UK's Finance Minister Cheers Affluent Savers In Budget
Apart from abolishing the lifetime limit allowance on pensions – a move designed to encourage people taking early retirement to return to work – the UK budget statement lacked major fireworks. It was delivered against a background of nervous markets.
In his annual budget statement yesterday, conducted amidst a banking crisis in the US and Switzerland, UK finance minister – aka Chancellor of the Exchequer – Jeremy Hunt sought to portray the UK as a haven of calm.
There were few of the big surprises or dramatic tax cut/hike announcements that roiled bond markets in the autumn of 2022. The drama of failed Silicon Valley Bank in the US, and the slumping share price of Credit Suisse, are reminders that dullness has its virtues. The question is whether Hunt did enough to improve the economic outlook and that of his own Conservative Party. (The Tories trail Labour in the public opinion polls by a large margin.)
As far as wealth managers and their clients were concerned, the most significant likely announcement from Hunt was his decision to abolish the lifetime limit allowance on pensions and raise the pensions annual tax-free allowance to £60,000 ($72,172) from £40,000. The statement was also notable for what didn’t happen – the headline rate of corporation tax will still rise to 25 per cent from 19 per cent, and tax thresholds, such as for those paying the 40 per cent and 45 per cent rates, will be frozen, dragging millions of people into higher rates. There was also no change to the threshold and rate of inheritance tax – which now captures a large swathe of the UK population.
Hunt, who came into the job late last year after a period of turmoil amid the short-lived Liz Truss administration, also announced a new incentive for business investment that will allow companies to offset 100 per cent of their capital expenditure against profits, although it represented a scaling-back of tax breaks under a previous, two-year scheme.
The pension rule change is designed to halt an exodus of people, such as those in middle age, taking early retirement. Under the current allowance limit, which was due to last until 2026, people would begin paying additional tax after saving £1,073,100.
Elsewhere, Hunt made moves on child care, fuel duty and spending on poorer areas of the UK, with an eye on the kind of issues concerning voters.
Here are reactions from advisors, wealth firms and others:
Claire Trott, divisional director for retirement and
holistic planning at St. James’s Place
On the ending of the Lifetime Tax Allowance, Trott said: “This is generally a welcome move and will mean that many people who would have been impacted by charges will now not have them applied. The lifetime allowance isn’t being abolished until 2024, although any LTA charges will not be levied after the end of this tax year.
“In addition to this and to take account of the abolition of the LTA, the TFC amount will be restricted to £268,275. This shouldn’t impact those with previous lifetime allowance protection, although full details of this are yet to be seen. There will be many who have paid charges this year, or who are hitting age 75 in this tax year and we are unable to determine yet if they will have any retrospective protections.”
James Lynch, fixed income investment manager at Aegon
“The chancellor’s budget on the 15th March was not particularly exciting – this is a very good thing from a UK perspective. Unless you are close to retirement with a large pension pot that is, as the ifetime allowance has been scrapped, if you are interested in this, there will be plenty to read in the coming days and weeks.
“At the same time we always get the Debt Management Office remit for gilt issuance for the year ahead. Once again this was not particularly exiting, all pretty much in line at £241 billion, which is a lot lower than some feared back in the depths of the gilt crisis of September/October 2022, £300 billion was not out of the question then. If there has been no excitement on the fiscal side today, there has been plenty on the repricing in gilt yields and Bank of England expectations. Ten-year gilts have fallen 60 basis points this month and the market is now only pricing in 10 basis points of policy move next week and 25 bps in total.
“The risk-off events for markets that started with SVB and US regional banks have caused a reprice in market participants' outlook that maybe, just maybe, [show] that the sharp interest rate hikes of the past are finally starting to work. With that in mind from a risk management point of view from the BoE, it is entirely plausible we have seen the last of the rate increases.”
Andrew Barker, director of proposition at Succession
“The abolition of the LTA will have profound implications for how we look at pensions and all other vehicles for investment. It’s the most significant change to pensions since scrapping the necessity to buy an annuity. Once again, pensions prove to be your best bet – the most versatile and tax advantageous way of investing.”
Susannah Streeter, head of money and markets, Hargreaves
“Jeremy Hunt’s sketch of a plan for growth has turned into a blueprint with welcome detail on incentives aimed at increasing investment in the UK. Although there will be huge disappointment that he hasn’t budged on the jump in corporation tax to 25 per cent, the full capital expensing scheme will offer some relief. It means that every pound a company invests in equipment will be offset but it’s still not as generous as the super-allowance which it replaces.
“Clearly the chancellor is prioritising areas where he believes the UK has a head start and could gain lots of ground in the future with the right support and tax breaks for R&D are right at the heart of the strategy. This is a hugely welcome development in a week when many smaller life sciences firms were facing an existential crisis with funding lines at risk of being severed following the SVB collapse. Now they’ll benefit from an enhanced credit if they spend 40 per cent or more of total expenditure on research and development. This is a big dose of financial persuasion to stay rooted in the UK and invest for the longer term. The much swifter approval for drugs with the shake-up of the regulatory procedure could be a game changer for pharma companies.”
Mark Littlewood, director general, Institute of Economic
“The budget lacks ambition but takes some welcome steps. Introducing full expensing for plants, machinery and equipment will encourage business investment and boost productivity. Abolishing the lifetime pension allowance will encourage more people to work. Recognising foreign medicine approvals could save lives by providing earlier access to treatments.
“The budget is nowhere near radical enough to jump-start the British economy. The tax burden and public spending will remain historically high, continuing the doom loop of low growth and high taxes.
“According to the OBR [Office for Budget Responsibility], freezing income tax thresholds will mean 3.2 million dragged into paying tax and 2.5 million more paying the 40p higher rate or 45p additional rate. Public spending will remain at the highest proportion of the economy since World War II and significantly above pre-Covid levels.
“Public borrowing is £24 billion less than forecast by the OBR last November. The government could have used more of this fiscal headroom to cut taxes, instead of increasing spending by £40 billion over the next five years. Public spending on childcare grew by over 500 per cent in real terms between 2001 and 2020. Yet England has the third highest out-of-pocket childcare costs among developed countries, according to the OECD. Without cutting red tape, more subsidies will only add fuel to that fire.”
Nimesh Shah, CEO at tax and advisory firm Blick
"The secret winners from Jeremy Hunt’s budget are individuals earning over £300,000. Whilst all the pension headlines are around abolishing the lifetime allowance, hidden away in the detail of Jeremy Hunt’s budget is an increase to the minimum tapered allowance to £10,000, up from £4,000 – this is the minimum level of tax relievable pension contributions. The £6,000 increase will be worth an additional £2,700 of tax relief to someone earning over £360,000. Quite perversely, a minority of very high earners will be some of the biggest winners from today’s budget announcements.”
Paul Gordon, head of medical specialist wealth planning
“The abolition of the lifetime allowance is an amazing response to some of the issues being faced by NHS doctors and employees. It will help retain the NHS workforce which is required.”
“At first glance this looks very helpful for those senior NHS managerial staff looking towards their retirement planning and should, when combined with the recent NHS consultation, allow greater flexibility and options to continue increasing their retirement pots. It will become even more important to help staff understand their retirement provisions and peripheral benefits.”
Daniele Antonucci, chief economist, and macro strategist
at Quintet Private Bank
“While the budget itself isn’t particularly surprising in and by itself, the macro and fiscal forecast does reveal that the UK economy remains under pressure. Our base case remains recession.
"The Office for Budget Responsibility, the fiscal watchdog, now expects a 10 per cent drop in house prices. This is somewhat more pronounced than the previous prediction back in November, when the mortgage market had been impacted by the high borrowing and spending mini-budget. The OBR expects property transactions to fall by 20 per cent.
“Interest rates and inflation are squeezing disposable income, which is now set to drop by almost 6 per cent over the next two years, marking the steepest fall in over half a century.”
Nikhil Oza, corporate tax director at UHY Hacker
“Nobody should underestimate just how radical a step the chancellor has taken on business investment today. This policy makes the UK a world leader in encouraging businesses to invest in IT, plant and machinery.
“It’s also a big step forward in simplifying tax for a huge swathe of businesses. This move will be welcomed by businesses all over the country and will encourage them to invest in the assets that will drive their growth and perhaps help close the productivity gap.”