Key announcements from the Budget
Chancellor Philip Hammond delivered his Budget on October 29, but how did pensions, savings and housing fare?
Those across the pensions, savings and housing industries were paying close attention to what chancellor Philip Hammond had to say in his Budget statement a few weeks ago.
For many, it was a relief there were no major changes to pensions, but others were disappointed there were no announcements related to the funding of later life adult social care.
Still, there were some treats - and a few tricks - that advisers may be able to pass onto clients.
Looming it over it all was Brexit, of course. Mr Hammond avoided giving too much away - instead giving an update on the economic outlook.
Read on to find out more about what announcements came out of the Budget and how they will affect your clients.
Advisers say personal allowance rise is biggest Budget win
Almost two-thirds of advisers believe a rise in the personal allowance to £12,500 will have the most positive impact on clients, according to the latest FTAdviser Talking Point poll.
The poll asked advisers to choose which of the four Budget 2018 announcements will have the most positive impact on their clients.
A total of 64 per cent said the £650 increase in the amount clients will need to earn before they have to start paying income tax from April 2019, while 21 per cent said the increase in the lifetime allowance (LTA) to £1.05m from April next year.
Only 15 per cent said the additional £5m in funding promised for the pensions dashboard over 2019 to 2020, and none said the extension to the Help to Buy scheme from 2021 to 2023 would have a positive impact on their clients.
Chancellor Philip Hammond delivered the Budget 2018 on October 29.
Jamie Smith, partner and financial adviser at Foster Denovo, agreed with the result.
But he said: "If we were to consider this question at an individual level, I would disagree as I believe the increase in LTA has the potential to have the biggest impact."
Rachael Griffin, chartered financial planner at Quilter, agreed the personal allowance rise will undoubtedly have an immediate positive impact, but pointed out National Insurance contributions have also moved, with higher earners losing half their newfound gains.
She explained: “Currently, people earning more than £46,350 pay 12 per cent on earnings, but only 2 per cent above that level."
From April next year, they will pay the full 12 per cent rate on everything up to £50,000. The 2 per cent rate then kicks in on earnings above £50,000.
Lynda Whitney, partner at Aon, added that the small rise in the personal allowance will catch out a new group of people who are in pension schemes with a net pay arrangement.
She said: "The personal allowance rise makes this anomaly incrementally worse.”
CPD: What the Budget delivered for your clients
Making sense of the 2018 Budget
This year, Chancellor Philip Hammond broke from tradition to deliver his 2018 Budget on Monday October 29 at 3.30pm.
All eyes were on Mr Hammond as he stood up to give his Budget address, which was supposed to end speculation about how the government would mark the “end of a decade of austerity”. He said this entails “leaving more of people’s hard earned money in their pockets”.
In the past few years, there have been several Budgets in quick succession for advisers and their clients to make sense of – five in three years to be precise – which has seen major changes take place to pensions, Isas and housing.
Mr Hammond received a bit of good news before he stepped up to deliver the Budget this year. Higher than expected tax receipts gave him some headroom and additionally, the Office for Budget Responsibility raised the growth forecast for 2019 to 1.6 per cent from 1.3 per cent as forecast in March.
For 2020, the forecast was upgraded to 1.4 per cent from 1.3 per cent.
Even though in the immediate aftermath advisers and the industry branded the Budget an uneventful one, the windfall gave Mr Hammond headroom to announce a few measures.
But did the measures deliver enough for clients?
Brexit to trigger fresh Budget ?
Advisers are, however, wary given that in the event a general election is called or the UK has to prepare for a ‘no deal’ Brexit, or there is a breakdown in Brexit negotiations by next March, this would require an emergency Budget to take place.
Kay Ingram, director of public policy at LEBC Group, says: “The Budget may prove to be a phoney Budget if the government falls or there is no deal agreed on Brexit.
“This will result in an emergency Budget which could change all the measures announced before they are implemented in April.”
This concern is voiced by several others.
Ed Shardlow, financial planner at Ablestoke Planning, says: “The Budget came with a huge caveat that it could be rendered redundant depending on the outcome of the Brexit process.
There was no mention of the reform to social care funding that has been previously promised.
“There is good reason to believe that any Brexit will have a negative short-term impact on the economy and may mean that the era of austerity is in fact far from over.”
Mr Hammond confirmed a day before the Budget was announced that a ‘no deal’ Brexit will definitely require another Budget.
There was little on the possible terms of a Brexit deal in the Budget, but more detail has come to light in the weeks following as Prime Minister Theresa May tries to get her withdrawal agreement through.
But Scott Gallacher, chartered financial planner at Rowley Turton Private Wealth Management, says: “Perhaps with Brexit on the horizon I’d have expected to see a plan, and the funding, to train our own people to do the jobs that we are currently importing.”
Social care stop-gap
It was hoped by many across the pensions and financial planning industry that social care and how to fund it would get some attention in this year’s Budget.
All eyes were on how the chancellor was going to raise the extra £20bn promised by Mrs May to address an understaffed NHS system.
“As for social care, some short-term funding aside, this will continue to be kicked down the road,” suggests Mr Gallacher.
Mr Shardlow notes: “There was no mention of the reform to social care funding that has been previously promised.
“The additional £240m of funds available to councils for adult social care won't fill the £3.6bn funding gap identified by the Local Government Association as necessary to maintain current care provision, let alone to enable councils to meet the cost of capping care fees.”
The chancellor announced short-term funding of £240m in 2018 to 2019, £240m for adult social care in 2019 to 2020, and an additional £410m for adult and children’s social care in 2019 to 2020 in the Budget.
George Bull, senior tax partner at RSM UK, explains: “The modest additional funding in respect of adult social care is welcome but should be seen only as a stop-gap.
“An urgent long-term financial plan is required for the NHS which also embraces social care.”
Respite for pensions
Pensions tax relief was not reduced by the chancellor, in a move that was widely welcomed by the industry which had prepared for yet more pensions tinkering.
Ms Ingram says: “The biggest concern before the Budget was that pensions tax relief would be changed.
“The fact this didn’t happen is a huge relief to many clients.”
But she cautions: “An emergency Budget could change all of this, so those who can save for retirement now with the benefit of current tax relief are being urged to do so.”
But it was the lifetime annual allowance which grabbed the lion’s share of the headlines.
It would have been great to see the lifetime allowance threshold dropped or at least increased.
Mr Hammond announced the lifetime allowance for pensions is set to increase in line with inflation to £1.055m in 2019 to 2020.
The lifetime allowance (LTA) is the maximum limit on the amount of pension benefit that can be drawn from pension schemes without incurring an additional allowance.
This differs from the annual allowance which is the limit of tax-free growth of input one can have in a registered pension scheme in a tax year.
Experts believe the annual allowance should have also risen or be scrapped altogether though, in order for clients to benefit.
Steve Webb, director of policy at Royal London and former pensions minister, suggests: “Most advisers feel that having both an annual allowance and a lifetime allowance is unfair – it is like limiting the amount you can put in and the amount you can get out.”
He continues: “The LTA in particular is a penalty on people who invest their money well and the pensions world would have welcomed its abolition. The annual allowance is unnecessarily complex and the ‘tapered’ annual allowance should have been abolished in order to simplify the system.”
Alex Shaw, director of Progeny Wealth, agrees: “It would have been great to see the lifetime allowance threshold dropped or at least increased, even if in favour of a more restrictive annual allowance or lower rate of tax relief.
“Adding a flat-rate of tax-relief on contributions but ensuring that savers aren’t penalised for implementing a successful investment strategy, would benefit all across the board.”
Increase in higher threshold
Mr Hammond announced an increase in the tax free personal allowance to £12,500 a year earlier than planned, while the higher rate threshold will increase from £46,350 to £50,000 from April 2019.
On the face of it, taxpayers earning less than £50,000 have a reason to celebrate.
But the chancellor did not announce in his Budget statement that National Insurance will also rise from 2 per cent to 12 per cent, eroding some of these gains. This only came to light in the days after the Budget.
Mr Shardlow says: “The rise in national insurance thresholds will offset the benefit of the rise in tax allowances to a degree. Those earning over £50,000 will pay £860 less in income tax, but £294 more in National Insurance, a net gain of £566.
“Those gains are reduced once you earn over £100,000 but everyone in this bracket will still be at least £436 better off regardless.”
Mr Bull warns the policy to increase the higher tax threshold is “definitely a situation where it’s a good idea to see the increase in your pay packet before you spend it”.
For 2018 to 2019, those who earn below £8,424 a year will pay no National Insurance contributions (NIC). Individuals earning between £8,424 and £46,350 will pay 12 per cent of NIC, and 2 per cent for anything above £46,350, according to HM Revenue & Customs.
But from April 6 2019, those who were earning more than £46,350 but less than £50,000 will pay lower income tax but the higher National Insurance of 12 per cent.
Help or hindrance?
Housing was an area which Mr Hammond emphasised in his Budget statement, announcing a range of policies aimed at helping homebuyers.
The Help to Buy equity loan scheme is to be extended, from its current 2021 deadline until 2023.
The Help to Buy Equity Loan scheme was launched in 2013 and is open to first-time buyers, as well as those looking to move, but is restricted to new build properties. From 2021, it will be open to first-time buyers only.
There will be a price cap for properties eligible for the Help to Buy equity loan scheme from April 2021 to March 2023.
While this could help ease property prices for first-time buyers it could also see rents rise if the number of lettings falls.
Mr Shardlow says: “Help to Buy measures are of limited long-term benefit as giving a boost to the buyer’s purchase power is negated by a consequent increase in prices for starter homes.”
He adds: “In a market with high demand and low supply, substantial increases in homebuilding are required to have any impact on ability to buy. It's unlikely that the measures announced will have that impact.”
Lettings relief reforms
Mr Hammond’s clampdown on lettings relief will potentially have the biggest impact, according to experts, particularly for landlords who have faced a number of tax blows recently.
Mr Hammond announced reforms to lettings relief due to apply from April 2020, and which will see the final period exemption lowered from 18 months to nine months.
Lettings relief can lower the Capital Gains Tax (CGT) on the sale of a property which was once used as the landlord’s residence but since then has been let out.
Ms Ingram says: “The abolition of lettings relief could cost landlords whose property has risen in value up to £11,200 in extra tax, so some are considering selling before April 2020.
“While this could help ease property prices for first-time buyers it could also see rents rise if the number of lettings falls.”
“If this takes longer than the final occupancy period, CGT then becomes potentially liable on any increase in the value of the property when sold,” she explains.
“Some divorcees already get caught out by the 18-month rule; reducing it to nine months will catch more,” adds Ms Ingram.
Saloni Sardana is a features writer at FTAdviser and Financial Adviser
House View: Budget 2018
The 2018 Budget was brought forward this year to avoid a nightmare clash with the Brexit negotiations. It was clear from the chancellor’s speech that he was keen to avoid a ghoulish backlash from any controversial announcements.
Indeed, the majority of policy measures unearthed had been leaked to the press beforehand, leaving Philip Hammond with no tricks up his sleeve.
The independent Office for Budget Responsibility (OBR) updated its forecast in the usual manner, and downgraded real GDP growth for this year from 1.6 per cent to 1.3 per cent. The chancellor skilfully neglected to mention 2018, and instead focused on the upgrades for 2019-2021.
The inflation forecast was revised higher in almost every year, but the good news for households is that the forecast for wage growth in real terms is positive throughout the forecast.
Overall, it is a modest Budget at a time when the government is in a precarious position ahead of the big Brexit showdown.
Borrowing figures have been coming in lower-than-expected this year, providing the exchequer with an unexpected windfall of around £10.8 billion, compared to the updated March forecast (like-for-like).
Additional tightening this year puts the chancellor £11.6bn ahead in total, but in fiscal year 2019 to 2020, fiscal giveaways will increase the level of annual borrowing as a share of GDP for the first time since 2009 to 2010.
Admittedly only by 0.2 per cent of GDP, with borrowing then falling to reach 0.8 per cent of GDP by 2023 to 2024.
Is this really the end of austerity? Not in our view.
Mr Hammond announced that he plans to increase departmental spending on average by 1.2 per cent in real terms each year in the next spending review from next year. While this is a substantial swing compared to real-term cuts overall, the rate of increase is expected to be less than GDP growth, and so demands on public services will probably still outpace funding.
In terms of the policy changes, key announcements included:
- The increase in the personal tax-free allowance to £12,500 from April 2019 (one year early), which will be welcomed. The higher rate tax threshold will also be increased to £50,000 at the same time.
- A new revenues-based tax on internet giants is expected to raise £400m a year. Moving ahead to introduce this tax before an international agreement is in place could be seen as targeting specific companies from certain countries, and could risk a backlash.
- More money for NHS services, especially for mental health crisis services.
- Additional funds for the government’s industrial and technology strategy.
- Some help for small businesses with an increase in rates reliefs.
- More funds for councils to spend on social care in England.
- More funds to help smooth over the full roll-out of the unpopular universal tax credit system.
Overall, it is a modest Budget at a time when the government is in a precarious position ahead of the big Brexit showdown. Extra spending in coming years will come as a relief for government departments, but with the deficit continuing to fall, the plans represent a fiscal giveaway compared to the previous forecast, but not in absolute terms.
The ghost of austerity is likely to haunt this government a little longer – at least until after Brexit, assuming a deal can be found.
Azad Zangana is senior European economist at Schroders