the government if goods are moved overseas without leaving the ‘Freeport’.
During the election campaign, the government pledged to ‘level up’ prosperity across the UK by investing in the northern regions, and in this budget we can begin to see the start of this.
Leeds is to host the UK’s first ‘green’ bank, channelling funds into many capital and infrastructure projects to help deliver the ‘net zero carbon’ target.
Additionally, Darlington has been chosen to host the Treasury’s northern campus, creating up to 750 jobs.
Other cities and towns across the country have been identified to receive government grants.
What does this mean for our clients?
Although there were a lot of announcements in this budget, the direct impact on our clients’ financial planning initiatives has been quite small. The tax regime for many investors continues to favour capital gains over income.
Lifetime Allowance – This freeze will bring more people into its scope. It will be necessary to review this where growth of investments and, in particular, where contributions being made could cause people to reach this allowance a lot sooner than first thought. This should be managed to prevent significant taxes applying in the future, especially where other methods of saving could be more efficient.
Rise in Corporation Tax – Where companies make allowable and offsetable pension contributions, the tax savings could be greater where Corporation Tax is higher. Although, overall, this is clearly unlikely to be positive for UK companies.
For life-insurance companies, the proposed tax rise will mean that the rate of tax paid within onshore investment bonds will be greater, making them a less efficient vehicle for investors.
National Savings and Investment (NS&I) Green Savings Bond – the detail of this is not yet known, but this could provide an alternative home for cash savings, backed by the Treasury.
We believe there will be tax rises in the future, although it is difficult to predict where these will fall. From a planning perspective, we would suggest, while there has been little change to the personal tax regime in this budget, that you should continue to ensure that all tax allowances are being used where appropriate, that portfolios are diverse and not overly exposed to one vehicle or asset, and that sensible plans are made to prepare for the unknown events of the future, be that the ongoing pandemic or potential tax rises. It is likely that the tax position will get worse in the future, so our message to you is to make the most of what is available now.
How did Financial Markets react?
Our Head of Investment Strategy, Rory MacPherson has provided the following commentary on the reaction of investment markets.
“If there’s one thing that markets don’t like, it’s surprises: especially ones that crimp growth and spending. The 6666.66 reading on the FTSE 100 as the Chancellor opened his budget alerted markets to the devilish threat of hefty tax rises, but reassuringly (for the markets, at least), Chancellor Sunak kept to the playbook. This was very much a ‘spend now and tax later’ budget, and the markets liked what they heard. The FTSE 100 finished the day up just shy of 1% (the best performer on the day of the European markets), with the Pound also strengthening too. There was a brief pull-back on the announcement on the planned rise to Corporation Tax, but the delayed and indefinite nature of this was such that previous gains were soon re-couped. Whilst Prime Minister Johnson is very much in favour of cutting taxes, Chancellor Sunak had made murmurings in the run-up about the need to raise taxes – this might yet come to pass, but frankly is a problem for another day. The big revenue-generating taxes for the Treasury are Income Tax, VAT and Corporation Tax, and whilst there were no extra concessions here, there was also nothing too drastic (or that broke the manifesto pledge on not raising income tax). Taxes like Capital Gains are less revenue-generating for the Treasury but are of high importance to investors; the absence of any action in this regard was a further fillip for the market. This wasn’t the most exciting budget by any stretch and was very much focused on propelling the economy back to recovery: just what the market ordered.”
This budget is the first in a series of budget announcements that will be needed to tackle the government finances and find a way to pay back a lot of the debt that has been created during the pandemic. At this stage, the focus is on helping people and businesses get back on their feet so that the economy can recover and support itself without stimulus. There is no doubt going to be some pain to come in the form of some tax hikes, so making the most of the current regime, which is unlikely to get more generous soon, seems the sensible approach to make.