Rishi Sunak’s re-election strategy was clear to see in Jeremy Hunt’s second budget. Here, Patrick Ingram shares the headlines and his key takeaways from yesterday’s announcement:
- Inflation - falling to 2.9% this year. Growth - UK to avoid a 'technical' recession.
- Increase in workforce targeted via childcare and changes to benefit regime.
- Business tax - Corporation Tax will rise to 25% in April, up from 19%.
- No inflation uplift to personal allowances. Significant real terms increase in tax.
- Abolition of LTA and increases to AA and MPAA good news for advisers.
The big news
As if by magic, Jeremy Hunt revealed a pair of statistical rabbits on his second outing as Chancellor. To start, the Office of Budget Responsibility now believe the UK will avoid a technical recession in 2023, and we’ll see the economy contract by only 0.2% this year. They forecast inflation will fall to 2.9% by Christmas. This is very good news, but not an end to all our economic troubles.
A big talking point for the financial services sector was the abolition of the Lifetime Allowance and the increase in the pension contribution Annual Allowance to £60,000.
Inflation, Debt, Growth
Sunak plans to fight the next General Election on a track record of halving inflation, promoting growth and cutting public sector debt. On the face of it, with the positive news coming from the economy, he’s in good shape. And with this extra spending headroom, Jeremy Hunt announced a much longer list of spending initiatives than we’ve seen in quite a while. The list includes £11bn on defence, £8bn on regional transport, £20bn on carbon capture, £2.5bn on research into Artificial Intelligence and over £1bn on childcare. The detail in the list and the vision are impressive. But what can his attempts to improve competitiveness and productivity do within 18 months that might change the outlook of the electorate towards their personal situations?
Getting people back to work
Central to the growth strategy is the expansion of the workforce. A variety of measures have been announced to achieve this, around childcare, guarantees of wrap around provision at the start and end of the school day, apprenticeships for older people and of course the pension changes mentioned already. There are new schemes to ensure the benefit system won’t disincentivise the disabled from working and a tougher approach to those on benefits refusing reasonable job offers. The target is a bigger, more productive workforce to drive a bigger economy and a bigger tax base.
Business taxation
Many smaller businesses are dreading the corporation tax rise to 25% in April. There was no change in this measure - but it is being blunted with £30bn in tax relief incentives to encourage businesses to make capital investment into plant, machinery and R&D. These are welcome - if you have the cash to spend and/or the confidence to borrow in expectation of a return. Both seem in relatively short supply, given the consumer is drawing in their horns.
Cost of living crisis and personal tax
To combat the severe impact of inflation, particularly in energy costs, the energy price subsidy of £67 a month is being extended to June at a cost of £3bn. What is not on offer is any uprating of personal allowances to reflect inflation. This represents a huge increase in the personal tax burden from this April and into the future. It also forms part of the jigsaw around public sector pay, to which the Chancellor made no reference. Clearly, with the new expectation that inflation will fall sharply, there is hope for additional leverage in those negotiations. Their outcome will have a considerable bearing on whether the fiscal plan stays on track.
Pension changes
What will advisers make of the abolition of the lifetime allowance, the increase in the annual allowance to £60,000 and the increase in the Money Purchase Annual Allowance to £10,000? And, perhaps more importantly, how will those taking advice react?
It’s a personal view but if you already have a structured financial plan to retire, these proposed changes might encourage you to take a second look, as you'd have more flexibility to reverse your decision if it doesn’t work out.
Money that would have come to the Treasury in tax before these changes amounts to £4bn over the next five years. This must be good news for financial advisers who will be responsible for recommending a home for most of that total. The work of this summer will include deciding how much more needs to be added to existing pots to keep plans on track, in real terms, as advisers talk with clients about how they see their futures and how the economic, and political, situation will play out.
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