Save, make, understand money


What could be announced in the Budget

Written By:

With chancellor Philip Hammond delivering his first (and last) Spring Budget today, we look at what savers and investors can expect.

Versus his predecessor George Osborne, who has been described as a showman and highly political chancellor, Hammond (pictured) has been labelled a dry and straightforward pragmatist, who will be looking to steer an already steady ship rather than rock the boat.

With this in mind Tilney Bestinvest’s managing director Jason Hollands says expectations ahead of Wednesday’s Budget are quite low, with those hoping for news of eye-brow raising fiscal initiatives set to be disappointed.

“There is no urgent imperative, either economically or politically, to implement radical initiatives at this stage,” says Hollands. “Indeed the government will want to keep its powder dry on this front for its impending negotiation with the EU.”

So with an economy in reasonable shape and no radical measures expected, what should we be looking out for?

1. ISAs

It is already known that from 6 April 2017, the adult ISA allowance will rise significantly to £20,000, enabling couples to put away £40,000 a year tax free. “Chancellor Hammond has already said he doesn’t have a pot of money under his desk, so it is unlikely we will see major giveaways for savers in the Budget,” says Tom Selby, senior analyst at AJ Bell.

“We would like to see the chancellor maintain the government’s commitment to increasing the ISA allowance each year in line with inflation,” Selby adds. “The last thing we want is for it to be frozen at £20,000 for the next 10 years as many other allowances have been.”

“We would be very surprised to see any major developments in this space,” adds Hollands. “With the launch of the Lifetime ISA looking like an almighty flop with few providers expected to be ready at launch, this should dampen any enthusiasm for announcing any new initiatives in ISA-world.”

2. Pension relief

Hollands says there are “gnawing concerns” that the clock is still ticking for the current system of pension tax reliefs, with the government having conducted a consultation into their future last year.

“Many will be looking for signs as to whether the current regime is now settled for the foreseeable future, i.e. the remainder of this parliament, or if the chancellor will end the uncertainty once and for all,” says Hollands.

Having shelved large-scale reform of the UK’s pension tax relief framework ahead of the last Budget, Selby says it is not inconceivable that Hammond will return to them in this Budget, particularly as pension tax relief is expected to cost the Exchequer £38.2bn in 2015/16.

“With the NHS in crisis, the chancellor may be tempted to raid pensions in order to beef up healthcare,” Selby says. “However the Treasury may be nervous about pursuing a radical, resource intensive and potentially popular reform, especially with ministers’ minds firmly focussed on Brexit negotiations.”

3. Lifetime/annual allowances

Hollands says while many would breathe a sigh of relief if there are no further reductions in the pension lifetime allowance (cut this tax year from £1.2m to £1m) or annual allowance, he urges Hammond to go one step further and unravel the Osborne legacy.

“In particular, we would like to see the tapered annual allowance introduced this tax year scraped,” he says. “This new regime is a complicated and confusing dogs dinner of a mess, especially for those in defined benefit pensions.”

Selby agrees that the lifetime allowance has created a “wildly complex” set of protections for past allowances even that it has reduced over the years.

“Tinkering with pension contribution allowances is a perennial favourite of chancellors on Budget day and Hammond showed he was no exception in the Autumn Statement,” he says. “His proposed cut to the Money Purchase Annual Allowance (MPAA) flies in the face of pension freedoms and we’d like to see him take a step back and look at other measures that would be economically more beneficial to the Treasury and fairer to consumers.”

However if Hammond does proceed with cutting the MPAA, Selby adds he could soften the blow by removing the lifetime allowance. “This would be a welcome move as it would greatly simplify things for pension savers and remove the danger they get penalised for achieving good investment growth,” he adds.

4. State Pension Age

With the Cridland review into the state pension age due to report this year, Selby says the chancellor may want to ‘roll the pitch’ by signalling the government’s preferred direction of travel for future increases.

“Given the more flexible approach people are taking to retirement today, the government could look at allowing people to take their state pension earlier, with the amount they receive adjusted so it is cost neutral for the Exchequer,” he says.

“This would be a positive development and in line with the pension freedoms where people have greater control and choice around how and when they draw their retirement income. However, immediate spending concerns may well see the Treasury dodge this reform – which would increase short term cashflow strains – at least for the time being.”

5. The economy

As part of Hammond’s update on fiscal policy, he will also announce the latest set of predictions of the strength of the UK economy from the Office for Budget Responsibility (OBR).

“The OBR had forecast growth of 2.1% for 2016, yet despite the slight undershot in growth, it looks like the chancellor will have a little more wriggle room than previously forecast in the 2016 Autumn Statement,” says Azad Zangana, a senior European economist at Schroders.

Indeed Zangana believes the OBR’s forecast for 2017 economic growth now looks too pessimistic and that an upward revision could yield another couple of billion pounds compared with the previous forecast.

He says: “Given the significant downside risks to the economy, and the OBR’s assessment that the government is not meeting any of its three fiscal targets, Hammond may opt to bank most of the unexpected gains that are found. However, he will also be under considerable pressure to find more funding for the NHS and social care, following a sizeable media campaign in recent months.”

6. Tax increases for the self-employed

Reports suggest Hammond will increase national insurance (NI) contributions for self-employed people to bring them in line with the contributions paid by employees.

Self-employed workers currently pay 9% on earnings between £8,060 and £43,000, while employees pay 12%.

7. Cost of care

The government could announce a review into funding the cost of care. Ideas mooted include tax free access to pensions to pay for care.

8. Crackdown on terms and conditions 

The government is expected to announce a crack down on misleading consumer practices including subscription traps, where people pay subscriptions they aren’t aware they’ve agreed to.

A report from Citizens Advice last year found as many as 2 million people struggle to cancel continuous payments – often used for buying products online – and 4 in 5 people had issues cancelling after being signed up without their knowledge.