Budget Summary Briefing

The key headlines from a savings and investment perspective:

Pensions

  • The Lifetime Allowance (LTA) will be abolished. The LTA is the maximum amount of savings an individual can build up without having to pay additional tax charges. The LTA was set at just over £1.07m. It was expected to be increased but the scrapping of this allowance completely removes any disincentive to save into a pension based on additional tax charges above a certain threshold.
  • The maximum Pension Commencement Lump Sum (tax free cash) will remain at £268,275 (unless protections apply), which is 25% of the current LTA of £1.07m.
  • The Annual Allowance (AA) increases to £60,000 from £40,000 per year. The AA is the maximum amount of money an individual can pay into their pension each tax year without penalty.
  • The Money Purchase Annual Allowance (MPAA), which applies to people who have taken a taxable income from their defined contribution (DC) pensions, increases to £10,000 from £4,000 per year. The minimum tapered annual allowance also increases to £10,000 from £4,000.
  • The adjusted income level for the tapered AA increases to £260,000 from £240,000. The threshold income remains at £200,000. If an individual’s income exceeds both of these limits, then their AA reduces by £1 for every surplus £2.
  • The levels of these allowances have been cited as reasons for people leaving the workforce early, particularly senior public sector employees with final salary schemes. However, the low level of these limits was also becoming a disincentive for those who had saved diligently and made good investment choices in DC schemes.

Economy and inflation

  • Chancellor Jeremy Hunt introduced a ‘back to work’ budget that made growing the economy one of the key priorities.
  • He said the Office for Budget Responsibility (OBR) expects the UK economy to shrink by 0.2% this year, but should avoid a technical recession this year (which is two consecutive quarters of contraction). This is an improvement on the Autumn statement which forecast the economy would shrink by 1.3% this year.
  • The economy is expected to grow by 1.8% next year and grow in the three subsequent years.
  • The OBR forecast that the rate of inflation will fall to 2.9% by the end of 2023. The current rate of inflation is 10.1%.
  • The unemployment rate is forecast to rise to 4.4%.
  • 12 new low-tax investment zones have been announced across Britain. ‘Levelling up’ support for regional regeneration and sustainable transport projects. Funding measures for Scotland, Wales and Northern Ireland have also been announced.

Energy and Fuel

  • The energy price guarantee will remain at £2,500 for next three months. This will save the average family £160 on their fuel bill. Prepayment charges will be brought into line with comparable direct debit charges so that poorest people in society do not pay more for energy. Fuel duty is also frozen for 12 months.
  • £20 billion of support for carbon capture projects with a target of capturing 20-30m tonnes of CO2 by 2030.
  • Nuclear power will be reclassified as ‘environmentally sustainable’ which gives it access to the same investment incentives as renewables.

Corporation Tax

  • Despite the previously announced corporation tax rise from 19% to 25%, the chancellor pointed to the fact that UK will still have the lowest headline rate in the G7. Only 10% of firms in the UK will have to pay the full 25% rate.
  • Annual investment allowance will now allow investments to be fully deducted immediately from profits. It means every £1 spend on plant and machinery can be fully expensed in the current tax year. Previously, firms could only deduct a fraction of the cost of investments each year over the accounting lifespan of the investment and inflation would erode the value of this over time. The OBR expects this to increase business investment by 3% per year. This full expensing has been announced for the next 3 years with the intention to make it permanent.
  • New tax credits for small and medium sized businesses that spend 40% of their expenditure on research and development (R&D).

Defence budget increased

  • £11 billion to be added to the Defence Budget over the next 5 years, meaning the defence budget will be 2.25% of GDP by 2025.
  • Commitment moving from 2% of GDP to 2.5% of GDP as soon as fiscal circumstances allow.

Other notable measures

  • AI ‘Manchester’ prize of £1m per year for the most ground-breaking research into AI. £400 m for mental health, and a new white paper on disability benefits. £30m support for veterans; £63m funding for leisure centres and swimming pools. Apprenticeships for over 50s to return to work. Free childcare for working parents in England expanded to cover children from nine months and increased funding to nurseries as well as incentive payments for childminders.

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