The Budget, your money and how to prepare for what comes next
The Budget has brought some relief to a hard-pressed country. Relief that pandemic support will remain in place for many months to come, relief that jobs are being protected and relief that the tax increases needed to pay for it all will not come into force quite yet.
However, for savers, this relief is shot through with anxiety. Rishi Sunak made clear that the Covid-19 bill was huge and would have to be met, ultimately, by taxpayers.
While the chancellor’s headline tax announcement was the big rise in corporation taxes, the first since 1974, he already has private individuals squarely in his sights. The freezing of income tax thresholds will bring more than 1m new people into the tax net over the next few years and oblige another 1m to start paying higher rates.
Over time, economic growth and inflation, even at low rates, can extend the reach of such a freeze well beyond its original aim, as the precedent of inheritance taxes shows. Frozen since 2009, the £325,000 threshold would now stand at about £450,000 had it risen in line with inflation. As Kyra Motley, a partner at law firm Boodle Hatfield, says, a tax intended for the very wealthy has “become a tax on Middle England”.
Given the chancellor’s need to raise money, savers should prepare for higher taxes ahead. Sunak will give more clues this month, when he launches new rounds of tax consultations on March 23. Capital gains, pensions, and property could all be in the line of fire. As our writers point out, now is the time to consider options — to take profits on shares, for example, amend pension arrangements or perhaps pass on assets to heirs.
The government has little room for manoeuvre, especially if the recent uptick in interest rates — raising the costs of public borrowing — persists. The Office of Budgetary Responsibility notes that since it made its forecasts on February 5, the 0.3 per cent rise in rates would add £6.3bn to the interest bill in 2025-26. That’s nearly a quarter of the £25bn estimated value of Sunak’s planned tax increases.
But the outlook is not all glum. Sunak promised growth-boosting investment plans, including in green energy. The investment stimulus will come on top of what is expected to be a sharp economic recovery as the UK emerges from the pandemic, probably sooner than other developed economies. Kevin Gardiner, strategist at Rothschild & Co, an investment house normally known for its caution, says prospects may be better than the chancellor assumes and “there is a good chance that the economy will overshoot” the pre-pandemic long-term growth rate. So be cautious by all means, but keep an eye open for opportunities too.
Investment tax breaks erode
It follows that you should not put tax considerations above everything. Laith Khalaf, an analyst at AJ Bell, cautions that investors should not rush into hasty investment decisions as a result of the Budget. “Don’t let the tax tail wag the investment dog and sell something just because it’s a good idea for taxes,” he says.
Khalaf adds that investors would be well advised to use the lack of change in many taxes to take a hard look at their investment portfolios and ensure they are still comfortable with their positions for the long term, because the UK is poised for the most significant period of economic change in a decade.
Still, while Sunak’s Budget contains few dramatic changes directly affecting investors, some quiet tweaks have a significant impact on personal portfolios.
The chancellor omitted to take account of inflation and raise contribution caps on Lifetime Isas, regular Isas, which have an annual contribution limit of £20,000, or Junior Isas, with an annual subscription limit of £9,000.
He also failed to extend an important pandemic measure — the cut in the penalty on Lifetime Isa withdrawals, which was dropped from 25 per cent to 20 per cent in March 2020 to allow investors to access funds more easily.
Forgoing a routine inflation-based increase to Isa allowances is in essence a tax increase, experts say, as it means investors can shield less money in tax-advantaged accounts. It’s also a long-lasting tax increase — as the freeze on allowances and the Lifetime Isa limit will last until 2026.
“The chancellor is trying to claw back money where he can, and where it is politically easier to do so,” says Susannah Streeter, investment analyst at Hargreaves Lansdown.
Charlotte Ransom, chief executive of wealth manager Netwealth, says: “People shouldn’t be fooled by thinking there is nothing to do because there is no change. People need to act with what they’re being given, and use any personal allowance available to them, before it is changed or taken away.”
Forward-thinking investors should maximise allowances now, such as utilising all Isa allowances, including the £9,000 Junior Isa allowance per child. “That’s a pretty significant tax-free basket that you can create in a family unit,” says Ransom.
Investors should also make full use of their tax-free allowances on capital gains, to minimise capital gains tax (CGT). In the UK, customers can use “bed and Isa transactions” to take advantage of the £12,300 threshold by selling stock to crystallise gains below the tax threshold, and then buying back the same shares within an Isa.
Maximising pension investment contributions is also key, especially for high earners. “Pensions are so important because you get tax relief at the highest marginal rates,” says Khalaf. “At 20 per cent relief it’s a good idea, but at 40 per cent relief it’s an even better idea.”
Stirring the pensions pot
Pension tax breaks for higher earners were spared the full swing of the chancellor’s axe, but were still trimmed — and experts warned of deeper cuts to come.
Prior to the Budget, there had been speculation that the chancellor might look to remove pensions tax relief for higher earners, given the heavy cost.
But Sunak held off making any sweeping reforms, instead choosing to target “people who can afford to contribute” with a more nuanced assault on tax relief for those building the biggest retirement funds.
The key measure was a five-year freeze on the pensions lifetime allowance, which governs how much can be saved in a pension and benefit from tax relief. This allowance, currently £1,073m, was due to rise each year with inflation, but will now remain at that level for the next five years.
Experts say the move — forecast to raise nearly £1bn over five years — will drag more savers into scope of tax charges.
“Freezing the lifetime allowance will help the chancellor to reduce the ‘cost’ of higher-rate tax relief — not much in the short term, but quite a bit by the end of the 2025-26 tax year,” says Jason Whyte, associate life and pensions partner at EY, the professional services firm. “It may also turn out to be a precursor to more comprehensive pension reform in the future.”
Among those hit will be senior NHS doctors belonging to traditional defined-benefit pensions schemes, where savings accrue differently from defined contribution funds. The longer the lifetime allowance is kept at its current level, the more Middle Britain will be dragged into its orbit, including headteachers, senior nurses, private sector professionals and others who prioritised pension saving early in life.
Savers at heightened risk of an LTA breach will now be considering their options say experts.
“For those who think they might reach the lifetime allowance limit in the next five years, these additional tax charges will look intimidating,” says Becky O’Connor, head of pensions and savings with Interactive Investor, an investment platform provider.
“There is a chance we could now see people crystallising their pension funds earlier, to try to prevent their pot reaching the LTA. It could also lead to some people slowing or stopping contributions. But the tax charge doesn’t mean pension contributions are automatically no longer worth making, as employer contributions and tax relief can compensate for charges due.”
Higher earners who are able to should make the most of pensions tax relief, say advisers, given that more drastic cuts reliefs could be afoot.
Dean Moore, managing director and head of wealth planning at RBC Wealth Management International, says: “There will be tax rises to come, and the areas previously flagged as being a focus of tax increases are still in play.”
Preparing for personal tax rises
As well as freezing thresholds on income tax, inheritance tax and the annual exemption for capital gains tax, the government also quietly published some less well-publicised changes.
This included the revelation that headline-making planned increases in corporation tax will hit not only big companies but many wealthy families — via vehicles called family investment companies (FICs).
The Budget small print disclosed that companies that will be charged corporate tax at the higher level would include units known as “close-investment holding companies (CIHC)”.
“[These companies will be denied] access to the 19 per cent corporation tax rate that is otherwise available to companies with profits of less than £50,000,” says Tim Stovold, head of tax at Moore Kingston Smith. “Many FICs will fall within the definition of a CIHC so will pay the full rate of 25 per cent regardless of the level of their profits.”
The news will leave many people holding such companies wondering whether to respond to the consequent tax rises. However, advisers urge caution for now.
“Possibly the calmest and most rational answer is wait and see,” says Sophie Dworetzsky, partner at law firm Charles Russell Speechlys. “There is a two-year period before the corporation tax rate increase takes effect, and there remain many open questions about what will happen to other tax rates between now and April 2023.”
Stovold adds that he expects FICs to remain popular, especially as they can receive dividend income without incurring corporation tax.
Another quiet Budget move involves a new penalty system for filing and paying taxes late. This will come into effect for VAT taxpayers for accounting periods from April 1 2022. From April 2023, the system will also cover self-assessment taxpayers with annual business or property income of more than £10,000, who are required to submit quarterly updates under the government’s Making Tax Digital programme. And from April 2024, all other self-assessment taxpayers will be subject to the new regime.
Then, as now, there will be separate penalties for filing a return late and paying tax late. The overall effect will be to impose bigger penalties for consistently late offenders and smaller charges for minor failures. It introduces a flexible points-based system, in which an occasional late submission is not necessarily penalised.
The Chartered Institute of Taxation welcomed the changes, saying they would help “redress the imbalance in the existing regime, where occasional errors by otherwise compliant taxpayers are subject to the same financial penalties as the minority of taxpayers with persistent poor compliance”.
But Graham Boar, partner at UHY Hacker Young, says: “The new late payment regime is going to be much tougher for some taxpayers. Particularly for those with large tax bills, this could see them face rather hefty penalties.”
Stamp duty extension boosts market
The key property announcement — an extension to the stamp duty holiday — had been widely flagged. But it still sparked an immediate response, according to Rightmove, the property website, which recorded its busiest-ever day, with more than 9m visits to its pages.
The arrangement that had been due to end on March 31 was extended by three months, but Sunak added a twist: over the subsequent three months, he would offer a half-strength, graduated incentive before ending the holiday entirely in October.
Introduced in July 2020, the measure lifted the threshold at which the purchase tax kicks in from £125,000 to £500,000, saving buyers up to £15,000. In this week’s Budget, it was extended to June 30, thereafter falling to £250,000 for another three months before reverting to the usual level of £125,000 from October 1.
The move applies only in England and Northern Ireland, since property purchase taxes are devolved to the Scottish and Welsh administrations. But yesterday, Wales said a similar holiday on its land transaction tax (LTT) would be extended by three months to the end of June. Unlike in England, however, its rates will then revert to normal.
Estate agents, who had lobbied hard for an extension, applauded the news, pointing to relieved buyers who could now complete in time to bank the full saving. But it leaves questions over how many will benefit and the prospect of worsening congestion in the homebuying process as more people enter the market.
The time taken to complete after agreeing a sale subject to contract has stretched from 14 weeks in summer 2020 to 22 weeks currently, according to consultancy TwentyCi. Colin Bradshaw, TwentyCi chief customer officer, says: “The number of sales agreed has risen sharply, up 40 per cent year-on-year, but there hasn’t been a magical increase in conveyancing capacity.”
It estimates that 181,000 of the 581,000 deals currently in the pipeline will not be completed by June 30 — a great improvement on the 374,000 that were due to lose out by the end of March, but the calculation does not account for more would-be buyers joining the queue as a result of the extension.
The chancellor’s other big property move was the unveiling of a government-backed mortgage guarantee scheme, to be launched in April. First-time buyers who need a 95 per cent mortgage have been locked out of the market as these higher-risk loans virtually disappeared in 2020.
The government will stand behind banks offering 95 per cent mortgages on properties worth up to £600,000 by guaranteeing a portion of the loan. With large banks offering the loans from next month, the scheme is available for all purchasers, not just first-time buyers.
Housing market experts welcomed the effort to help first-time buyers, but many questioned the likely loan terms and how widely they would be offered given tight mortgage affordability rules.
Simon Gammon, managing partner of mortgage broker Knight Frank Finance, says the interest rates offered by banks on 95 per cent loans are likely to remain much higher than for, say, 75 per cent mortgages. “With house prices the way they are, first-time buyers are already stretched. How many will in practice be able to take advantage of a larger mortgage? Will their income support it?”
But Andrew Wishart, property economist at Capital Economics, says a previous mortgage guarantee scheme that ran from 2013 to 2017 had shown “some success” in bringing back high-LTV lending and in cutting the interest rates charged on those loans. So the new scheme may have a similar effect.
Reporting by Emma Agyemang, Josephine Cumbo, Madison Darbyshire, James Pickford and Stefan Wagstyl