Five months and a day since Liz Truss appointed him as Chancellor, Jeremy Hunt delivered his first Budget in the House of Commons. He was brought in to steady the ship after the calamitous tenure of his predecessor Kwasi Kwarteng, and on that front has delivered: the public finances – and UK financial markets – stabilised in the wake of his appointment, and his Autumn Statement in mid-November. The Spring Budget is an attempt to build upon that foundation and deliver long-term sustainable economic growth via a number of supply-side reforms.
We applaud the chancellor for attempting to tackle the UK's structural weakness by focusing on long-term supply-side measures. But issues such as poor productivity growth and high economic inactivity rates are intrinsically entrenched. And though the measures announced last week are welcome, they are far from a silver bullet for the economy's woes.
What is clear from the Budget is that the time for large tax cuts has not yet come. The Chancellor will hope that forecasts for economic activity will again beat expectations as inflation slows (the government aims to halve inflation this year), leading to continued improvements in public finances. If so, he will aim to find room for a tax giveaway ahead of a likely 2024 election.
In the meantime, Hunt’s changes to the pension rules, which will see the Lifetime Allowance (LTA) effectively abolished, are a welcome boon for high-net-worth individuals who want to contribute more to their pension before retirement.
In the meantime, Hunt’s changes to the pension rules, which will see the Lifetime Allowance (LTA) effectively abolished, are a welcome boon for high-net-worth individuals who want to contribute more to their pension before retirement. Helpful in this regard is also the rise in the Annual Allowance Limit for pension contributions from £40,000 to £60,000. Note though that, as beforehand, an ‘adjusted income’ threshold applies, beyond which the standard Annual Allowance is tapered. This is now to be raised too, from £240,000 in the current tax year to £260,000 in the 2023/24 tax year. As always, therefore, seeking personalised advice suited to an individual’s specific circumstances remains of paramount importance.
For businesses, the upcoming corporation tax hike will be painful, with the main rate due to rise from 19% to 25% in April 2023. However, for smaller businesses with profits of less than £50,000, there is some respite with their corporation tax rate to remain unchanged. Businesses with profits between £50,000 and £250,000 will also see their corporation tax bill rise from April 2023.
Prior to the outbreak of turmoil in the global banking sector, the UK’s economic outlook had broadly changed for the better, with the economy no longer expected to enter a technical recession this year, according to the Office for Budget Responsibility (OBR). Even then, the OBR was hardly looking for a buoyant environment. Their key judgement was that real household disposable income was still expected to decline (by -2.6% in 2023 after -2.5% in 2022). Inflation, although easing, was predicted to stay high this year, the key factor behind the current cost-of-living burden. The good news, though, is that it was forecast to fall away quickly in subsequent years.
The extent to which the banking system turmoil changes that – a factor not incorporated into the Budget, given it is too recent – is the elephant in the room now. This is still a very fluid and fast-moving situation, but we are cautiously optimistic that the authorities are sufficiently proactive, and banks’ capital and liquidity positions sufficiently improved from the GFC, to prevent wider contagion that could turn idiosyncratic issues at certain institutions into a wider banking and financial crisis.
Read on for our five key takeaways from the Budget:
1. Relaxation of pension rules
One of the most headline-grabbing policies was the removal of the LTA charge. The LTA is the maximum amount a pension holder can draw tax free in their lifetime and is currently set at £1.07 million. From 6 April 2023, however, there will be no tax charge should this limit be breached. Moreover, from April 2024, the LTA will be removed entirely. Alongside this, Hunt also raised the yearly allowance – the maximum amount that can be put into a pension in a year – from £40,000 to £60,000, subject to a tapering of this for those with ‘adjusted income’ of over £260,000 p.a. (previously: £240,000).
Pension pots will still be constrained to some extent, but the potential disincentive to keep on saving in pensions is removed for many. The government hopes the measures will incentivise workers with pensions that may be close to breaching the LTA to stay in jobs longer.
2. Extension of childcare support
From April 2024, parents of one- and two-year-olds in households where all adults work at least 16 hours a week will be eligible to receive 30 hours of free childcare. The government already provides some support in this area, with working parents of children aged three and four eligible for 30 hours of free childcare each week. The new measure will be rolled out in stages from 2024. The policy is intended to encourage labour-force participation among parents – and future parents – who struggle to return to work because of the UK’s high childcare costs.
3. Energy bill support
The government will maintain the Energy Price Guarantee (EPG) at the current level of £2,500 a year for a typical household’s energy bills for a further three months. The hope and expectation is that, by the time it is raised to £3,000 a year from July 2023, market prices actually warrant energy bills of below £2,000 and the EPG becomes effectively redundant. The chancellor also announced that fuel duty will remain frozen, extending the 5p cut that came into effect in March 2022 by a further 12 months and cancelling its indexation to inflation in 2023-24. These measures were widely expected. In fact, fuel duty has not actually been raised since 2010.
4. Business incentives for investment
Hunt also introduced a new scheme to encourage business investment, and thereby ultimately stimulate growth in the economy. A two-year ‘super-deduction’ for business loans for investment was introduced in the March 2021 budget. Under the new ‘full expensing’ scheme that replaces it, 100% of qualifying capital expenditure on plant and machinery in the UK can be deducted from taxable profits, as opposed to 130% previously. This applies for the next three tax years, although the chancellor hopes to turn it into a permanent measure.
5. Income-tax thresholds
Perhaps the biggest takeaway is what was not said, namely that the chancellor made no changes to the planned freeze in income-tax thresholds. This was extended until April 2028 – so by an extra two years – in November’s Autumn Statement, having initially been introduced by then-Chancellor Sunak in 2021. It means that taxpayers who receive a pay rise could be pushed into a higher tax band and can therefore be regarded as a ‘stealth’ tax rise. Similarly, the cut to the additional (45%) tax rate threshold will also go ahead, with it due to fall from £150,000 to £125,140 in April 2023.
Watch the webinar where Investec Chief Economist Phil Shaw provides details insight into the Spring Budget
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