This Budget was Mr Hammond’s first – and last – Spring Budget. From now on Budgets will take place in Autumn and there will be a financial statement each Spring. Thus, the next Budget is probably a little over eight months away although, as 2016 revealed, much can happen even over such a brief period.
The backdrop to this Budget was very much dictated by the events between March and November last year. In what proved to be his last Spring Budget, George Osborne performed a range of financial gymnastics to hang onto his one remaining borrowing target, the elimination of the budget deficit by 2019/20. Even before the Brexit vote, that goal was looking unlikely to be reached. By July it – and Mr Osborne – had been abandoned. Although Mr Hammond talked early on about a “fiscal reset”, he wisely waited until November’s Autumn Statement to reveal new numbers. These markedly increased government borrowing over the coming years and replaced Osborne’s projected £10.4bn surplus in 2019/20 with a £21.9bn deficit.
That projected increase in borrowing was more a recognition of post-referendum reality than any new policy initiative. Helpfully, it did give the new Chancellor some wriggle room. £12.2bn was added to the 2016/17 borrowing target, making it that much easier to hit and setting a higher baseline for 2017/18 onwards. However, the latest calculations from the Office for Budget Responsibility (OBR) suggest that not only will the Chancellor undershoot the revised 2016/17 target by £13.4bn – more than the November increase – he will also see marginally lower borrowing in the next three years than previously forecast.
One reason for the improved outlook is that the OBR has increased its growth forecast for this year from the 1.4% it saw in November to 2.0%, the same adjustment as the Bank of England made last month in its Quarterly Inflation Report. Economic growth further out is modestly reduced in the OBR’s latest projections. 2016 produced economic growth of 1.8%, marginally lower than the Autumn Statement estimate of 2.0%.
Inflation, running at 1.8% on the CPI measure (and 2.6% on the old RPI yardstick), is expected to reach 2.4% this year and 2.3% next year. While working age benefits generally remain frozen, the government finances still suffer because of increased borrowing costs on index-linked gilts. However, the government remains able to borrow 10-year money via the conventional gilts market at a rate of about 1.25% – just as well with over £55bn needing to be borrowed in 2017/18.
So what did emerge from this final Spring Budget? Much of the answer is to be found in the previous year’s Autumn Statement but, as ever, there were a few surprises, both good and bad:
- A rise of £500 in the personal allowance to £11,500 for 2017/18.
- A £2,000 rise in the higher rate threshold for 2017/18, to £45,000, clawing back a small part of the under-indexation of earlier years. However, this will not apply fully to Scotland, where the higher rate threshold for non-savings, non-dividend income has been frozen.
- A reduction in the tax-free dividend allowance to £2,000 from 2018/19, just two years after its introduction at a level of £5,000.
- An increase in the Class 4 National Insurance contributions (NICs) rate for the self-employed from 9% to 10% in 2018/19 and a further 1% increase to 11% in the following year
- A £200 increase in the capital gains tax annual exemption to £11,300.
Based on this information, we’ve come up with twelve universal quick tips for our investors:
Twelve quick tax tips:
- Don’t waste your (or your partner’s) £11,500 personal allowance.
- Don’t forget the personal savings allowance, reducing tax on interest.
- Think about how you can use the dividend allowance.
- Don’t ignore National Insurance contributions – they are really a tax at up to 25.8%.
- Think marginal tax rates – the system now creates 60% (and higher) marginal rates.
- ISAs should normally be your first port of call for investments and then deposits.
- Even if you’re eligible for a LISA, you still might find a pension is a better choice.
- Check that you understand all the tax changes before investing in buy-to-let.
- Trusts can save inheritance tax, but suffer the highest rates of CGT and income tax.
- File your tax return on time to avoid penalties and the taxman’s attention.
- Never let the tax tail wag the investment dog.
- Don’t assume HMRC won’t find out: automatic information exchange is spreading.
If you need further information on how you will be affected personally, you are strongly recommended to consult your wealth manager.
Disclaimers: The information and illustrations contained in this newsletter is for general consideration only and is subject to change dependent on specific legal implementation. Tax treatment depends on individual circumstances and may also change in the future. You should not take, or refrain from taking, action based on its content and no part of this document should be relied upon or construed as any form of advice or personal recommendation.
Accordingly, Raymond James has no responsibility whatsoever for all and any losses that may result from such action or inaction and it is essential that professional advice is taken. If you have any questions, please speak to your Wealth Manager in the first instance. Raymond James Investment Services Limited is a member of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales number 3779657. Registered Office Broadwalk House 5 Appold Street London EC2A 2AG.