Budget 2021

Today’s post takes a look at the usual speculation in advance of Budget 2021, and at what actually happened.

Budget 2021

This is the third budget of this Tory government.

• It’s fifteen months since Boris beat Commie Corbyn and promised us no tax rises, lots of infrastructure and a general “levelling up” of the North.

Instead, we got a virus pandemic, millions of deaths globally, a stock market crash and recovery, 32 weeks of lockdown (and counting), plus a few riots here and there.

• The two budgets so far have been pretty dull, with a focus on supporting the economy (and firms and jobs) through the crisis – to the tune of £400 bn so far.

Investors (and investing bloggers) have had little to think about:

• The scrapping of a planned cut in corporation tax from 19% to 17%
• A cut in entrepreneur’s relief from £10M to £1M
• An increase in the pensions taper threshold to £200K pa, to help out NHS doctors
• A property stamp duty holiday

It should be noted that there is a separate “Tax Day” three weeks after the budget (on 23rd March) and consultation documents containing the details of some proposals might not be released until then.

Speculation

Notes in blue indicate what actually happened.

Job support

The furlough scheme and VAT cuts and business rates holiday for certain sectors were expected to be extended.

• There’s also a ban on commercial evictions which should be extended.

This happened.

Corporate tax

An increase to corporation tax was expected, perhaps at a rate of 1% per year, taking the rate from 19% now to 23% – or 25%, depending on which report you read – at the end of the parliament.

This happened – corporation tax will rise to 25% in two years.

• But there is a small companies rate, a taper and some extra reliefs for investment in the meantime.

An online sales tax targeted at Facebook, Google and Amazon was also mooted.

• This might to reform or replacement of business rates.

This wasn’t mentioned.

Investments

There was speculation that the pension lifetime allowance (LTA) might be frozen at £1.073M, or even reduced to £1M.

• Above this level, pension withdrawals attract a 25% penalty (on top of the regular income tax liability) – and 55% on lump sums.

This is a stupid tax on successful investment – on the gains from capped annual contributions and set far too low.

• It should really be abolished.

But in fact, it was frozen for five years, along with all the other allowances. (( Income tax allowances get the scheduled raise in April 2021, but no more ))

• Should inflation return as feared, a lot of people will be looking up the meaning of “fiscal drag”.

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Other reports suggested that the ISA allowance might be trimmed.

• The annual suggestion that higher rate pension relief might be replaced with a flat rate of 25% also appeared, though other reports suggested that this would be shelved until at least the autumn.

This didn’t happen.

Income tax

The higher rate threshold of £50K was expected to be frozen, but the £12.5K annual allowance was likely to be spared.

• In fact, all allowances will be frozen after the April 2021 rise.

A new higher earners’ rate of NIC had been mentioned, along with NICs for workers over the state pension age (perhaps at a reduced rate or with a £30K earning qualification).

This didn’t happen.

Capital gains

We had a CGT review from the OTS a few months ago, so many people expected some of those recommendations to be implemented.

• Doubling CGT rates to match income tax bands, and cutting the annual allowance to £5K or less were mooted.

This didn’t happen.

Another proposal was removing the CGT uplift on inherited assets, which would be a disguised form of IHT increase.

• It has also been suggested that the IHT exemption for AIM stocks might be removed.

This didn’t happen.

Wealth tax

There was a report from a Wealth Tax Commission in December, so some people imagined that one might be implemented.

• But it wasn’t an official report and introducing a wealth tax would be a hard thing for a Tory Chancellor to live down.

Replacing council tax and possibly also stamp duty with an annual property tax was a long-shot, but had been denied by a government spokesperson.

• A “one-off” Covid wealth tax had been similarly denied.

There were no wealth taxes other than the stealth taxes from fiscal drag.

Green stuff

The UK hosts the Climate Change Conference in November, providing some motivation for green incentives.

• As you might expect, there has been a lot of lobbying, but there were few proposals that people expected to happen.

Ideas included:

• A carbon tax
• Bans on fossil fuel investment by eg. banks
• A national infrastructure bank
• R&D tax breaks for electric vehicles
• More taxes on plastic packaging
• Some kind of green savings bond (though it’s not clear how to reward green savers without increasing the government’s borrowing costs)

There was a green bond – I’ll be interested to see the details.

Property

The stamp duty holiday was expected to be extended.

• There was also a mooted proposal to guarantee 95% mortgages for first-time buyers of properties up to £600K.

I have mixed feelings about this kind of thing:

• UK Property prices are very high
• But the economy would crash if they fell quickly (not least because so much bank lending is secured against houses)
• New buyers should be encouraged to get on the property ladder
• But more lending just means higher prices (I have a fair amount of property exposure, so this is not bad for me personally – though £600K doesn’t go far in London
• Stamp duty is bad (like most transaction taxes), but the alternative is higher council tax which penalises those who stay put

Both measures were announced.

Sin taxes

Tax increases on drink look impossible given the troubles in the hospitality sector, but it was thought possible that duty might be reduced for on-sales (in pubs) and increased for off-sales (largely in supermarkets, but also in off-licences).

• Tobacco would be a less controversial target.

Driving probably counts as sin these days, and there was speculation that the decade-long freeze on fuel duty might come to an end.

All sin duties were frozen for another year.

Social Care

The social care can was expected to be kicked down the road for another year – as it has been for a decade now.

This wasn’t mentioned.

Other stuff

An increase in the contactless payments limit from £45 to £100 was leaked.

• The use of cash has decreased during the pandemic, and the lower it goes, the easier it will be to impose negative interest rates.

Surprises

I guess the only surprise was the announcement of eight free ports – tax-incentivised enterprise zones around rivers and airports.

• It’s possible that some form of investment vehicle (like an EIS) will emerge to take advantage of these.

Conclusions

It was yet another anti-climax of a statement from a Chancellor.

• Or perhaps it just seems that way, in the context of everything that we’ve seen already this year.

It’s probably mildly positive for the UK, and mildly negative for investors.

• Until next time.