Delivered against a backdrop of stock market turmoil, chancellor Rishi Sunak’s first Budget could not have been more dramatic.
The Bank of England announced an emergency rate cut just hours before he promised to do “whatever it takes” to protect the UK economy from the coronavirus crisis, as lenders pledged to offer forbearance to businesses and homeowners struggling to balance their own budgets.
Although higher earners had been braced for expensive tax rises in the first UK Budget for nearly 18 months, the chancellor had some surprising tax concessions inside his red box.
About 200,000 higher earners stand to be lifted out of the pensions “taper tax” threshold from April 6, putting pension savings back on the agenda — although the highest earners will see further restrictions.
FT Money reporters draw out the details of this and other personal finance measures, below.
Pensions taper loosened
Hundreds of thousands of higher earners are to be lifted out of a “nightmarish” pension tax trap which has landed many NHS doctors with large unexpected tax bills, under measures unveiled by the chancellor.
The £2bn Budget giveaway effectively removes the threat of the annual allowance taper for workers in the public and private sector earning up to £200,000 — a measure that took pensions experts by surprise.
“Having been largely frozen out of pension saving, higher earners have been brought in from the cold with this news,” says Nathan Long, senior analyst with Hargreaves Lansdown.
Most people are allowed to save up to £40,000 a year tax free into a pension. However, in 2016, restrictions were introduced which put those with an annual income over £110,000 at risk of seeing their annual allowance gradually tapered to £10,000 a year.
Mr Sunak delivered a £90,000 boost to the two measures used to determine where the taper kicks in.
From the start of the new tax year, “threshold income” — defined as your annual earnings plus any income from property, investments and savings — will increase from £110,000 to £200,000.
“Adjusted income” — essentially all of the above, plus the value of any employer pension contributions — will rise from £150,000 to £240,000.
Under the new measures, if your threshold income is £200,000 or less you won’t have to worry about being stung by the taper and your annual allowance will be restored to £40,000.
This will only start to be tapered when an individual’s adjusted income exceeds £240,000 — but the sting in the tail is that the new “floor” is £4,000, not £10,000 as before.
“Those earning more than £300,000 will see a reduction in their annual allowance and will pay more tax as a consequence,” says the Treasury policy document outlining the change. “Likewise, those earning below £300,000 adjusted income are likely to see a reduction in the tax they pay because they are either no longer impacted by the taper and are entitled to the full £40,000 annual allowance, or they are still impacted by the taper, but their tapered annual allowance has increased.”
Experts predict the giveaway will lead to a revival of pension savings in the private sector where executives had begun to shun pensions due to the risks of being snared by the taper.
“The changes mean that highly paid people will be able to save significantly more into pensions without incurring a tax penalty,” says David Robbins, director at Willis Towers Watson, a professional services firm.
“For example, someone with an income of £170,000 and not contributing themselves can currently face a tax penalty if their employer pays more than £20,000 into their pension on top. From 2020-21, that employer contribution could be as high as £40,000.”
Expert view: Nimesh Shah, partner, Blick Rothenberg
At a time when all UK businesses face huge uncertainty, it was disappointing that the chancellor, only a few weeks into the job, decided to bring down the axe on entrepreneurs’ relief.
He hasn’t abolished it, but the business world was stunned that he made the move without any consultation. In fact, the Conservative manifesto promised a review of the relief, rather than any rushed changes.
In an overnight move (which has its own complexities), the relief lifetime allowance was slashed from £10m to £1m, reducing the potential tax savings from £1m to just £100,000.
Rishi Sunak claimed the reduced limit should only affect the wealthiest 20 per cent of entrepreneurs who use the relief and will raise £6.3bn for the Treasury over the next five years.
But what about the long-term benefits that entrepreneurs could have brought to the UK economy over that time?
What is more amazing is that investors’ relief, introduced in April 2016 and providing a £1m tax saving, remains unchanged. The move suggests that the government is minded to support investors over entrepreneurs — not what you would expect from a Budget aimed at backing businesses.
In another example, an individual with total income of £200,000 who made a pension contribution of £40,000 today would face a £13,500 tax charge under the current taper rules. But from April 6, they can do so without penalty.
“Those who can now save more into pension annually than before, should review the options available to them through their employer and consider whether increasing savings is the best course of action for them,” says Susan Hanlon, a senior associate with Mercer, the professional services firm.
The chancellor was prompted to act as the inflexibility of the NHS pension scheme meant that thousands of senior NHS hospital doctors had been turning down extra shifts through fear of being landed with large tax bills.
Wednesday’s measures are predicted to lift 98 per cent of hospital consultants and 96 per cent of GPs out of the taper zone.
“With the current pressures on the NHS created by the coronavirus, it is even more essential that perverse tax results do not lead to senior clinicians being disadvantaged from working extra shifts when they are most needed,” says Colin Ben-Nathan of the Chartered Institute of Taxation. He added it was “right and sensible” that the changes applied across the board and not just for NHS staff.
With the changes coming into effect on April 6, experts say employers will want to review the pension arrangements for their senior executives.
Many employers had taken action to protect their staff against tax bills by capping pension contributions at £10,000, or looking at other options, such as cash in lieu of pensions.
“We expect the immediate action for employers will be to communicate the changes to their employees, particularly those for whom the new rules provide the chance to increase or recommence their pension savings,” Ms Hanlon adds.
Wednesday’s emergency interest rate cut of half a percentage point to 0.25 per cent will immediately benefit some mortgage borrowers, but it is bad news for savers who have suffered from poor rates for many years.
Mortgage lenders are under pressure from the government and regulators to pass on the rate reduction in full to borrowers on variable rate and tracker mortgages.
Santander and Barclays were among the first to respond, and will apply the full half point reduction to their standard variable rates (SVR) on April 1. However, anyone on their lender’s SVR can undoubtedly get a better deal by switching elsewhere — even after the reduction, Santander’s SVR will still be 4.49 per cent.
Santander says it will be “reviewing its other rates in the light of the current climate”.
Aaron Strutt, product director at mortgage broker Trinity Financial, says the majority of bigger banks are likely to pass on the change, but many had been caught on the hop by the Bank of England’s move.
“A lot of the lenders we’re speaking to are still working out what to do,” he says. “Obviously, they’re under pressure to pass on the reduction, especially in their variable and tracker rates, but they’re telling us they’re already struggling to keep margins on their products.”
Expert view: Michael Martin, private client manager, Seven Investment Management
Coronavirus might be worrying many pensioners, but may have saved many pension savers.
The pensions taper hasn’t been killed off, but the important news is that threshold income will now increase to £200,000 and adjusted income £240,000. This will help protect higher earners from unexpected tax bills, including NHS consultants (the main reason for the change).
This will breathe some life back into pensions saving for individuals who benefit from the enlarged thresholds. However, it won’t make taper calculations any easier for those who remain caught in its clutches.
Even the chancellor appears to be confused by how the taper works, and the Budget documents do not detail whether the annual allowance is tapered all the way down to the new floor of £4,000, or if it’s simply a tax precipice. I await the detail.
And from April, the lifetime allowance goes up to £1,073,100 as expected. So well done Rishi — you resisted the urge to tinker pensions into obscurity.
However, he also pointed to the Bank of England announcement of extra funding for banks to provide cheap lending for businesses and individuals, which should give lenders more leeway to improve their rates.
Those on fixed-rate deals will see no change to their monthly payments, but Moneyfacts, the finance website, says those coming to the end of a fixed-rate deal may find improved rates appearing on the market in the coming weeks. Banks are also expected to reduce the cost of personal loans, while rates for overdrafts and credit cards are expected to remain the same.
As well as being encouraged to reduce rates for borrowers, banks were also this week urged to offer mortgage “holidays” to anyone suffering financial hardship as a result of coronavirus. Royal Bank of Scotland, Lloyds, Nationwide, TSB and NatWest are among the banks and building societies to announce measures to help after discussions between the government, regulators and the industry.
Ray Boulger, senior technical manager at mortgage broker John Charcol, says that setting criteria for granting a payments holiday will be a challenge for banks, which would require reassurance that requests for help were genuine.
“If a significant number want to use this facility it makes it difficult for the banks — they’ll need to make sure that people are not milking the system,” he says.
A bigger issue, he adds, is whether people’s credit ratings would be affected by taking up the offer.
“The government should require banks to inform customers if taking up such a forbearance offer will affect their credit rating. Better still, it should require that banks no longer have to report such a reduction in payments as arrears to the credit rating agency,” says Mr Boulger.
At a time when many investors have much higher cash positions than normal, the search for a half decent interest rate is about to get even tougher.
“Savers have seen cuts to both the best buy and existing savings accounts accelerate over the last couple of months in particular, even though no base rate cut has happened until this week,” says Anna Bowes, co-founder of the Savings Champion website.
She says that most of the high street banks are already paying such low interest rates to their savers “there is very little wriggle room to make things much worse”.
For example, Lloyds Bank is currently paying just 0.10 per cent on its Easy Saver account, and Halifax cut the rate on its Liquid Gold account to just 0.05 per cent in mid-February.
Rachel Springall, finance expert at Moneyfacts.co.uk, says she expects the base rate reduction to get passed on in full to savers over the next few months, adding this should prompt savers to shop around for a new deal.
“As we have seen time and time again, the biggest high street banks are unlikely to be matching base rate — let alone beating it, so this cut is the perfect excuse to pay out less in interest to consumers,” she says.
Expert view: Jason Butler, the FT’s Wealth Man columnist
I’m glad the Budget documents contained some measures to boost our financial wellbeing, in addition to more immediate measures to help the finances of those affected by the coronavirus.
There was help for millions struggling with problem debt, as the government announced an additional £12.5m of funding to enable HM Revenue & Customs to implement the new “breathing space” initiative in 2021.
This will enable those struggling with debt repayments to benefit from a 60-day cessation of enforcement action and interest charges while they formulate a plan of action with a debt adviser.
Additionally, innovation grants were announced for various fintech companies focused on improving financial capability and inclusion — which should be more positive news for financially stressed people.
Funding for the British Business Bank will be continued into 2021-22, so it can provide loans to budding entrepreneurs seeking start-up finance. While this is welcome, awareness of the scheme needs to be improved and the application process made easier to ensure that money gets to work quickly.
The other big surprise in the Budget was the doubling in the Junior Isa and child trust fund allowance to £9,000 from April 6 — getting close to half the level of the £20,000 annual Isa allowance for adults, which remains unchanged.
Critics were quick to point out that this policy change will have little impact on most Britons, despite its stated intention to help “hardworking people”.
“The doubling in the Junior Isa allowance is a boon for the rich,” says Moira O’Neill, head of personal finance at investment platform Interactive Investor. “A family of four can now squirrel away £58,000 in Isas every year, tax free, which is eye watering.”
But few are likely to take advantage of the “odd” decision, according to Anthony Morrow, chief executive at OpenMoney, a financial advice service. “It’s not going to cost much in terms of tax relief and it’s unlikely to see a huge uptick in Jisa numbers except for the wealthy.”
Few families are able to afford to fully fund Jisa contributions. Although the annual limit is now £4,368, the average contribution is just under £1,000.
Interactive Investor says that for the current tax year, only 37 per cent of its Jisa accounts were fully subscribed. Hargreaves Lansdown says its figure was 15 per cent for the same period.
Expert view: Lindsay Cook, the FT’s Money Mentor columnist
This really was the perfect storm Budget — the virus, floods, failing high streets, stock market crashes, extra sick pay and emergency loans — but the plight of adult savers appears to have been forgotten.
With an emergency cut to interest rates hours before the chancellor stood up, the Budget document warned savers that rates would remain at “very low levels for an extended period”. But borrowers can expect the cheapest ever mortgage rates.
The only silver lining was the unexpected news that the annual Junior Isa allowance will double to £9,000 in the new tax year.
Overall, this was a tactical rather than strategic budget with little other than the immediate crises dealt with. I was also surprised to see nothing about funding the cost of social care. We will have to wait until the autumn for the “jam tomorrow” of fiscal changes.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, welcomes greater flexibility for parents. While in some years, they might have less to put away for a child, in the case of a one-off inheritance or bonus, parents could have more funds to pass on to their children tax-free.
For the “lucky few” who can afford to max out the new £9,000 annual allowance, a Junior Isa could be worth over £265,000 by the child’s 18th birthday assuming a 5 per cent annual return, says Ms O’Neill.
However, this could also induce new levels of worry for parents as control of the money passes to the child as soon as they turn 18, and their account morphs into an adult Isa.
“With this new allowance, your children stand to be in control of an even larger pot of money in years to come,” says Christine Ross, client director at Handelsbanken Wealth Management.
“It all comes down to financial education. As well as saving on behalf of a young person, parents and grandparents have to educate them about investment and how it works.”
Reporting by Josephine Cumbo, Lucy Warwick-Ching, James Pickford, Madison Darbyshire and Claer Barrett
Budget briefing — a round-up of the key personal finance measures
A £1bn package to support the “financial security” of workers was unveiled, making it easier for the self-employed rapidly to claim universal credit and Employment Support Allowance benefits if they cannot work, plus a £500m “hardship fund” to be distributed by local authorities.
Statutory sick pay (£94.25 per week) will be made available from the first day of self-isolation, even if no symptoms are present. The government will refund the cost for businesses with fewer than 250 employees, for up to 14 days per employee — a measure expected to cost £2bn.
HM Revenue & Customs has been asked to “scale up” its Time to Pay service to allow individuals and small businesses extra time to pay tax bills if they need it. Interest on Time to Pay balances is currently charged at 3.5 per cent.
The chancellor also announced a new £1bn Coronavirus Business Interruption Loan Scheme to support SMEs. The British Business Bank will guarantee 80 per cent of loans granted by participating UK banks to give lenders the confidence to provide finance. More details will be announced in coming days.
About 700,000 firms eligible for small business rate relief will be able to apply for a £3,000 grant from their local authority to meet ongoing business costs.
These measures were in addition to financial forbearance plans outlined by major UK banks this week, including a three-month holiday on mortgage repayments.
The national insurance threshold will be raised from £8,632 to £9,500 next month, giving 31m people a tax cut. The average worker will be better off by £100 a year.
The chancellor held back from abolishing entrepreneur’s relief, but opted to reduce the lifetime limit on the relief from £10m to £1m — which will save £6bn over the next five years.
He abolished the “reading tax”, with no VAT to be charged on ebooks and digital publications from December 1 this year, “just in time for Christmas”.
Fuel duty will remain frozen for one further year. All duty on alcohol including wine, beer, cider and spirits has also been frozen.
The annual capital gains tax allowance for individuals will rise from £12,000 to £12,300 in 2020-21. The exemption for trustees will be £6,150.
Parents of half a million school-aged children will receive an extra boost to tax-free childcare accounts to pay for “wraparound childcare” before and after the school day.
A stamp duty land tax surcharge of 2 per cent is to be brought in for non-UK residents, raising the costs of purchase for overseas buyers when the duty comes into effect in England and Northern Ireland in April 2021.
The government says the surcharge would help limit house price rises but housing market analysts say the long lead time will encourage a spike in purchases over the next 12 months, followed by lower activity in 2021-22. The duty is forecast to produce £105m a year in extra tax revenue, compared with an overall stamp duty bill of £8.37bn in 2018-19.
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