On Wednesday 3 March, Rishi Sunak delivered his second Budget as chancellor, outlining the state of the economy and the government’s spending plans.
In this article we look at some of the key announcements made, and consider how they could impact on your personal finances.
The shadow of Covid still looms large
From a macro-economic point of view, Covid-19 is still the dominant issue.
It’s over a year now since the World Health Organization declared Covid-19 a pandemic. Since then, it has resulted in lockdowns, restrictions, and an enormous rise in government spending.
It has also forced many businesses to close their doors, either on a long-term basis or permanently, and homeworking has become the routine for hundreds of thousands of people.
Borrowing in the 2020/21 tax year will total close to £400 billion, which is the highest figure seen outside of wartime.
The chancellor noted the economy has been damaged, with GDP shrinking by an almost unprecedented 10% in 2020, and that the road to recovery would be a long one. However, he added: “We will continue doing whatever it takes to support the British people and businesses through this moment of crisis.”
In more positive news, the Office of Budget Responsibility (OBR) now estimate that unemployment will reach 6.5%, rather than the 11% initially forecasted. The OBR also projects the economy to grow faster than previously forecast – by 4% in the coming fiscal year, and then by 7.3% in 2022.
But they also predict that, in five years, the economy will still be 3% smaller than it would have been otherwise.
Those are the high-level figures, and the parameters within which the chancellor was working. But what of the key announcements and their potential impact on your personal finances?
Covid-19 support measures
The Coronavirus Job Retention Scheme, often known as the “furlough scheme”, will now run until the end of September. It will continue to provide 80% of wages (up to £2,500 per month) to workers unable to work due to the pandemic. From July, employers will need to pay a proportion of their wages.
Self-employment grants will also continue, with two further instalments over the coming months. The scheme has been extended to include the newly self-employed who missed out on previous grants and have now filed a tax return.
How this could impact on you – If you are an employer with furloughed staff, the extension offers some valuable breathing space. Likewise, if you are self-employed the extended support available will be welcome.
The Personal Allowance – the threshold before you need to pay Income Tax – will increase from £12,500 to £12,570 as planned in the 2021/22 tax year. The threshold for higher-rate taxpayers will also rise from £50,000 to £50,270 in 2021/22.
However, both these thresholds will then be frozen until 2026.
How this could impact on you – Freezing personal allowances will reduce the value of your income in real terms over the next four years.
The chancellor also announced that several other allowances will freeze, rather than rising in line with inflation:
- The pension Lifetime Allowance (£1,073,100)
- The Capital Gains Tax allowance (£12,300)
- The Inheritance Tax nil-rate band (£325,000) and residence nil-rate band (£175,000)
How this could impact on you – As with the Personal Allowance, these freezes could affect your personal finances in the long term. Using recent estimates of a 2.5% inflation rate, the Lifetime Allowance would have reached £1.2 million by 2026. This freeze will therefore result in many more people becoming subject to the excess charge.
It has also been estimated that freezing IHT nil-rate bands will result in an extra 11,000 estates being liable for IHT by 2026.
The headline announcement for businesses is the rise in Corporation Tax.
From April 2023, Corporation Tax, paid on company profits, will rise from 19% to 25%. However, small businesses with profits of less than £50,000 will continue to pay the current 19% rate and there will be a taper.
Only businesses with profits of more than £250,000, around 10% of firms, will pay Corporation Tax at 25%.
However, a new “super-deduction” will allow companies to reduce their tax bill when they invest.
From 1 April 2021 until 31 March 2023, businesses can reduce their tax bill by 130% of the cost of investment in a bid to encourage firms to invest for growth. Such a move has never been tried before, but the OBR predicts it could boost investment by 10%.
How this could impact on you – this is clearly positive news if you are a business owner looking to invest in your business in the short term, as it offers a valuable tax incentive. However, the rise in Corporation Tax will hit larger businesses hard further down the road.
Other important announcements
The chancellor confirmed the introduction of restart grants to help businesses reopen as lockdown restrictions lift.
Retail firms can apply for up to £6,000 per premises, while hospitality businesses can receive up to £18,000:
- Recovery loans will be available to provide businesses with a capital injection. The scheme will offer loans from £25,000 to £10 million until the end of the year, with the government guaranteeing 80% to encourage lenders.
- The chancellor confirmed an extension to the business rate holiday for retail, leisure, and hospitality firms for a further three months until the end of June. There will then be a six-month period where rates will be two-thirds of the normal charge.
- The reduced VAT rate of 5% for the hospitality industry will remain in place until the end of September. There will then be an interim 12.5% VAT rate until April 2021.
Businesses can also take advantage of the government’s drive to encourage apprenticeships and traineeships. Incentive payments for firms hiring apprentices will double to £3,000. Sunak also revealed he is launching a programme to help firms develop digital skills.
How this could impact on you – All these measures will be welcome, especially if you’re involved in the hospitality sector, which has been particularly hard hit by lockdown measures.
Housing and Stamp Duty
The chancellor announced two key measures for the property sector.
First, the Stamp Duty holiday will be extended by six months. Until the end of June, homebuyers purchasing a property worth up to £500,000 will not have to pay Stamp Duty. The threshold will then fall to £250,000 until the end of September. From October, the threshold will be £125,000.
Second, the government will provide mortgage guarantees to lenders offering 95% mortgages. The move aims to support first-time buyers with small deposits. These mortgage products will be available from April.
How this could impact on you – If you’re buying a property, the Stamp Duty extension will be welcome. From a wider perspective, it will also help keep the housing market relatively buoyant. Support for first-time buyers will also help keep the market bubbling, allowing more people to get their first step on the housing ladder.
Summing up the Budget
The Covid-19 pandemic means that the government face unprecedented economic challenges.
It was noteworthy that Brexit was hardly mentioned in the Budget speech, or in much of the post-Budget analysis, even though it will clearly have an impact on the economy in the medium and long term.
With the pandemic still ongoing, and potentially choppy economic waters ahead, the chancellor will be hoping he has done enough to encourage business investment to drive the recovery.
Get in touch
If you have any concerns over how the budget could impact your financial planning, get in touch and we’ll be happy to talk through any issues you may have.