Ah, the ‘summer’ Budget.
We had a Budget in March. We’ll have one in autumn. That’s at least two too many a year for my liking. Do we really need another?
But as it turns out, this one was more eventful than usual. And it proved to be more than just an opportunity for George Osborne to rub the opposition’s noses in the Tory’s election victory. (Though he did a lot of that too.)
So what’s new? And what bits matter to you?
Surprise, surprise – the ‘cuts’ are slower than expected
We’ll start with the big picture. Before the Budget, I talked to various people who said that the scale of ‘the cuts’ needed to trim the UK’s annual overspend (the deficit) would be catastrophic. If you shield the NHS and the pensioners and all the other special interest groups, you’d be left looking at cutting the police force in half, or various other politically suicidal decisions.
Exactly the same sort of thing that was said before the 2010 Budget – visions of cuts so vicious that the entire army would have to be laid off.
These people always surprise me. Politicians have been known to tell the odd fib. So if they make a promise, and the outcome of said promise would be politically disastrous, then you can assume that they’re just saying it for effect.
So the deficit-cutting plans have been eased up on. The aim is to have a surplus (ie to start paying down our national debt) by 2019/20 rather than 2018/19. And the £12bn in welfare cuts promised is spread over three years rather than two.
In short, there’s no more reason to panic about ‘the cuts’ than there was under the coalition.
There was a big jump in the minimum wage (now called the ‘living wage’), while various benefits were frozen and plans put in place to restrict child tax credits to a maximum of two children from April 2017.
The goal, as Martin Wolf put it in the FT, is to “make employers, rather than taxpayers, pay”. But employers shouldn’t be too upset, as there was also a big drop in corporation tax to go along with it.
There’s still way too much complication in Britain’s tax system. And while Osborne likes to talk about a small state, he has quite a ‘big government’ mentality – the new apprenticeship ‘levy’ on companies to fund training may or may not be a good idea, but it’s certainly not small government.
But by and large, this is all moving in the right direction – particularly the rolling back of the sprawling and bureaucratic tax credits system.
So what do the changes mean for me?
On a smaller scale, for investors specifically, there were quite a few things to pay attention to. In no particular order:
Pensions and Isas
As the Tories promised, they’re cutting back tax relief on pensions contributions for higher earners. If you earn over £150,000 a year, your annual pension allowance will be tapered down from £40,000, to a minimum of £10,000 for those on £210,000 or more.
Also – and this is one for the longer run – Osborne has announced a consultation with the industry over tax relief. It sounds to me that he’d effectively like to merge pensions and Isas into one flexible, tax-efficient savings vehicle.
That seems quite radical, but given that you can technically whip your whole savings pot out at 55 now (thought that’s probably not a wise decision for most people), and that annual pension contribution allowances have already fallen drastically, it’s not as big a jump as you might think.
I’m all for simplification, and I think Osborne’s changes on this front so far have been largely good. Chances are though, that things like higher-rate tax relief and the 25% tax-free lump sum would be potential casualties of such a shift. So it’s one to watch.
Dividend tax
The dividend taxation changes seem to be mainly aimed at those who pay themselves dividends from a company (as opposed to income), but could also hit investors with big portfolios that aren’t held in a tax-efficient wrapper.
Basically, you’ll be able to get £5,000 of dividend income tax free. Then it’s taxed at 7.5%, 32.5%, and 38.1%. As Nimesh Shah of Blick Rothenburg puts it, “an individual with no other income can currently receive approximately £38,000 of dividend income tax-free. From April, that same individual will have a tax liability of £1,700.” Beyond encouraging you to use pensions or Isas to hold your savings where possible, there’s not a lot you can do about this.
Inheritance tax (IHT)
By 2020-21, if you’re married and you live in a house worth at least £350,000, you’ll have an IHT allowance of £1m. That’s because the government is adding £175,000 a head to the £325,000 IHT allowance – but only for ‘family homes’. It’s being phased in gradually – so it’ll start at £100,000 from April 2017 and go up from there.
This is a gimmick and a giveaway. Primary property in the UK really doesn’t need any more tax advantages than it already attracts. But it’s the classic example of a political, rather than economic, Budget move – IHT is a very emotive tax which scares and angers a much wider group of people than those who actually end up having to pay it.
Buy-to-let changes
Finally, the other big change is that landlords will be restricted to basic-rate tax relief on mortgage interest. This will be phased in over four years, from 2017.
This might be a bigger deal for the housing market than it looks, particularly as the ‘wear and tear’ allowance is being tightened up too. If you can’t claim higher-rate tax relief on your buy-to-let, then that’s going to hit your rental yield quite hard.
Given that yields are pretty low anyway, that’s going to hurt. It might not force you to sell up, as Capital Economics notes. But it could certainly put you off entering the market, or expanding your portfolio.
Vested interests argue that it’ll just drive up rents. But that implies that landlords are currently charging lower rents than the market would bear. That makes no more sense for landlords than for anyone else providing a service. So putting up rents to compensate for higher costs isn’t an easy option.
In short, it might not be the straw that breaks the housing market’s back, but it’s certainly not going to help. Which is by no means a bad thing.
As for the fairness of banning interest relief on landlords, but keeping it for many other forms of business debt – that’s a reasonable point, and we’d rather like to see it extended to other areas. The favourable treatment of debt over equity has done a lot of damage to our economy over the years. Andrew McNally has a great column explaining exactly why in this week’s issue of MoneyWeek magazine – don’t miss it.
• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.