News & Insights | 28th October 2021
5 Min Read
Following his appointment on 13th February 2020, the early days of Rishi Sunak’s tenure as Chancellor was rapidly overshadowed by the COVID-19 pandemic. With the subsequent March 2020 budget coming less than two weeks before the announcement of the first national lockdown, any ambitions for shaping the nation’s finances over the longer term were quickly taken off the table.
Stepping up to the despatch box yesterday for the third time in 19 months and in command of a rebounding, but ultimately fragile, economy there was significant debate regarding what Mr Sunak might have up his sleeve. Not that the content of his speech was necessarily shrouded in secrecy. The now-traditional leaks prior to budget day had transformed into an unprecedented deluge of 19 press releases covering some £30bn of spending, leading even the Deputy Speaker to question in parliament what else the Chancellor could possibly have left to announce?
Wednesday’s budget arrived in tandem with a Spending Review, and it was, therefore, natural to expect that this would be more focused on the government’s plans for feeding economic growth and recovery. Hot on the heels of the March 2021 ‘big freeze’ budget (as well as more recent increases such as the Health and Social Care Levy) and invigorated by a stronger than expected set of growth forecasts, we now have a flood of attention-grabbing new spending and investment announcements to sweeten the pill of past tax increases.
With the spotlight firmly on the Chancellor’s unforeseen pivot away from austerity towards a more Keynesian approach to fiscal policy (‘you gotta spend money to make money’) the budget speech itself contained little interest for the world of personal finance. As ever, a deep dive into the Treasury’s Red Book unearthed a few key details.
As a matter of completeness, we received confirmation that the annual subscription limits for ISAs and Junior ISAs are to be maintained at £20,000 and £9,000 respectively for the upcoming 2022/23 tax year.
Pension contribution allowances, and the related tapering rules, are also due to remain unchanged for the upcoming tax year. As financial planners, we naturally welcome consistency in the rules and the confidence in the pension system that this brings. We do, of course, remain conscious that pensions tax relief remains prone to political tinkering, and would encourage taking advantage of allowances while they are available.
In welcome news for investors, the long-predicted reforms to Capital Gains Tax (CGT) have, once again, failed to materialise with rates and allowances remaining untouched. The only change of any significance has been an increase, effective immediately, in the deadline to report and pay CGT on sales of UK residential property, from 30 days to 60 days. Given the potential complexity of the CGT calculations when a property has been eligible for private residence relief for part of its period of ownership, such a move will no doubt be welcomed by property investors and their advisors.
With the Office for Tax Simplification’s second report on CGT only published in May, it would be safe to assume that the expected reforms are gone but not forgotten, with any additional tax revenue that this might generate, albeit relatively modest, being low hanging fruit for any future budget. On a parallel note, the well-received simplification and restructuring of the alcohol duty system could be taken as a sign of willingness on behalf of the government to tackle tax reforms head-on.
It is also worthwhile noting some of the details surrounding the forthcoming 1.25% Health and Social Care levy, which will be introduced initially by way of an increase to Class 1 (employee and employer) and Class 4 (self-employed) national insurance contributions (NICs) from April 2022. The operation of this charge is due to change a year later in April 2023 (once HMRC have updated their systems), with the Levy being separated out from national insurance and applied as a standalone tax. It is worth noting that this will result in the Levy being applied to the earnings of those who continue to work past their state pension age, who do not currently pay any NICs.
In tandem with this effective 1.25% tax increase on earned income, the budget also confirmed an equivalent increase to dividend taxes, with rates moving to 8.75%, 33.75% and 39.5% as appropriate, effective from April 2022. Income from interest and property remains unaffected for the time being.
Remaining with NICs, the government will use the September CPI inflation figure of 3.1% as the basis for uplifting the applicable national insurance limits and thresholds – with the exception of the upper earnings limit, which will remain at £50,284 in line with the threshold for higher rate income tax. Following the general freezing of allowances in March 2021, this will reflect the only uplift in tax thresholds or allowances for the coming year.
On this note, the spectre of inflation cannot be ignored. The official CPI figure of 3.1% arguably flatters to deceive when compared to our own personal inflation rates based on real-world price increases. Initially dismissed as purely transitory, official forecasts now suggest that inflation is likely to get worse before it gets better, with a predicted rise to c.4.4% by mid-2022 before returning to the government’s longer-term 2.0% target figure by 2024.
The Chancellor made a point to re-affirm this 2.0% target to the Bank of England during Wednesday’s speech, adding further weight to expectations of a rise in interest rate rises over the course of 2022. For those looking to refinance debt to take advantage of current low rates, there may well be no time like the present.
It is also vital to consider the impact of inflation when it comes to planning for the longer term, and in particular future spending needs. Although we continue to base our own projections around the official 2.0% long term inflation target, like all underlying assumptions this remains under ongoing review.