Queen’s Speech 2015: what it means for your money
The Monarch read the words, but the document is prepared by the Prime Minister and outlines a number of key government policies and laws. Once delivered, parliamentary debates will kick-off on the speech’s contents.
That’s all well and good. But what will this display of pomp and power ultimately mean for you and me?
Well, as a start it’s worth remembering that not everything proposed in the Queen’s speech will become law. A significant slice falls by the wayside due to political opposition. That said, the speech is a good roadmap for the country’s future path.
Here are some of the key announcements made today and what they mean for you and your family’s financial planning:
Uncertainty for investors
The Queen’s speech introduced an EU referendum bill, which will pave the way for a decision on Britain’s place in the European Union.
Prime minister David Cameron needs to make good on his pre-election promise to renegotiate the UK’s terms of membership within the EU and hold an in/out referendum by the end of 2017.
While some commentators, including the Bank of England governor Mark Carney are calling for the referendum to be held earlier in order to address the uncertainty weighing on British companies, others are cautioning Cameron not to rush into a referendum before bedding down the needed reforms.
Either way, uncertainty over the outcome of an EU referendum will no doubt weigh on investor sentiment.
Possible results of a UK exit from the European single market, or ‘Brexit’ could include: a reduction in UK gross domestic product (GDP) thanks to lower exports to the EU, less direct investment in Britain (most of it comes from Europe); a downgrade in the UK’s credit rating; and lower for longer interest rates to compensate for the slowdown in economic activity.
Respite for taxpayers
The Queen had some good news for taxpayers with the announcement that the so-called five-year ‘tax lock’ preventing rises in income tax, VAT and National Insurance will be written into law. This will provide some respite to tax payers although questions remain over how the prime minister will plug the country’s deficit.
The other good news is a proposal to raise the amount you can earn without paying tax to £12,500 by 2020 and tie future increases in the threshold to the national minimum wage.
In his last budget speech Chancellor George Osborne pledged to increase the threshold to £10,800 in 2015/2016 and to £11,000 for the 2016/2017 tax year. Increasing the personal tax-free allowance is a good way to keep voters happy by putting more money in taxpayer’s pockets. But it is also an expensive tax cut for the government as it drags more individuals out of tax in a country where income tax already tends to be top heavy.
Good news for parents is that childcare will be getting cheaper with an increase in free childcare for three and four year-olds to 30 hours a week.
On the campaign trail, David Cameron promised to create 600,000 extra free childcare places and double the amount of state-subsidised childcare for three and four year-olds to 30 hours a week.
Currently, all three and four-year olds in England are entitled to 570 hours of free early education or childcare a year, which works out to 15 hours each week for 38 weeks of the year. The proposal will be funded by reducing tax relief on pension contributions.
While the reduction on pension contributions will be a hard blow, the news will be music to the ears of parents struggling with the debilitating costs of child care.
As it stands, British parents shoulder some of the highest childcare costs in the world. It is important for all families to work childcare costs into their broader financial planning. Cash-strapped parents will no doubt welcome the increase in free childcare for three and four year-olds to 30 hours a week, however the less welcome news is that this proposal is expected to be funded by reducing tax relief on pension contributions.
Further tinkering to the pensions regime is unwelcome if it disincentives pensions savings. Moreover in the long run parents will be reluctant to sacrifice their pension savings for a brief respite in the child care fees.
Property: many initiatives but will they work?
Thanks to their election victory, the Conservatives have a clear path to implement their vision for the UK’s property market. In the run up to the election, the Tories outlined a number of policies designed to boost the UK’s residential sector including an extension of Margaret Thatcher’s Right to Buy scheme to 1.3 million housing association tenants in England, help for first-time buyers, with 200,000 starter homes made available to under-40s at a 20% discount and a Help to Buy ISA.
The new ISA wrapper will launch in autumn this year allowing first time buyers to save £200 a month from the taxman. The government said that they would give people 25p for every £1 saved into a Help to Buy ISA, up to a maximum of £3,000 for £12,000 stored in the account. The account will have a minimum requirement of £1,000.
On paper the initiative sounds virtuous, but in principle it will do very little for buyers eager to get a foot on the property ladder. Our calculations show that the Help to Buy ISA (HISA) will leave first time buyers nearly £14,000 short for their deposit based on current house prices.
Investing the full allowance of £2,400 into a HISA each tax year for five years, could see you save £12,000 and achieve potential returns of £252.72. Once you buy a property, the Government will top up your deposit with £3,000, giving you a total of £15,252.72 – which still leaves you nearly £14,000 shy of the average first time buyer deposit, based on current house prices.
For Londoners, the black hole is even bigger as a first time buyer needs to stump up an average of £69,000 for a deposit, which means the HISA at today’s property prices will leave them a staggering £54,000 shortfall.