UK Budget 2020: What to expect

05 Mar 2020

The first budget since Prime Minister Boris Johnson’s landslide win in December is just days away. A hefty parliamentary majority should have given the government more scope for fiscal and spending reform, but plans have been knocked off course firstly by last month's resignation of the then chancellor, Sajid Javid, and then by the coronavirus outbreak.

The budget on March 11 will give the first indications of how the new chancellor, Rishi Sunak, intends to support the economy in the event of a more significant outbreak of the coronavirus, called COVID-19, as well as potentially shedding light on the strategy for the UK after the end of the Brexit transition period.
 
Here we analyse what it might contain and how it will impact companies and individuals.

Businesses

Leaders of the UK’s army of small and medium-sized enterprises will be watching out for tax changes, such as any curbs on entrepreneurs’ relief, the prospect of a much-awaited overhaul of business rates, and plans for any financial support amid the COVID-19 outbreak.
 
Business leaders will also be looking at Boris Johnson’s long-term vision for cultivating a flourishing, independent economy, with announcements expected around both physical and digital infrastructure, as well as plans to boost productivity after Brexit.
 
The government’s ability to provide a regulatory framework that succeeds in balancing labour and environmental protection with support for business will also be a high on the watchlist for businesses.
  • Fiscal policy

    With speculation that Mr Sunak may adopt a more relaxed approach to public spending than his predecessor, it remains to be seen whether this will be funded with tax hikes or an extension to the deadline for balancing the books.

     

    • As they currently stand, the existing budget rules apply until the 2022/23 fiscal year and provide only a small degree of headroom to loosen policy beyond existing promises.
    • The new chancellor may wish to adjust the rules to provide more scope to “level up” the regions, possibly by extending them across the five-year lifespan of the current Parliament.
    • A commitment to the triple tax lock is expected to hold, which means no increases in income tax, national insurance or VAT.
    • Amid warnings that the coronavirus could hurt the economy, Mr Sunak has told officials to develop measures which can support the public health response and businesses to mitigate the effects of any epidemic in the UK. Mr Sunak is expected to make extra cash available for the NHS, and other potential measures may include help for small companies that have lost staff to quarantine.
  • Tax and business rates

    Several changes to business taxes could form part of the budget, ranging from an overhaul of the rates system to the introduction of a digital services tax. However, what does seem clear is that any cut to corporation tax is off the agenda.

     

    • The government will likely confirm that corporation tax will not be cut from 19% to 17% as previously planned.
    • Business rates will increase by 1.7% in April, in line with the Consumer Price Inflation (CPI) figure for September.
    • However, the budget may include plans for a fundamental review of the business rates system, including specific reductions for small retail businesses and other select leisure sectors.
    • There is also talk of the chancellor announcing a consultation on scrapping business rates altogether and replacing them with a land value tax, as a way to provide support for struggling high streets.
    • In response to the threat of a more significant outbreak of COVID-19 in the UK, the government has indicated that businesses facing short-term cash flow issues as the result of subdued demand may be given more time to pay their taxes.
    • The Conservatives said in their manifesto that they would increase the R&D tax credit rate to 13%.
    • A Digital Services Tax is set to be introduced from April 2020, with the Conservative manifesto committing to its implementation. This will see 2% levied on UK-derived revenues of social media platforms, search engines and online marketplaces.
    • The government has suggested that it may curb entrepreneurs’ relief, a tax break that allows company owners to pay less capital gains tax when selling their businesses. Under current rules, sellers pay only 10% on lifetime gains of up to £10 million, compared with the 20% paid by higher-rate taxpayers.
    • The budget may also include provisions for raising the Structures and Buildings Allowance from 2% to 3%, benefiting businesses looking to invest in new or renovated premises.
  • Support for start-ups and SMEs

    The budget is a chance for the Conservative Party to show its support for SMEs, the backbone of the UK economy.

     

    • The government has said it will clamp down on late payments and strengthen the powers of the Small Business Commissioner to support small businesses that are exploited by their larger partners.
    • Possible plans could include making make the Prompt Payment Code compulsory for businesses with more than 250 staff and payment terms to be halved to a maximum of 30 days, as well as a financial penalty regime for persistent offenders.
    • Other measures might include an expansion of start-up loans by the British Business Bank and support for SMEs in public procurement processes.
    • Potential measures may include help for small companies that lose staff to quarantine or suffer financial difficulties amid the coronavirus outbreak.
  • Infrastructure

    The government has reiterated its pre-election promise to reduce economic inequality between south-east England and areas won from the opposition Labour Party in the Midlands and the North.

     

    • The Conservative manifesto included plans for £100 billion of infrastructure investment.
    • Further commitments to major infrastructure projects including Northern Powerhouse Rail, HS2 and Midlands Rail Hub are expected.
    • The Conservatives pledged in their manifesto to bring full-fibre and gigabit-capable broadband to every home and business across the UK by 2025, as well as £5 billion of new public funding to connect premises which are not commercially viable.
  • Labour market reforms

    The Conservative Party’s approach to labour market reform in the run-up to the election focused on ensuring that it is “sensible and proportionate”, so while the budget is likely to include additional protections for those on zero-hours contracts, the emphasis is expected to fall on investment in skills.

     

    • In December, the government confirmed it would raise all minimum wage rates in line with that recommended by the Low Pay Commission. This will see the headline National Living Wage increase by 6.2% to £8.72 per hour from April 2020.
    • Plans may include improvements to the Apprenticeship Levy and the creation of a £3 billion National Skills Fund.
    • The government plans to scrap a £30,000 minimum salary threshold for immigrants arriving in the UK after Brexit under plans to implement an Australian style points-based system.
    • The budget may include an increase in workers’ rights to protect those on maternity leave and zero-hours contracts.
    • Reforms to off-payroll working rules known as IR35 may impact around 230,000 contractors in the UK as part of a crackdown on “disguised employment.”
  • Environment

    During the 2019 general election campaign, the Conservative Party promised to prioritise the environment at its next budget. The government is likely to give further details on how it intends to reach its goal of net-zero carbon emissions by 2050. 

     

    • There is a plan to help lower energy bills by investing £9.2 billion in the energy efficiency of homes, schools and hospitals.
    • Flood defences will likely receive £4 billion in new funding.
    • The Conservatives pledged in their manifesto to invest £1 billion in completing a fast-charging network to ensure that everyone is within 30 miles of a rapid electric vehicle charging system.
    • The Conservatives have also vowed additional charges on single-use plastics, a new clean energy fund, investment to support the decarbonisation of energy-intensive industries, and to build a carbon capture storage cluster by the mid-2020s.
  • Innovation

    A strategy for fostering innovation is likely to feature. 

     

    • The budget may include a target for increasing investment in R&D to 2.4% of GDP.
    • The Conservatives said in their manifesto that they would increase the R&D tax credit rate to 13%.

Individuals

Given that expectations are for Mr Sunak to increase public spending, speculation is rampant about how this will be funded. The primary focus is on whether the government will raise the tax burden on wealthy people, with potential measures including cutting the rate of pension tax relief from 40% to 20% for high earners, a so-called mansion tax on the most expensive homes and the reform of entrepreneur’s relief.
 
It is also possible that the government will use the budget to reveal a shake-up of the inheritance tax system with significant implications for private banking clients.
  • Tax

    • The Conservative manifesto ruled out raising income tax rates. Prime Minister Boris Johnson suggested he might raise the higher rate threshold from £50,000 to £80,000, though this looks to have been put on ice for now.
    • Mr Sunak’s predecessor, Sajid Javid, has said he planned to cut the basic rate of income tax by 2% at this budget had he not resigned last month. It is unclear whether the current chancellor will include this policy.
    • An increase in the threshold at which individuals start paying National Insurance from £8,628 to £9,500 is likely to be confirmed.
    • The chancellor has been urged to make changes to Inheritance Tax (IHT), with an all-party parliamentary group of politicians calling for a reduction to 10% from the current rate of 40%, together with an overhaul of how the system works, including an end of tax-free gifting and a £30,000 cap on cash gifts over a lifetime.
    • The government has suggested that it may curb entrepreneurs’ relief, a tax break that allows company owners to pay less capital gains tax when selling their businesses. Under current rules, sellers pay only 10% on lifetime gains of up to £10 million, compared with the 20% paid by higher-rate taxpayers.
  • Pensions

    • The Treasury was said to have drawn up plans to cut the relief that higher-rate taxpayers receive on pension contributions from 40% to 20%, while basic-rate taxpayers’ relief would have remained unchanged. However, such a move now seems unlikely following media reports saying that these plans have been dropped.
    • It has been reported that the Conservatives are looking to provide pension’s relief to doctors by raising the threshold from £110,000 to £150,000.

     

  • Property

    • There is the potential for an overhaul of stamp duty, including switching the tax from buyer to seller and scrapping it for homes worth £500,000 or less.
    • A wealth tax could be levied each year on expensive properties, although Mr Johnson appears to have ruled this option out.
    • The Conservative manifesto also pledged to introduce a possible 3% stamp duty surcharge on second home and investment properties purchased by individuals and companies who are not tax resident in the UK.