Chancellor of the Exchequer, Jeremy Hunt, announced what could be the final Budget statement before the next election, last week. Whilst the speech was light on surprises, it delivered several changes of note from a financial planning perspective.
Building on the National Insurance cuts announced in the last Autumn Statement, Hunt announced a further cut of 2% in the main rate of National Insurance from April 2024. This will reduce the main rate from 10% to 8%, and will save an employed individual who pays higher rate income tax just over £750 a year.
The chancellor has also cut national insurance for self-employed individuals, with rates falling from the expected 8% to 6%.
The changes will further reduce the advantage of a Salary Sacrifice arrangement, which is an increasingly common way of making pension contributions; however, Salary Sacrifice remains a tax-efficient way to structure regular pension contributions, in particular if the Employer National Insurance savings are rebated.
Amidst growing pressure to reform the current Individual Savings Account (ISA) allowances, the Chancellor announced the intention to create a new British ISA. The new ISA will have an allowance of £5,000, which will be available in addition to the current ISA allowance of £20,000. The aim of the new ISA will be to promote investment in UK-focused Equities; however, the measure is currently light on detail, and a consultation period will run until June 6th to decide how the new ISA rules will be implemented. It is likely that both directly-held UK shares and Collective Investments that invest in UK Equities will be eligible for the new ISA, and UK Corporate Bonds and Gilts may also be permitted.
The Chancellor announced that National Savings & Investments (NS&I) will launch a new 3 year Fixed Rate British Savings Bond in April 2024. Press releases from NS&I have indicated that the new Bonds will offer “mid-market” interest rates in comparison with similar products offered by other Banks and Building Societies. This seems to suggest there is less prospect that the new Bonds will offer a market leading rate, which was the case when the last set of one-year NS&I Bonds were launched last year.
One of the measures announced was a cut in the rate of Capital Gains Tax (CGT) payable when higher or additional rate taxpayers sell residential property (other than their primary residence). The rate is currently 28%, but this will fall to 24% from 6th April. The rate paid by basic rate taxpayers will remain unchanged at 18%. The Treasury hope the measure may encourage more property transactions; however, those selling after 6th April need to be aware that the tax-free CGT allowance is halving from £6,000 to £3,000 in the next tax-year.
Individuals whose net income exceeds £50,000 in a tax year have previously seen their Child Benefit tapered away until income reaches £60,000, at which point Child Benefit is lost completely. This High Income Child Benefit Charge will remain, although the Chancellor announced that the thresholds have been increased. To completely lose Child Benefit, individuals will need to earn £80,000 and the lower level of the band on which Child Benefit is tapered has been raised to £60,000.
In addition, the Treasury will consult on ways to alter the High Income Charge, so that it is based on household rather than individual income. Under the current rules, a couple who both earn just under £50,000 a year would receive the full rate of Child Benefit. In contrast, a household where one parent earns more than £50,000 would see a reduction in the amount of Child Benefit received.
Pension contributions remain an effective way for an individual to bring down their net income so that more Child Benefit can be obtained. As H M Revenue & Customs uses “adjusted net income” to calculate the High Income Child Benefit Charge, the Charge can be reduced by the individual making personal contributions to a pension in the tax year in question.
The Budget speech always provides an update on the prospects for the UK economy, and the forecasts announced by the Office for Budget Responsibility (OBR) last week underlined the difficult conditions faced in the near term.
The OBR predicts the UK economy will grow by 0.8% in 2024, which is higher than the estimated 0.1% growth seen last year. In future years, the OBR estimates growth of between 1.7% and 2% per annum in the period from 2025 to 2028.
Inflationary pressures are likely to ease substantially over the course of the year and into next year, according to the OBR estimates. They see headline inflation falling below the Bank of England 2% target by the middle of the year, and falling further to stand at 1.5% next year. These estimates reinforce our expectation that the Bank of England will take action to reduce base interest rates in the second half of the year and into 2025.
The Budget measures announced did not include any further changes to pension legislation, and apart from the National Insurance change, to personal taxation rules. The British ISA appears an interesting concept, although the details of how the ISA is to work have yet to be ironed out. Nonetheless, any additional tax-free allowance that is provided for investors is welcome, in particular given the impact of the reduction in the dividend allowance.
As always, our advisers are on hand to discuss the measures announced, and whether these have any impact on your financial plans.
