Hammond’s boring Budget speech promises very little

Chancellor Philip Hammond must be thanking his lucky stars that Britain voted to leave the European Union (EU). Not only did it land him the role of second most powerful politician in Britain, but it also gave him a very good excuse to do very little, in what he promises was his last spring Budget (from now on, the constant fiddling with our tax system will be limited to an annual autumn statement, we’re told). Yet even if we didn’t have Article 50 and the Brexit negotiations lying ahead for the rest of this year, the chancellor was right to be cautious. The British finances might not be quite as bad as he expected when he stood up in late 2016 (public borrowing this year is set to be £51.7bn rather than £68bn, and growth is expected to be higher), but they’re still dreadful.

The Office for Budget Responsibility (OBR) – which looks at the government’s sums then provides independent (if still generally wrong) economic forecasts based on them – reckons we’ll still be spending more each year than we raise in taxes by 2021/2022 (ie, we’ll still have a deficit). For a bit of perspective, overall borrowing in 2020 will be £100bn greater than originally forecast in  March 2016. Given that the OBR also expects to see higher average inflation (at or above 2%) over the coming years, and that it expects wages to grow faster than that, we can’t expect today’s microscopic interest rates to last for very much longer – so the cost of servicing that debt should very much be at the forefront of any sensible chancellor’s mind.

No big headline measures

So this wasn’t a big headline-grabber of a budget. We didn’t have any radical reforms to pensions (thank goodness), or even much by way of grandiose improvement schemes (the new T-Levels for technical education are a nice idea, but it’ll be a while before we see if they have any impact). Instead, Hammond focused on providing a few sticking plasters for long-term problems, and stinging soft targets (ie, voters who are unlikely to desert the Conservatives for Jeremy Corbyn) for the bill. On the “giveaway” front, there will be £2bn for social-care budgets across England over the next three years, while the government plans to lay out its options for funding social care in the long term later this year.

As for the other big issue of the day – firms worrying about rising business rates – Hammond expressed sympathy, but was clearly not for turning. They were handed a £300m “discretionary fund” to be used by councils to help out the hardest hit; firms losing small business relief will see rate increases capped at £50 a month; and most small pubs will be given a £1,000 discount on their business rates.

Who’s paying for these odds and ends? Mainly the self-employed. We look at the changes in more detail in the box below left, but Hammond’s rationale is that too many self-employed people aren’t really self-employed and are only saying that they are in order to get favourable tax treatment. The fact that every self-employed person (not just the “fake” self-employed) will be hit by these measures wasn’t noted. Nor was the fact that this “loophole” only came about as a result of a former chancellor – Gordon Brown – and his efforts to make small business creation look healthier during the early days of the New Labour administration.

The chancellor also reduced the dividend allowance – the amount you can earn in dividend income each year without being taxed on it – from £5,000 to £2,000. This takes effect from April 2018. This is also primarily aimed at self-employed people who pay themselves dividends via a company, but it’s another good reason for everyone else to do their investing tax-efficiently through an individual savings account or a pension. There will also be yet another crackdown on tax avoidance. You might think that there are very few areas of avoidance left to crack down on, given that this has been a theme for many years now. Yet it’s still expected to raise another £820m.

A worrying lack of ambition

So what’s the verdict? Hammond did intimate that we shouldn’t expect much from this budget, given that the main event is being moved to autumn, and that he wants more visibility on Brexit. It’s also refreshing to have a chancellor who doesn’t try to audition for the top job every time he stands up. “Boring” can be a healthy quality in a chancellor. But given the weakness of the opposition, it’s also worrying that there wasn’t much sign of any attempt to simplify the UK’s overly complex tax system. Pushing through tax hikes under the guise of “fairness” might help the Tories steal more ground from Labour – but it won’t do much for the UK’s productivity problem. 

What’s in store for the self-employed?

So why is the chancellor picking on the self-employed? Philip Hammond argues – with the backing of Matthew Taylor of the RSA think tank, who is currently leading a review of modern working practices – that many people who are self-employed or work through a company are doing so primarily for tax benefits, rather than because they are genuine entrepreneurs.

What are these benefits? Well, says Hammond, an employee on £32,000 would end up paying £6,170 in national insurance contributions (NICs – including the employer’s contributions). A self-employed person would pay just £2,300. There’s also the ability of company owner-directors to take earnings as dividends rather than income, and thus pay a lower tax rate. The chancellor pulled the useful presentation trick of presenting this lack of taxation as a “cost” to the taxpayer – as in, “incorporations cost the public finances over £6bn a year”. So, to make thing fairer, from next April, Class 4 NICs (payable on profits of between £8,060 and £43,000 a year), will rise to 10% from 9% in April 2018, and to 11% in April 2019 (Class 2 NICS are still being abolished from 2018, which means that self-employed people on less than £16,250 will see a fall in their NICs bill).

This is expected to raise more than £2bn over the coming years, while the cut in the dividend allowance from £5,000 to £2,000 will raise around £2.6bn by the 2021/2022 tax year. Whether you consider this fair or not may depend on your employment status, but the Resolution Foundation think tank notes that the change is “highly progressive” (it hits higher earners harder than lower ones). That makes it hard for Hammond’s political adversaries to object to – and also means that protests from the hardest hit are unlikely to be met with much sympathy.

Odds and ends

From 6 April the annual individual savings account (Isa) allowance goes up to £20,000 from £15,240.

If you’ve already taken money from your pension, then from 6 April you’ll only be able to contribute £4,000 a year to a pension, rather than £10,000.

The price of a packet of 20 cigarettes went up by 35p; the cost of a pint of beer goes up by 2p from Monday, whisky goes up by 36p; gin by 34p, cider by 1p; and wine by 10p.

The personal tax-free allowance will rise as planned to £11,500 this year and to £12,500 by 2020.

Most sugary soft drinks are to be taxed at 24p per litre as part of plans to reduce childhood obesity.

From 6 April the existing inheritance-tax threshold of £325,000 will be joined by an additional residence nil-rate band (RNRB) of £100,000, which increases to £175,000 by the 2020/2021 tax year.

A 25% tax charge will be imposed on all transfers of UK pensions to qualifying overseas schemes (QROPs).

Leave a Reply

Your email address will not be published. Required fields are marked *