Doubtless by now you have had an opportunity to digest the main provisions of the Budget last Wednesday.
I don’t normally send a list of the announced tax changes as these are widely available but if you would like a useful, easily digestible summary, please let me know as James Hay have provided me with a Budget Guide, which I will happily share with you.
I don’t think there were too many surprises announced last week, the Budget was mainly focussed on providing continuing support for businesses, at least while the social distancing restrictions remain in place. The true long-term damage to the employment market won’t become clear until the furlough scheme ends and businesses are once again responsible for the payment of their own workforces’ wages. How many companies have been kept artificially afloat through the Chancellor’s largesse, remains to be seen.
There were some tax rises through the back door, so to speak; some like to refer to these as ‘stealth taxes’ but on this occasion the Chancellor was not terribly stealthy at all, first leaking and then announcing boldly in the House of Commons that he was going to freeze a number of allowances. Inevitably this pulls more people into the tax net through a process known as fiscal drag. Following the Budget most people surveyed felt that this move was fair in that the country is facing an unprecedented debt mountain and at least it can be seen as progressive. It will also only have an impact on individuals as their pay rises, in terms of Income Tax and their pension fund value rises, in terms of the Lifetime Allowance. This move also enabled Rishi to stick with his pre-election pledge not to raise the main rates of Income Tax, even though the effect is essentially the same.
The Chancellor is on a narrow tightrope, he knows he must not let the debt get out of control and at the same time, he must not risk the expected economic recovery by taxing people too heavily so that they don’t feel able to spend when the economy finally reopens.
His increasing of Corporation Tax from 19% to 25% seems like a sensible move; our Corporation Tax rate of 19% was, by some margin, the lowest in the developed world and all he needed to do was reduce that margin. If we are still the cheapest place to setup shop then businesses will not be inclined to flee these shores, which is always the fear with higher corporate taxes. In addition, the man in street will feel that this rise does not directly affect him, forgetting of course that higher taxes will mean less money for dividends (most people own shares in their pensions and ISAs), less money for wage rises and the possibility of passing on the tax increase in the form of higher prices. In the end, we do all pay!
Inflation is a concern but I don’t think an immediate one. The stimulus that has been provided by effectively printing money and the money that has been saved by many during the pandemic coupled with a contraction in manufacturing and therefore supply, could see inflation rise above the Bank of England’s target of 2.0% per annum. The blunt instrument that is usually employed to tackle inflation is interest rates but I can’t see that being on the cards in the short-term, mainly because increasing interest rates, rather like raising personal taxes, could risk snuffing out the recovery. As a result, I expect the Bank of England to allow a little bit of inflation in the short-term, a side benefit of which is that the money we owe as a country will reduce in real terms. In addition, any rise in inflation is likely to be temporary, so I don’t think it will be seen as particularly worrying, as long as it is indeed, short-term.
In very brief summary, we might have dodged some painful tax rises this time around but that doesn’t mean they are not coming.
These are just my thoughts of course and I might be entirely wrong (it has been known); we’ll just have to wait and see.
As always, if you have any questions about this piece or any other finance related matter, please do not hesitate to get in touch.
Yours sincerely
Graham Ponting CFP Chartered MCSI
Managing Partner
