The newly appointed Chancellor, Rishi Sunak, announced a Budget with a repeated emphasis on ‘getting things done’, echoing the recent election campaign.
His initial focus was on the short-term measures needed to deal with the challenges the UK faces as a result of the coronavirus pandemic. These amounted to a £12bn fiscal stimulus, with more available if required. There was help for both businesses and individuals.
For the coming year, statutory sick pay will be available to more people and so will some other social security benefits. Business Rates will be reduced or even eliminated for some smaller businesses – at least in the short term. Other immediate support initiatives for smaller businesses include greater access to bank lending, as well as enhancements to the HMRC ‘Time to Pay’ service.
The Chancellor is due to announce another Budget in the Autumn and so there were several consultations about possible future tax changes, including new proposals on the treatment of fund management companies, pension tax administration, and aspects of research and development tax credits.
Some of the other highlights were:
- The changes to the taper of the pension annual allowances will mean that many fewer higher paid people – especially important for the NHS – will be hit by a reduced annual allowance.
- The reduction of entrepreneurs’ relief to £1 million of gain was well trailed, and for a time abolition seemed a possibility.
- More than doubling of the annual limit for Junior ISAs to £9,000 was a pleasant surprise.
- Smaller businesses will welcome the increase in the NIC employment allowance to £4,000.
- Publishers should be very pleased by the decision to make electronic publications zero-rated for VAT.
- From April 2021, only electric and other zero-emission cars will qualify for first year allowances and cars with emissions over 50 g/km will qualify for writing down allowances of just 6% a year.
The Chancellor decided to raise the annual allowance taper by £90,000 immediately from this April. For the tax year 2020-21, the threshold income will be £200,000 as opposed to the current £110,000. The annual allowance will only begin to taper down for individuals who have an “adjusted income” above £240,000. In other words, the taper now kicks in for those with adjusted income between £240,001 and £312,000 though the lowest relief can fall to £4,000, lower than the current £10,000.
The Government wanted to resolve the issue for senior NHS staff and, especially, to end the disincentive for doctors to work additional hours. It believes it has now removed the vast majority of them from facing additional tax bills. That could prove very important if the NHS is trying to catch up with a backlog when Covid-19 does finally relent.
In a more run-of-the-mill change but still a helpful one, the lifetime allowance itself will increase in line with the consumer price index (CPI) for 2020/21, rising to £1,073,100.
Generally, we welcome the decision not to radically alter tax relief more broadly either in the quest for extra cash or indeed of ‘levelling up’ the pension system. In our view, it would really have been levelling down.
Entrepreneurs Relief and ISA changes
There were no changes to personal income tax rates, bands or allowances. Capital Gains Tax threshold will rise to £12,300 from 6th April 2020. The big loser is entrepreneurs Relief, which has been cut back from £10m to £1m. More business people will face a full 20 per cent CGT bill on the bulk of money raised from the sale of a business rather than the current 10 per cent.
But the Chancellor has also given back at least a little – so for example, the national insurance threshold will rise to £9,500 and the junior ISA limit will rise significantly from £4,368 a year to a much more generous £9,000.
This means that, at the age of 16, a child can have access to both an adult ISA as well as their JISA, so can potentially put away £29k tax free, starting from April this year.
The residence nil rate band will increase from £150,000 to £175,000 from April 2020, delivering on the Government’s commitment to allow some couples to leave an IHT-free inheritance of up to £1 million to future generations.
Despite recommendations to make sweeping changes to the Inheritance Tax legislation by the Office of Tax Simplification, no changes were announced.
From 1 April 2021, non-UK resident buyers of residential property will pay an additional 2% of stamp duty to help ease house price inflation and make homes more affordable to UK residents
Funding the giveaway
The Budget has been financed in part with the direct fiscal savings associated with Brexit – the contributions no longer required (net of the divorce settlement) and the customs duties no longer remitted to the EU – and by cancelling the corporation tax cut that was due in April.
But tax receipts will rise a little too. Revenue from income tax and National Insurance contributions will go up by 0.7% of GDP over the course of this Parliament because unchanged personal allowance and higher rate thresholds mean more people will be dragged into higher tax bands. Capital taxes are boosted from 2021-22 onwards by the big curtailment of entrepreneurs’ relief. According to the government there is no evidence this relief actually encourages entrepreneurialism.
But the huge amount of new spending announced Wednesday will be financed mainly through higher borrowing.
The fact is, governments with their own mints can spend as much money as they want. The government’s ability to finance itself is ultimately constrained only by inflation. It collects taxes and issues debt.
If inflation expectations remain low, a government with its own currency can run deficits ad infinitum. Just look at Japan, the sustainability of Japan’s debt rarely gets mentioned these days, even though its net debt ratio is c.150% of GDP (the UK’s is c.80%).
Excluding the virus-related stimulus, the OBR expects the economy to grow by just 1.1% in 2020, even with the purse strings significantly loosened. This shows what a weak state the UK economy is in. Indeed, this may even be a bit optimistic.
Assessing the impact of Covid-19 itself and the related stimulus is extremely difficult. We do not know if the disruption is likely to lift rapidly in the second quarter or carry on for some time. On balance, the extra stimulus announced by Mr Sunak is likely to be offset by the cost of the disruption. It is unclear at the time of writing whether the stimulus would remain in place for the full year if the disruption lifts quickly.
Gilt yields and interest rate expectations were little changed following the Chancellor’s speech. The pound weakened a touch, but that could be due to the general risk-off move in global markets that has little to do with UK fiscal maths. The more pertinent question for investors is: will the EU and the US do more to stimulate the economy? We’ll continue to monitor the developments and endeavour to keep you up to date.
If you have any questions about the summary’s contents or how any aspects of your tax and financial planning may be affected by the Budget, please call us to discuss them.