Swaati Taylor, Wealth Planner
In the Brief a fortnight ago, we considered what to expect from this week's Budget. Whilst the long-term picture of the UK public finances remains somewhat unknown, we did receive more detail on a few key areas from Chancellor Rishi Sunak.
The emphasis in the Budget was for the government firstly to continue to "do whatever it takes" to protect jobs and livelihoods during the pandemic, and then start to repair the public finances and outline plans to build the future economy.
The Chancellor's primary objective is supported by an additional £65 billion of measures, including:
In most instances, these measures will provide continued support that lasts beyond the key dates of the Prime Minister's current roadmap, offering stability and reassurance for the exit strategy and accounting for any delays.
From a personal taxation point of view, there were no major changes or shocks. The speculated changes to capital gains tax (CGT), the introduction of a wealth tax and changes to Inheritance Tax rates were not mentioned at all. The biggest impact for many is a "stealth tax" via the removal of previously planned increases to the Income Tax Personal Allowance and basic rate Income Tax threshold. Whilst these changes (or lack of) perhaps don't capture headlines, it is projected to raise an additional £8 billion a year by 2025/26 tax year, compared with what would have been received had thresholds been raised in line with inflation. The Office for Budget Responsibility expects the change to bring 1.3 million more people into paying Income Tax and a further million into paying higher rate tax.
Taking the rise in the cost of living into account, the freezing of Personal Allowances would effectively bring the personal allowance in 2025/26 tax year to the same level it was in the 2014/2015 tax year. This will ultimately hit middle to higher income earners the hardest. It is not the first time we have seen such a strategy, with Gordon Brown enacting a similar policy under the Labour government at his 2002 Budget.
Mr Sunak also announced a freeze in the pension lifetime allowance at £1,073,100, which is projected to generate a further £300 million per annum by the 2025/26 tax year, compared to increasing the allowance in line with inflation.
Whilst the Budget changes will bring in additional revenue to the Treasury, details remain sparse on the long-term plans to rebuild the public finances following the pandemic. However, the Treasury has confirmed it is set to publish a number of tax consultations on 23rd March, which is widely being branded "Tax Day". This is likely to shed more light on the government's longer-term thinking regarding its tax strategy.
Indeed, if you watched the 5pm briefing on Wednesday evening, when the Chancellor was asked if he could rule out any increases in CGT this Parliament, he stated he "was not able to comment on fiscal policy other than those detailed in the Budget", before referring back to their Manifesto pledge not to increase Income Tax, National Insurance or VAT. Thereby, CGT could potentially be a key part of the "Tax Day" consultations. Other areas we heard little about included pension tax relief, Inheritance Tax (other than a freeze in the nil rate bands) and business relief.
Overall, the Chancellor will feel he has managed to strike a balance between encouraging economic recovery and balancing the books. Nevertheless, we anticipate that further measures during the remainder of this Parliament will be needed in order to repair the public finances. We may well see more transformative changes to the overall UK taxation system in the Autumn Budget.
Whilst the 'Tax Day' consultations are likely to give rise to further speculations, a key takeaway from this week's Budget is that Personal Allowances are unlikely to become any more favourable then they currently are. With this in mind, it would be prudent to give some thought to your long-term financial goals, which, when overlaid with strategic planning, can ensure that you are as prepared as possible for the future.
Read more from the Brief: Will higher inflation lead to interest rate rises?
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