On Budget day 2021 Rishi Sunak struck a delicate balance between fanning the flames of a nascent economic recovery and plugging the holes in the largest annual deficit on record. Brewin Dolphin has put together a helpful commentary highlighting the most impactful elements of measure announced today.
Brewin Dolphin Chief Strategist, Guy Foster, surmised the day, saying,
“Unsurprisingly, he’s kicked the tax-raising can down the road. For those expecting the worst, they are relieved to only have had their allowances frozen. That story could be quite different next year. This was a well-judged budget, careful not to trample on any nascent recovery. It’s jam today but something far less appetising a few years hence.”
“The big tax increase is coming at the right point in the economic cycle but the wrong time in the political cycle which is another reason to direct it at business rather than employees. So companies can do more than just fix their roof while fiscal sun is shining with a huge benefit for investment and any benefits that accrue to the new freeports. The hope is the economy is an unstoppable force as it meets the immovable object of fiscal repair.”
Brewin Dolphin’s Lee Clark, financial planner, said,
“Sunak knows now is not the year to dabble with people with higher propensity to spend. Whilst we anticipate that there will be a root and branch reform of the UK’s tax system at some point, the chancellor has given the people who can save the opportunity to keep on doing so. We still have the annual £40,000 pension allowance, a £12,300 capital gains tax allowance and £20,000 ISA allowance. Our advice to our clients is to keep making the most of these allowances whilst they are available.”
Guy Foster continued,
“I don’t envy the chancellor at all. He’s stuck between helping the economy recover and raising taxes to fill the deficit black hole (and prompting a Tory rebellion if he raises them too soon). Within that context, he clearly feels it’s too early to be raising taxes. But he has clearly found some early easy wins, like simply not raising tax allowances, like the pension lifetime allowance, which will start to fill the void.
“Freezing the lifetime allowance is effectively a tax on pension withdrawals and so will have consequences for spending and growth. The current need to repair the public finances seems to be undermining the ever-present challenge of encouraging people to save for their retirement.”
Brewin Dolphin Chief Strategist, Guy foster said,
“The Chancellor announced a significant rise in the rate at which company profits are taxed, with a gradual rise from 19% to 25% over this parliament. The staggered increase will reportedly raise £12bn. The pandemic has had a huge impact on companies. Some have benefitted and will have broad shoulders on which the burden of this tax can rest. Other have received huge support from taxpayers and will not suffer from higher corporation tax rates yet but will as their profits recover.
“The impending six percentage point increase in the rate of corporation tax brings the UK closer to other G7 countries but means that the UK may have a corporation tax rate that is double that of Ireland. By contrast President Joe Biden plans to raise the equivalent tax from 21% to 28% in the US.
“Against the increase in corporation taxation are some appealing aspects for business. Tax advantaged areas have had limited impact in the past but these free ports are in areas which could now benefit from a business environment that is less dependent upon physical proximity. The temporary 130% allowance on investment is a further opportunity for UK industry to transition and transcend the new economic environment.”
Income tax thresholds
Financial planner, Lee Clark, said,
“We’ve all got to play our part. This is a good way for the government to maintain manifesto pledges to not raise income tax by freezing rates. There is a structural deficit; we are currently not raising enough tax to pay for what we spend. By freezing income tax, the chancellor will scoop up those people getting pay rises over the next few years. This will include unionised pre-approved pay rises. It will also include workers who will start to pay tax for the first time.
“But the flip side is that consumers will have less spending power as a result. We’re also concerned that people moving into high tax bracket will be affected by any future changes to pension tax relief for higher rate tax payers. It will affect consumer spending and saving power just at a time when many will be getting back on their feet financially.”
Freezing of the lifetime allowance
Lee Clark, continued,
“This is the least worst option when considering the alternative is to tinker with tax relief on pension contributions. But whilst we appreciate that the debt does have to be paid somehow, it would be far better to leave pensions alone.
“By freezing the lifetime allowance, the chancellor is effectively bringing the real value of people’s pensions down. While ISA millionaires are celebrated, and rightly so, as prudent savers, those who have accrued pension funds of a similar amount are to be penalised.
“Those individuals with larger pension pots are considered to be amongst the fortunate. However, if the move goes ahead, we will see pension changes cause a further disincentive to save when as a nation we have a greater need than ever before to make provision for later life.
“If you think you might hit £1,073,000 in your pension pot before retirement, you should have regular reviews with your adviser, make sure that the full range of savings options are considered and review your death benefit nominations.”
Green savings bond
People can invest in the world’s first sovereign green savings bond. The bond will be offered by NS&I, which issues Premium Bonds, and will invest £20 million in offshore wind, £70 million in long-term, low-carbon energy storage and £4 million to boost green-energy crops.
Rob Burgeman, Investment Manager, at Brewin Dolphin, commented,
“There is no doubt that raising money for these key national infrastructure projects is crucial so we can invest in a carbon-free future. However, hard-nosed savers will need weigh those objectives up against the savings rates of this new product. When an NS&I income bond is giving you a return of just 0.01%, the UK inflation rate is 1.4%, this is not what investors and pensions need to stop their savings being ravaged by the corrosive effects of inflation. What is important to people, and those relying on income particularly, is what interest rates are going to be paid. Over the last few years NS&I products have seen nothing but cuts, cuts, cuts.”