(Instrumental music plays)
Myron:
Hello, everyone, and a very warm welcome.
I'm Myron Jobson, and I'm thrilled to be hosting today's post-budget webinar. I'm joined by Rebecca Williams, our financial planning divisional lead, and Ed Smith, our co-chief investment officer, to unpack what we heard less than 24 hours ago. Yes, after a very, very long lead-up to the budget and a raft of speculation, the chancellor finally unveiled measures aimed at plugging the multi-billion-pound black hole in public finances, as well as positioning the UK for economic growth. And what a budget it was.
The Office for Budget Responsibility apologised for leaking key budget announcements less than an hour before the budget speech. And the Deputy Speaker of the House of Commons also rebuked the extensive level of briefing among the media ahead of the fiscal event. On policy, the most eye-catching measures included changes to property taxation, a cap on salary sacrifice arrangements, and a planned reduction in the cash ISA allowance in a couple of years' time, and also a stealth tax rise. Equally notable were the omissions: no changes to pension allowances or pension taxation and no reforms to inheritance tax gifting. So, there is a lot to unpack.
What does it all mean for you, for the economy, and for markets? That's exactly what I'll be exploring with Ed and Rebecca today. And as ever, we want to hear from you, so please do send your questions through the chat. I'll be keeping a keen eye on them throughout the session, and will aim to weave in some in our conversation. We'll also have time for Q&A at the end of the session. And because this is a budget special, we want to try something a little bit different.
Now that you've had a night to sleep on it, we want to ask you, our esteemed viewer, what you made of the budget. If the tech is working, and hopefully it should be, you should see that very question popping up on your screen. So, let us know your thoughts, and I'll reveal the poll results later in the session. All right, so we've got a lot to get through before I can finally lie down. So, without further ado, let's begin. (laughs)
Rebecca, Ed, welcome.
Rebecca:
Hello.
Myron:
Um, Rebecca, I would like to start with you.
Rebecca:
Sure.
Myron:
So, what do you think? What do you make of it? What was a key announcement that you think relates to financial planning?
Rebecca:
So, I think, I mean, you're so right. It's been such a bizarre three-month lead-up to the budget. We've seen so many rumors, so much speculation. And actually, what happened yesterday was pretty much none of that stuff happened. So, you know, one of the key headlines, I think, from yesterday was we were expecting a lot and didn't get it. So, um, so I think that was one thing. I think, um, you know, there's gonna be a lot of arguments about whether the chancellor's broken her manifesto, either in spirit or in letter, and I think, you know, you can debate that endlessly and probably not something for today.
But definitely one of the things that came out yesterday is that we are seeing tax increases. So, um, you know, whether that's the stealth tax or the increases to some of the rates of tax, which I know we're gonna talk about in a little while, um, we definitely saw that yesterday. So, taxes definitely going up is gonna mean that the tax landscape is more complicated and that we've probably got nine different rates of income tax now, if you think about what happened yesterday. So... And we've also got these changes coming in kind of year after year. So, keeping track of all of this stuff, you know, the landscape's just got hugely more complex, which, from a client's point of view, from our point of view, just makes that planning piece even more important.
But I think probably the thing that I would pick out of yesterday is the high-value council tax surcharge or a mansion tax in any other name really, and that... I think that is a tax on wealth, so we've talked a lot about a wealth tax. But we have had taxes on wealth. So, last year we had inheritance tax applied to unused pension funds. This year we've got a tax on high-value properties, so if you own a property that's worth more than £2 million, you're going to have to pay an additional surcharge through your council tax. So, that starts at £2,500 and then kind of increases incrementally based on the value of your home until where you've got properties above £5 million and then you're talking about £7,500 each year on your council tax. So, that's a big increase for people, big change.
Myron:
I think, you know, some of our viewers might be living in the south, so they might be living in London and the south-east of England where there's typically a higher proportion of properties that are high value. Would it be fair to say that some people might be asset rich but cash poor and can't afford to pay this additional surcharge on a property?
Rebecca:
So that might be, you might have bought your property 20 or 30 years ago and be really fortunate now to be sitting on a property that's worth over £2 million, just purely because of the way that prices have moved. So, you know, there is definitely going to have to be a conversation around that.
Myron:
Yeah.
Rebecca:
And, you know, it may be that if you've got empty nesters or retirees, so you've got, like, a couple in a big family home, where all the kids have now left and gone their separate ways. They're in this big house, it cost more than £2 million, is that gonna prompt them to think about selling or downsizing?
So, you know, between now and April 28, we've got quite a lot on their minds.
Myron:
And what about renovations, for example? You know, do you think people might rethink adding value to their house by, I don't know, converting their loft or…
Rebecca:
Maybe. I mean, I guess that depends where you are in your life. If you're in a family home, you've got kids, it's worth more than £2 million, but you want to renovate it to make it a better space for your family, you're planning to stay there long term, then, you know, why wouldn't you? Especially if you're in a £2 million house, you're probably earning enough to be able to pay an additional surcharge, especially if you're planning renovations as well.
So, but if, again, if you're retired, you know, if you're a couple living in a big house, yeah, maybe it would cause you to rethink whether you wanted to add value to the house. Particularly as the bandings are graded. So, I think it's after £2.5 million, you go up to £3,500 as the surcharge. And after £3.5 million, it's £5,000. So yeah, the more you add the value to your house, the more you're going to pay.
Myron:
And, you know, one last thing on this, the valuations surely, that's the first thing I thought about is, there might be disputes, you know, in following years. What do you think of that?
Rebecca:
It's gonna be really interesting, isn't it? I think it will be. Yeah, yeah, yeah. So it'll be really interesting to learn a bit more about this targeted valuation, and how that's going to work. My understanding is whether this happens in some other countries, that they deliberately undervalue the house a little bit, to avoid any kind of disputes with homeowners. Because obviously, if you've got that kind of admin back and forth, people challenging values, I mean, that's gonna take up so much time and be so costly, for something that's expected to raise £400 million. So it's not huge in the scheme of things, in what the government's looking to raise from this surcharge.
Myron:
Yeah. I think the interest will usually go to an estate agent to give the valuation of a house, you know, amplifies it. But (laughs) it might result in the opposite, you know, because this policy.
Rebecca:
Yeah. Well, it'll be really interesting what happens in the property market because of it.
Myron:
Actually, Ed, that's a question I want to ask you. So, what does this mansion tax mean for the housing markets and also markets more broadly?
Ed:
Yeah. So, I mean, I think it's just at the margin, another piece of policy that makes investing in residential property, which of course is something that's historically been very popular for British public, less attractive. We put out a report, you can find it on our website, a few months ago, called Don't Bet the House. And it sets out why we think a diversified portfolio of financial assets is likely to deliver better returns than residential property in the UK over the next decade. Some of that is structural market forces, but a lot of that is just every year for really the last decade, there's more and more policy changes announced by the government that just make it a little less fruitful to invest in residential property, particularly buy-to-lets. And if at the uppermost end of that, this is another one of those factors.
Myron:
All right. Let's move on. So many people follow the budget to just understand what the announcements mean for their personal finances. Which of these announcements are most likely to impact people on a day-to-day level?
Rebecca:
Yeah. So day-to-day, I think it's got to be income tax rises.
Myron:
Yeah.
Rebecca:
Sorry, well, not income tax rises — threshold freezes, which brings more people into the tax system.
Myron:
How so, actually?
Rebecca:
Well, so, so I think, important to say that we were braced for an income tax rise before the budget, and obviously we had that U-turn. So we haven't had an income tax rise, which some people might think, "Yeah, great, that's fantastic." But actually, what the Chancellor has done is extended a freeze on thresholds. So, that means that the point at which you start paying tax, and the point at which you start paying higher rates of tax is fixed and won't move.
So, you've got a fixed threshold and as your earnings rise, you're pulled into either paying tax or you're pulled into a higher rate tax band, and that's gonna net billions for them in the next, um, over the course of the Parliament. So we were expecting it to be frozen until '29, '30. Now it's gonna be frozen till 2031. So that means that actually for about 10 years, by the time we get to 2031, we won't have had an increase in any tax thresholds. So, the personal income tax allowance at the moment is just over £15,000.
If we'd have had those increases, it would probably be a bit more like £17,500 by 2031. So you can see, you know, we are really losing out by the thresholds being frozen. And it's not just income tax either. If you look at inheritance tax, the nil rate band for inheritance tax has been £325,000 since 2009. So by the time 2031 rolls round, that's 22 years, 21, 22 years of a frozen band. So, you know, the impact that has is huge on people. So, I think that those kind of, they call them stealth tax rises, it's fiscal drag because you're being dragged into those tax bands more and more.
That's gonna net the government huge, huge amounts of money.
Myron:
I think also, you know, with fiscal drag, it's people who, you know, wouldn't think that they all consider themselves extremely rich, and they'll be dragged to paying the high rate of tax.
Rebecca:
Yeah. Yeah, yeah, yeah. These are people who used to be teachers, for example. You know, nurses.
Myron:
I suppose that's why it's such a contested policy.
Rebecca:
(inhales deeply) I mean, it's something that a lot of chancellors have done. It's not new. Um, we just keep extending it. So, it just keeps getting worse. Um, it will draw more people also into that tax trap between £100,000 and about £125,000 of income, where you start to lose your personal income tax allowance, so you're dragged into this effective kind of 60% tax rate as well.
So, you know, it's huge. It's gonna have a real significant impact on taxpayers. And it will mean that, when you couple that with the different tax rates that we've got now, so the increases to dividend tax rates and savings and property income, that tax landscape is just becoming really complicated. And the need and the importance of seeking professional advice just to manage that is really important.
Myron:
And what of salary sacrifice? I was just looking at the question. Thank you for submitting your questions. There are plenty of them. Please keep them coming. Um, about salary sacrifice. Asking to confirm the limits. Um, the £2,000 cap. And this person says, "I understand it won't come in until April 2029, so what do the panel think the chances of it actually happening?" But should we first explain what's going on with salary sacrifice?
Rebecca:
Yeah, yeah, sure.
Myron:
Mm-hmm. And why it could have a telling impact on, you know, people's lives, especially when it comes to saving for retirement?
Rebecca:
Yeah. So, salary sacrifice is important for employees. And it's not available for all employees. Not all employers will offer it. But basically what it is, is you give up some of your salary in exchange for your employer making a pension contribution for you. So, what the government has done is... I mean, at the moment, you could give up as much salary as you like, subject to the limits on how much you can put into a pension every year. But in theory it's unlimited. And what the government's done is capped that at £2,000. So, you can only get the NI savings from both the employer and the employee on that £2,000. If you sacrifice any more than that, which you still can do, you just don't get those NI savings.
So, it's interesting around the 2029 question, 'cause I was thinking about this earlier and whether, you know, she's done that deliberately, because, you know, if growth picks up in the meantime, and, you know, we've got lots of headroom, and maybe that would be a great thing to say, "Actually, I'm not going to do that," just before the next election and just kind of, you know, put everyone back in that position and maybe win a few votes.
Rebecca:
(laughs) I mean, pragmatically, this is going to affect quite a lot of employers, so you've got to give them some time to sort out processes, talk to staff, change any policies that they've got. So... But still, we're talking about, you know, three years away, so it is quite a long time.
I'm not sure that anyone really knows exactly why we've got all these different dates staggered with the changes in the announcements yesterday. So it was quite unusual.
Myron:
And also has an impact on businesses, doesn't it?
Rebecca:
Yeah. Absolutely, yeah. Because now that it's capped, anything that's above that, well, they have to pay National Insurance. An increase in National Insurance. Yeah, yeah, absolutely. So the concern is that pension contributions overall will go down. Employers may restrict the amount or curtail the amount they're putting into pensions on behalf of employees.
And that, I mean, that's fundamental, because we are not saving enough for retirement as a nation as it is. We need to be encouraging people to save more into retirement, into their pension funds. The state pension, which did go up yesterday, so 4.8% increase on the state pensions. So up to another £575 a year. And just shy of the personal allowance, you know, £12,570.
Myron:
Yes, yes, yeah.
Rebecca:
But the state pension's woefully inadequate for a comfortable retirement. And anyone kind of our age, younger, shouldn't — I'm not saying it's not gonna exist, but we shouldn't be relying on it to give us a nice retirement.
Myron:
Yeah.
Rebecca:
Yeah, yeah. So, we said mansion tax, salary sacrifice, freeze on the tax thresholds.
Myron:
And freeze on tax thresholds.
Rebecca:
Yeah, yeah. And equally, what were the things that weren't announced that people were worried about. And I think I know your answer to this question.
Myron:
Yeah, yeah. (laughs)
Rebecca:
Because we've spoken about it many a times. We have, we have. So much was announced — sorry, so much was speculated on, so many rumors. I mean, there was... The big one is pension tax-free cash, obviously. That was last year, it was this year. A lot of people took tax-free cash out of their pensions in the lead up to the budget again. That money can't be put back. So, if anyone has done that, just think really carefully about what you want to do with that money, get some advice.
We didn't see any changes to pension tax relief, which we could've seen. So, maybe a cut on higher rate tax relief for pension contributions. We didn't see any big changes to CGT or inheritance tax, particularly for inheritance tax. There was lots of speculation about caps on lifetime gifting. Whether when you make a gift that kind of seven-year clock would be extended, whether they would remove the CGT uplift on death. So we didn't even see national insurance on limited liability partnerships — that was speculated, wasn't it? That was in... Yeah, that was speculated a couple of weeks ago, so yeah, there was lots we didn't see.
Rebecca:
And I think, I mean, like you said, the deputy speaker who I think was fantastic by the way, really chastised the government for just such an unhelpful commentary in the last 12 weeks of, oh, you know, "We might do this, we might do this. What do you think of this? Oh no, that's got a bad reaction. Let's change our minds." So, so unhelpful for everyone listening and for us in the industry. Really hope we don't see that next year.
But, you know, coming out of that and what we've been consistent on all the way through is don't make knee-jerk reactions. Think about what it is you want to achieve. Think about your financial goals and think about your long-term plan, and prioritize that over, you know, the tax tail wagging the dog.
Myron:
Yeah. Well said, Rebecca.
Ed, I'd like to bring you into the conversation. So personal finances are shaped by the wider economy and how markets respond to events such as the budget. How have markets responded to, I suppose, what the chancellor announced yesterday?
Ed:
Yeah, I'd say, I mean, for the next two and a half years, the announcements yesterday meant that the government was announcing more spending, more increases in spending than it was announcing revenue-raising measures over the next two and a half years before some more significant revenue-raising measures kick in from fiscal year 2028, '29.
Now you'll hear the media describe that as a net fiscal loosening or phrases to that effect. But what I think the media and most of the economic commentators on which the media draws, they do a really bad job of explaining that that phrase, net fiscal loosening, is a relative statement. It's a net fiscal loosening relative to the path that the government was already on.
But what gets lost in that message is that government policy for every year for the remainder of the next, of the current parliament is going to be in fiscal tightening mode. So over the next two and a half years, it's not tightening as much as would otherwise have been the case, but it is still tightening fiscal policy.
And if you bring up a chart on the screen now, you can see this. So this shows UK public sector net borrowing on this chart, it's as a percentage of GDP. The green box on the right-hand side shows how that is declining every year for the rest of this parliament, and beyond. That's relative to the size of the economy. If we showed this chart in terms of pounds and pence, again, net public sector borrowing is decreasing in terms of pound and pence every year for the rest of this parliament.
That means that there'll be fiscal drag on the economy and the government is also doing that whilst also increasing its headroom, its wiggle room against future government spending either coming in higher than expected or future taxation coming lower than expected as well.
So yes, there is a bit of a fiscal loosening in the next two and a half years, but fiscal tightening is on track. The government is increasing its headroom, that means that financial markets have been kept relatively happy. At least relative to where they were a few weeks ago. The pound has strengthened, UK equity markets, more domestically focused parts of the market, smaller companies or some of the consumer or financial names, they had a really strong day yesterday, up 2% to 5% in some cases. And the bond market, which is really what you want to look for gauging the market's reaction to all of this — bond yields fell, bond prices rose.
The 10-year government bond yield, which is a good gauge of all of this, effectively gave the chancellor a thumbs up. And because there are three things that move the government bond market — interest rate expectations, inflation expectations, and this idea called the term premium, which is where the market's pleasure or displeasure of the government's fiscal probity plays out — it was that part, that final part that fell, that caused bond prices to rise. So that's a really positive sign.
Myron:
And Ed, Rebecca and I, we were just saying earlier about the deputy speaker and her rebuke of the level of briefing to the media ahead of the fiscal event, ahead of the budget. How did markets respond to the kite flying, the briefing, the leaks ahead of the budget?
Ed:
Yeah, so although some of those leaks and briefings sort of help us prepare for events like this (laughs) so perhaps in more advance, they're not helpful in financial markets, right? Because the, you know, there are three components to any budget: government spending, new government spending policies, new government tax-raising policies, and the economic forecasts. And if you leak or brief on any one of those, but not the others, the market is getting an incomplete picture.
So a couple of weeks ago, what you saw is the chancellor saying, "Well, I'm not gonna do this one percentage point increase in income tax," that she was widely expected to do. The market didn't like that. Government borrowing costs spiked, bond yields spiked because it didn't have the crucial other pieces of information that I would've thought the chancellor would have had at the time, that actually the Office for Budget Responsibility's forecasts about future UK growth weren't quite as bad as expected.
So she didn't have this fiscal black hole to fill that the market thought she did. Even if Rachel Reeves had done nothing yesterday, she would have still had £4 billion worth of headroom. So these have real-world effects. Government borrowing costs were unnecessarily higher for a couple of weeks. Mortgage costs, you know, they're priced off the back of them, other private sector borrowing costs. So if you were unlucky to have had to refinance a loan 10 days ago, these leaks sort of made you pay a little bit more than you would've needed to.
Myron:
Yeah. And we just had a question in asking for explanation on fiscal loosening and fiscal tightening and what it means and the impact.
Ed:
Yeah, sure. So it's really about whether the government is injecting more money into the economy, or taking more money out of the economy. If it's spending more than it is raising in revenue, then it's gotta issue debt to do that, and that's injecting money into the economy.
If it's — what I showed on the chart on the screen a moment ago was that that amount of debt raising is reducing. It is still raising debt, but it's raising debt at a lower rate than it did in the previous year. If you think about economic growth being about the change from one year to another, that means that there is a fiscal tightening. That's what we mean.
Myron:
Okay. So, you know, let's dig a little deeper into the forces that move the bond market. So, there has been plenty of talk about inflation and national debt leading up to the budget. Ed, how should investors think about them in light of yesterday's announcements?
Ed:
Yeah, so the UK's rate of inflation, consumer price inflation, has been more stubbornly high since 2022 than any other G7 economy, you know, any of the other big major developed market economies. Now, in the last 12 months, some of that has been inflicted upon us by government policy, so the unusually high increase in the national living wage, the minimum wage, that Labour announced initially, and also the increase in employers' National Insurance contributions.
Both of those things raise the cost of employing people, and so firms are faced with a choice. Either they try and improve productivity and do more with fewer staff, which is often quite hard to do, or they wear lower profit margins or they maintain their profit margins but pass on some of that increase in staff costs to the end consumer. And firms did do some of that, and that's why particularly service sector prices, which tend to be more determined by people costs, have stayed stubbornly high.
The rate at which that inflation rate has been coming down has slowed dramatically this year, and the increase in food costs is also partly explained by that. Some of that is agricultural prices all around the world that's got nothing to do with the UK, but some of it is also farmers, wholesalers, and supermarkets who employ a lot of low-wage staff passing on some of that to the end consumer.
So the good news is that this budget contained a relatively moderate increase in the minimum wage. There weren't major taxes on payrolls for employers. There was that increase in employer National Insurance contributions on pensions, which Rebecca has already discussed, but that's not kicking in for a few years. And unfortunately, that's probably more likely to result in just less generous pension contributions rather than higher costs for employers.
Ed:
So the good news is that this budget contained a relatively moderate increase in the minimum wage. There weren't major taxes on payrolls for employers. There was that increase in employer National Insurance contributions on pensions, which Rebecca has already discussed, but that's not kicking in for a few years. And unfortunately, that's probably more likely to result in just less generous pension contributions rather than higher costs for employers.
On the inflation front, I don't think it particularly moved the dial. There's one thing pushing in the opposite direction, pushing things up. That's the increase in business rates on large retailers, which might mean food price inflation at supermarkets stays a little higher than would otherwise be the case. But that's offset for the consumer by short-term decreases in energy bills by some of the mechanisms they announced.
Our base case is that inflation does work its way back to 2% by 2027. But there are still some risks that it stays a little higher than in other nations. So that's inflation, and the other part of the question was on government debt.
I mean, for our viewers at home, the best place to get an answer to this question is read this fantastic, relatively short report that my colleague, Adam Hoyes, posted — it's on our website. But the bottom line is that the UK's government debt position is really not remarkable compared to other countries. We have the second or third lowest debt-to-GDP ratio in the G7. It's middle of the pack if you compare to a broader group of developed countries. Its fiscal position is not enviable by any means, but France and the US is much worse.
And the chancellor is pretty much the only chancellor or equivalent of a major indebted developed nation that is actually tightening fiscal policy, that is actually shrinking the deficit and shrinking public sector net borrowing. That makes the UK rather unique for a good reason. So this idea that the UK's headed towards some sort of government debt crisis is just really not based on facts.
And to monitor that, just look — whenever a government is heading to a government debt crisis, its currency tends to tank if it's got a floating exchange rate, and the pound has been strengthening this year. What the UK does have is a growth problem, right? And that makes it more important for our chancellor to be shrinking the deficit because that further down the line could build into more sustainability problems. But that's a little further down the line.
Myron:
Brilliant. Thanks for that, Ed. I think now is a good time to revisit the poll that we put to our viewers earlier in the session. And the results are in, so I'll just remind you all of the question. So it was, "Now that the government's plan have been announced, how are you feeling compared to what you expected?"
The vast majority said about the same as expected. 62% of you said that. Better than expected was next down, with 25% of respondents selecting that option. And yeah, only 13% of people said that the budget announcement was worse than expected.
Surprised you, Rebecca? You think that's better?
Rebecca:
Uh, yeah, uh, no, I don't think so.
Myron:
About the same?
Rebecca:
I don't think so.
Myron:
Yeah?
Rebecca:
Yeah. I think, um... Yeah, I'm perhaps surprised a few more people didn't say better than expected actually, given some of the speculation. Yeah. 'Cause, 'cause it's, yeah. Especially pensions. You know, we had a lot of concerned clients calling us up wanting to do knee-jerk things that wouldn't be in their best interest, and that's where Rebecca and her colleagues really come into their own.
Rebecca:
(laughs) I mean, if you're talking to me as Rebecca probably I would definitely have preferred not to have the salary sacrifice cap and not to have a freeze on income thresholds for the next however many years. Thank you. Um, but as a financial planner, yeah, I mean, we didn't see so much of the stuff that we were expecting.
Pensions, inheritance tax, CGT. I mean, the concern is that that stuff goes back on the table for next year. But hopefully she's done enough not to have to do that next year because, you know, this has been, I think, a fairly exhausting process all round on both sides of the table — for clients and for us. We've been talking about it for months. People have been speculating on what's gonna happen. It's our job to work on what we know and what is the client's trying to achieve and what's the best thing for the client.
That has had, there's been some challenging conversations 'cause people really worry, obviously really worry about this stuff, worry about what's gonna be introduced. People have worked really hard to build up their wealth. They want to protect it. They want to have a great retirement or they want to pass it on to future generations. You know, it's all completely understandable goals and rationale. And this kind of thing is just really unhelpful. So my wish would be that we don't go through this again next year.
Myron:
And our next survey question actually which I'll introduce now, so this time, Rebecca, I want you to also share your perspective live as I read this question out, to see if your answer aligns with our viewers' responses.
So to the audience and to you Rebecca: Which area of the autumn budget announcements concern you the most? So property — so what we spoke about in terms of mansion tax. Pension savings. Passing wealth on. Investing. And income tax.
I'll read that again just to give you maybe another second to think about the answer. So which area of the autumn budget announcements concern you the most? Property, pension savings, passing wealth on, investing, and income tax?
Rebecca:
Can I have two answers? (laughs)
Myron:
Yes.
Rebecca:
Okay. Okay. So I think the bit that concerns me most overall and will impact the most people again is the freeze on tax thresholds. That is just huge in terms of the impact that has on how many people are paying tax and the rate that they're paying it at. And particularly, you know, for people who are passing wealth on, the freeze of the nil rate band for 20-plus years, that has a huge impact. So I think if overall it's got to be that kind of stealth fiscal drag with income tax.
Myron:
And actually might as well say that the largest percentage of our participants, of our viewers agree with you. So 34% said income tax is actually, you know, fiscal drag is their top concern.
Rebecca:
Yeah, I think so. I'm not surprised about that at all. The other thing I would highlight — I don't think we had many... So we didn't have really any inheritance tax changes. There was a little bit about the £1 million band you get for business relief and agricultural property relief now being transferable between spouses. That was probably just something that needed amending from last year really. But otherwise, we didn't really see much on the inheritance tax front.
On the investing front, we have those changes to the 2% increase for dividend tax on dividends for basic rate and higher rate taxpayers. Not additional rate taxpayers, but just the basic rate and higher rate taxpayers. So again, you know, kind of a little bit but not too much.
Maybe the property would've been my second answer, just because — and I'm just kind of playing devil's advocate here really — but it is a wealth tax really. We haven't got a wealth tax, but it is a tax on wealth following on the tax we had introduced last year, well, the removal of inheritance tax on, like, the exemption on unused pension funds. So unused pension funds now being brought into the inheritance tax net. Now we're getting a tax on high-value properties.
Is that... are we just... is that the thin end of the wedge? You know, could we see more of that? I don't know, but that'd probably be my kind of second area.
Myron:
Well, the top three concerns are, yep, income tax, so that's number one. Followed by passing wealth on, so inheritance tax — estate planning. And then third, property.
Rebecca:
I think passing wealth on was a big priority before the budget. So although we haven't seen any changes, I mean, since COVID we've been talking about that so much more. It's a really hot topic and there's much bigger focus now on clients wanting to pass wealth on during their lifetime particularly. Not just because loved ones, children need that help with getting on the property ladder, with school fees, with whatever it might be, just kind of day-to-day living even because cost of living has gone up so much.
But it's also about those giving the wealth getting to see the enjoyment and the benefit of passing on wealth during their lifetime and seeing how that helps their loved ones. So, yeah, that's definitely been a conversation for a long time, so again, I'm not surprised that that's still a theme.
Myron:
And Ed, actually, which of the options has the greatest impact on markets? So property, pension savings, estate planning/inheritance tax, investing, and income tax?
Ed:
So, I mean, I guess the obvious answer would be investing, right? You invest in markets. But actually, a lot of the changes that we see, they don't really move the dial enough on public markets. Especially as the majority of ownership in most of the UK public financial markets are overseas investors or institutional investors who don't pay tax in the same way that individuals do.
So, but changes in pensions, I think, potentially. Not in the short term — you won't see a big spike in the bond yield because of it or anything like that. But the government is doing something very counterintuitive and contrary to its own designs, right? So last year, Rachel Reeves spoke a lot about mobilizing the investment power of the pension sector to increase productive investments in the UK.
Well, why then would you go ahead and introduce measures at the previous budget and this one that disincentivize savings into pensions? So in short, to boost growth, you need to boost investment. To boost investment, you need to boost savings. Pensions is a really good way of doing that. And she's doing the opposite.
Although we didn't get a tax relief cut, which could have been much worse. Could have been, yes. Much, much worse. And we didn't get a tax-free cash cut either. But I think the thing there is that we now need some stability — some kind of, not guarantee, but some reassurance in that pensions landscape to stop this coming around again next year.
Rebecca:
Yeah. What we need to do is we obviously need to encourage people to save more, but while things are changing constantly and people aren't certain about what pension's gonna look like in the future or what kind of benefits it's gonna give them — that's the unhelpful part. That puts people off saving into their pensions. So that's the bit that we need more certainty and a bit more reassurance for savers that pensions still are a really excellent way to save.
You've still got tax relief on the way in. You've still got tax relief in the fund. You've still got your tax-free cash at the end. Still a great way to save. We shouldn't be discouraging that at all. In fact, completely the opposite. But what is unhelpful is just the uncertainty around how pension legislation changes so frequently.
Myron:
Next question relates to VCTs and EISs. And it sounds... The question says, "I understand in terms of EIS investments have improved. While high risk, does this provide any way of reducing tax, particularly for early-stage companies that have proven commercial demand?" And I suppose that changes — I think the limit has increased, hasn't it, in terms of what you can invest from £10 million to £20 million. But also there's that change with VCTs in terms of their income tax relief will drop from 30% to 20% from eight years.
Rebecca:
Yeah. So at the moment, VCT and EIS tax relief is 30% across the board, and that's changing. So VCT's tax relief will go down to 20%. But you also get tax-free dividends with a VCT. So, you know, one of the things I heard was that that was kind of — they were trying to equalize the attractiveness of investing either/or.
With EIS, you do also get some other tax reliefs. So you can use it to defer CGT, defer capital gains. You can get some inheritance tax relief through an EIS as well, which you can't get with a VCT. VCTs — they're UK-listed companies. They invest in early-stage businesses, so they are high risk. You can use them to reduce your income tax bill though. But they are illiquid, so you're looking at having to hold them for seven to 10-plus years.
There will be companies within those, within VCT and EIS that fail. So, you know, it's early-stage companies. Yeah, it's high risk. So definitely get advice if that's what you're thinking about, wanting to reduce your income tax bill. You might also think about 101 stuff like obviously use your ISAs. Think about planning between spouses and civil partners. You know, if you can maybe move savings or investments into a lower-tax payer spouse's name, you could do that as well.
So I think VCTs — and obviously pension contributions as well. Great for income tax relief, right? So I think that's probably where we'd go first as financial planners. But on the understanding that a lot of high earners are already restricted in how much they can put into a pension. So a VCT is an alternative to that. But yeah, high risk, definitely. If you are interested, talk to your financial planner and talk to an investment manager about getting more information on those.
Myron:
Yeah. And on the VCT thing, I just think it's quite interesting in terms of — I saw a commentary about pension contribution versus VCTs. What are your views on that? I mean, I suppose there's no longer a lifetime cap on pension contributions, but you still have the annual cap.
Rebecca:
The annual cap, yeah. But I suppose you can still get income tax, up-front tax relief of up to 45%. So when do VCTs really kick in for people? So I think VCTs used to be really attractive for people who are maxed out on their pension contributions. They are attractive now for people who are very high earners who are restricted in the amount that they can put into their pension every year but have got lots of income and want to look for other ways to reduce that income tax bill.
But I think, you know, I'd definitely come back to the fact they're a really long hold. So you're buying and holding them for the long term. They are illiquid, so you can't get in and out of these vehicles easily. They do, but they do have the tax reliefs. And that's why they have the tax reliefs, right, to encourage people to invest in them because that's what the government's trying to generate. So I would always go for pensions, if you can, over a VCT, but VCTs can complement that if you're restricted from saving into your pension.
Myron:
And this is where you need advice, isn't it, because they're high risk.
Rebecca:
Absolutely, because it will absolutely depend on your individual circumstances and what you're trying to achieve with your money.
Myron:
Just the last few questions. I want to make sure we have an ample amount of time for Q&A at the end. So, Ed, this one's for you. The chancellor clearly believes these measures are enough to plug the fiscal gap and build reserves for a rainy day. What short-term challenges might these measures create? And also, when we talk about fiscal gap and fiscal headroom, can you explain that? And it's gone up, hasn't it, from £9.9 billion last year to £22 billion this year. Can you explain the impact of that?
Ed:
Yeah, so the fiscal headroom — the chancellor is subjected now to, or imposes upon herself actually, fiscal rules. That was an innovation brought back by George Osborne really, and we've had variations on these rules ever since. One of them is shrinking the current government budget deficit, that's obviously projected out. Current plans and the economic forecasts are projected out to the end of the next parliament. The degree to which the chancellor meets that rule is that sort of fiscal headroom.
So obviously, there's a negative headroom if she's not on track to meet that rule. If she was perfectly on track to meet that rule, she'd have zero headroom. If the central forecast is that she shrinks the budget deficit a little bit more, then she's got a positive fiscal headroom. And that's really prudent because we're talking about financial and economic variables where there's a lot of uncertainty about projecting them into the future.
So £22 billion is a little bit lower than the headroom the average chancellor has run since 2010, but it's more or less there. In terms of challenges, I think the biggest one is the bond market changing its mind. I said how the bond market has treated this budget relatively kindly. Because a lot of the significant revenue-raising measures don't kick in till 2028, there is a possibility that the market might start to worry that those measures may never actually kick in. Especially because those revenue-raising measures occur in the final year before the next general election. But that's probably something for further down the road.
And actually, look, the UK has the highest government borrowing costs out of all the G7 nations at the moment. That's looking increasingly at odds with the fact that it's got the only chancellor meaningfully shrinking the deficit out of that group. It's got relatively weak growth and inflation is coming down. So we don't think that's a challenge, but it's a risk. Another risk is the OBR downgrading growth forecasts again, productivity forecasts. That's an ever-present risk, certainly when it comes to productivity. The government can't do that much about that in the short run.
Spending costs, you know, they've been coming in ahead of what was planned. Labour is increasing the welfare bill. There is a risk that that carries on getting a little ahead of the forecast. But again, unlikely to the degree that it depletes all of that fiscal headroom. And then finally, this one's a bit more speculative — it's the risk of capital flight and a brain drain on the economy. We know from surveys that bright young things are increasingly looking to move abroad in a way that they really didn't used to. You know, some of you may have heard that anecdotally from speaking to younger people or parents of kids in their 20s.
The government disproportionately taxes higher earning salaried workers. So higher earning salaried workers in the UK are taxed at a higher rate than pretty much anywhere else. There are other countries that tax more, quite a few countries that tax a lot more in general, but not necessarily putting the burden on those shoulders. And in those higher tax countries, there tends to be much higher trust in quality public services. Whereas that in the UK is really at rock bottom. So there is this ever-present risk of the tax base shrinking because more and more people move abroad. But the good news is that where that really moves the dial is when very wealthy people move abroad. And we haven't had that introduction of wealth taxes and the sorts of things that could cause that mass exodus.
Myron:
Yeah. And just lastly on this fiscal headroom point, which is I suppose a rainy day fund, should something go wrong, the government can dip into to plug any kind of gaps in its public finances. Does the rise from £9.9 billion to £22 billion mean that we're somewhat insulated from a smash-and-grab tax raise budget in the future?
Ed:
I think it's probably safe to say we're relatively well-insulated for a year. What that looks like in two or three years' time is another matter. But I think we're relatively insulated for another year, and that will really help us. Rebecca has said there's so much uncertainty ever since Labour took power. For businesses and the economy, that's really not good because people put off future spending, future investment decisions when they're uncertain. We know that empirically. There's loads of evidence of that all around the world, and we need some policy certainty. And hopefully that's what we've got at least for the next year.
Rebecca:
Yeah. And if you're planning for retirement, if you're still way off retirement, that uncertainty is still there. I mean, you think of all the changes that we've had to pensions over the last, well, I don't know — I was in the industry in 2006 when we had simplification. And, you know, there's been so many changes since then. It's always a moving feast, and I think that it would be lovely to have some certainty for the longer term, not just the shorter term as well.
Myron:
Actually, more broadly, Rebecca, and last in terms of the official questions, how should people broach their personal finances following the budget?
Rebecca:
So, well, so I think it's really important to have a financial plan in place, right? So instead of thinking about the budget and what's changed, the starting point should be, "What are my financial goals? What do I want to achieve, and what's important to me? Do I want to retire at a certain age with a certain amount of money? Do I want to send my children to private schools? Do I want to be able to travel in retirement? How much money do I need?" What's important to you — that's the starting point always when you're talking to a financial planner.
So take all the legislation, all the tax changes, everything off the table because where you want to start is, "Where do you want to get to?" Because otherwise, you know, what makes life worth living, right? It's not all of this stuff. (laughs) It's being able to do what you want to with your money that you're working really hard for all the way through your life. So, I think it always comes back to the financial plan. So, if people are worried about what happened yesterday, if they have concerns, I would encourage them to talk to a financial planner or to talk to their point of contact at Rathbones, investment manager or financial planner, about what the changes mean for them.
And then just take that in the context of what it is they're trying to achieve. For many people, for retirees, for example, there wasn't a huge amount in the budget yesterday that will have knocked those plans off course. So they might want to pass wealth on to the next generation. There wasn't really anything yesterday that stopped them, that would have changed whatever strategy we'd put in place in a financial plan to allow them to do that.
So I would think just, a bit of a theme throughout all of our budget discussions really is just try and dial down that noise, all that kind of, you know, this is changing, that's changing. Think about what it is you want to achieve and whether yesterday — or what impact yesterday had on you specifically. And definitely get someone, get a professional to help you do that. And once you've got that long-term plan in place, you can kind of take a bit of a step back. You can kind of relax a bit and just watch what's going on knowing that actually these changes are not gonna mean that you can't do what you want to do.
Myron:
Yeah. No, I think that's really well said. Brilliant. And I've been fortunate enough to have a look at the amazing questions that have been put to us. Thanks again, viewers.
Ed, this one I thought was quite interesting, and it's for you. So in your opinion, did the chancellor really put anything in the budget that could improve growth in the UK economy?
Ed:
Uh, no. So it was very interesting that she barely spoke about growth yesterday. It was an unusually long budget speech and virtually nothing on growth, in contrast to the huge number of words she expended on talking about growth in 2024. And actually, there were some things that we wanted to see, like more full expensing of business investment. Businesses can deduct all kinds of investment from their profits before they have to pay tax on them. That's what you're seeing in the States. Some other countries do that. We do that to a degree. But actually, some of those investment allowances were taken away at the margin in the UK yesterday from businesses, which isn't great.
I've spoken about pensions before. You know, some disincentives there or measures that will make future pension saving lower than they would otherwise have been. That's really not great. Actually, we've got a quick chart just to show why I really care about that. So UK productivity growth has slumped since the financial crisis. It's slumped everywhere, but it's a bit more chronic in the UK. And that's this sort of chickens coming home to roost that we can see here. So this chart shows the green line is UK government investment as a share of GDP on the left, and on the right, corporate investment in the UK as a share of GDP. It is lower than average. It's been the case. Actually, you could take this back to the 1970s. But we need more investment in the economy. The government needs to do more to spur that, and we didn't see any of that yesterday.
Myron:
So you don't think the £8,000 of the ISA allowance going into investments is gonna...
Ed:
(laughs) I mean, that is small change, unfortunately. No, it's not going to shift the dial significantly.
Myron:
Well, maybe education, financial education is quite important.
Rebecca:
Yeah.
Myron:
And that's it. Thank you very much for joining, and until next time, take care.
