Punter Southall Wealth
The Alternative Budget
The Bank of England set the tone of this budget hours before it was delivered. By cutting the base rate from 0.75% to 0.25% the message was already clear. The UK authorities will do whatever it takes to provide support in reducing the impact of Covid-19.
How different things seemed only a few months ago with the newly empowered Government promising a radical agenda. Maybe next time.
Instead, in the face of a rapidly rising infection rate and the reality of a pandemic, the budget understandably focused on short term measures to relieve financial stress. We also witnessed the brakes being taken off public expenditure. £30 billion is indeed a lot of money. Small businesses are being offered extra temporary support although whether this will be enough remains to be seen. We are in unchartered territory.
There was some good news for doctors and consequently other ‘high earners’, aggrieved by the way the pension regime taxes them and also for those investing on behalf of children.
This feels like an alternative budget to the one that, had circumstances been different, could have been delivered. Despite this we hope you will find our review helpful.
A Budget for our Times
If this budget was not one for radical changes in how money was raised it may be so in taking the breaks off Government spending after years of austerity. More large infrastructure projects seem likely to be given the go ahead, amongst other initiatives, such as to reduce homelessness. While the extra spending will take time to filter through, it should provide a major boost to the UK, at a time when we will be developing new trading relationships.
Perhaps surprisingly, the new Digital Service Tax is going ahead, from 1 April 2020. This should make our trade negotiations with the US even more interesting. There is also a focus on eco friendly initiatives although, paradoxically, fuel duty remains frozen for another year.
Disappointingly, there was no reference to developing a much needed long term solution to social care costs; presumably this will emerge at a later date.
Below we highlight some of the areas we think will of interest to our clients. As ever, the devil is in the detail, not all of which was available when we prepared this edition of Finance Matters.
Pension Saving for ‘High Earners’
The tapered annual allowance has been in the news recently because of its impact on high earning NHS staff. The Chancellor has therefore announced that the income levels at which the tapered annual allowance will apply have been raised. Broadly speaking, with effect from 6 April 2020, the tapered annual allowance will kick in for those with income plus employer pension contributions in excess of £240,000. As is the case currently, the annual allowance will then reduce by £1 for every £2 over the adjusted allowance.
It has also been announced that the minimum level that the annual allowance can be tapered down to will be £4,000 from 6 April 2020. This is a reduction from £10,000 currently. It means that those with adjusted income above £312,000 will only be entitled to a £4,000 annual allowance for making pension contributions.
Investing for Children
Junior Individual Savings Accounts have become increasingly popular with investors although a low annual limit has been frustrating for many. This, and the limit for the predecessor Child Trust Funds, has been increased to £9,000 from 6 April.
As such, this will provide a far more valuable way of saving and investing on behalf of children in a tax efficient way, with no income tax or capital gains tax payable.
Entrepreneurs Capital Gains Tax Relief
Despite rumours that this relief could be abolished, it remains, although with the lifetime limit significantly reduced from £10m to £1m. There are some transitional provisions for those who have already exceeded this limit. This feels like a temporary reprieve.
Tax and Other Rates / Bands for 2020/21
- National Insurance threshold increases from £8,632 to £9,500.
- Income tax rates and bands are unchanged.
- The Capital Gains Tax exemption increases to £12,300 and £6,150 for most trusts.
- The main ISA allowance remains at £20,000.
- Basic state pension increases by 3.9%.
- Maximum Inheritance Tax Residential Nil Rate Band increases by £25,000 to £175,000.
- Other Inheritance Tax allowances, reliefs and exemptions are unchanged.
- Corporation tax remains at 19% reversing an earlier intention to reduce it to 17%.
- There are no changes to the standard pension annual allowance, which remains at £40,000.
- The lifetime allowance will increase in line with CPI for 2020-21 to £1,073,100.
- Pension tax relief remains unchanged.
In summary, the focus of this budget has clearly been on short and longer term spending boosts to the economy, with any major changes to fiscal policy deferred presumably until a return to the new ‘normal’. It should provide modest boosts to pension saving, and enable the NHS to retain more doctors for longer, as well as providing a major boost to Junior ISA saving. Given the challenging hand the new Chancellor has been dealt, this budget seems to be a prudent approach, notwithstanding an inevitable boost in Government borrowing to invest in the economy. We live in interesting times.
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