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Spring Budget 2017 - Response

| Tax | Pensions | Investment

Key thoughts from our Private Client, Corporate Client and Investment & Fund Management Teams following Philip Hammond’s delivery of the Spring Budget.

Private Client Team

Philip Hammond, like most recent Chancellors, had already pre-announced many of the measures and next year’s tax rates before his Budget address this lunchtime – these include increases to personal Income Tax allowance and thresholds at which 20% and 40% Income Tax become payable.

To a degree tax rises were expected, as the prudent Chancellor is looking to build up a “war chest” as a slush fund just in case the UK economy tanks post-Brexit. And clearly he is committed to reducing the public deficit whilst needing to spend on essential services like schools and hospitals. A difficult balancing act for any chancellor.

As a “Tory” Chancellor I was a little surprised to see how bold he was in attempting to bridge the amount of tax (and by this I mean National Insurance) paid between the self-employed and the employed. He’s been seen by many commentators as picking on small business and entrepreneurs. Aside from this there were few surprises or major amendments to taxation and pensions over and above what had already been pre-announced. So here are a few key points:

  • A 1% increase on NI on profits for the self-employed (Class 4 NIC) to 10% from April next year and a further 1% increase in April 2019 to 11%. The plan to scrap Class 2 NICS for the self-employed from 2018 will still go ahead. The Chancellor calculates that the disparity between the NI paid by the equivalent self-employed and employed workers is £5billion this year alone. These measures will significantly close this gap.
  • A decrease in the nil rate band whereby dividends can be paid to company directors/shareholders free of tax. This has reduced from the £5,000 introduced by Mr Osborne from April 2016, to £2,000 effective from April 2018. A most unwelcome surprise for owners/managers of small businesses and investors.
  • Re-affirmation of 2015 Conservative Election Pledge that Income Tax threshold to be raised to £12,500 by 2020 and 40% tax band to be increased to £50,000 over the same time taking more people out of the scope of income tax and higher rate income tax.
  • Help for small businesses which are seeing overall £435m of business rates relief including a £300M “hardship fund”
  • No major changes to UK pensions but some punitive tax charges on some transfers to overseas pension funds.
  • No other changes to Income Tax or NI rates aside from those already announced such as the personal allowance increasing to £11,500 for 2017/18
  • ISA allowance is £20,000 from 6/4/17 – this tax free savings allowance was pre-announced. This is positive news but by increasing the amount savers can place into a tax wrapper like an ISA is this a smokescreen for future attacks and removals on the tax breaks offered by pensions – watch this space!!!
  • No major or immediate changes announced to Inheritance or Capital Gains Tax.
  • Corporation Tax is to be reduced to 17% by 2020 with incremental reductions in the intervening years – as Philip Hammond says “Britain is open to business” post Brexit – this has been seen by many to be at odds with the tax rises announced for the self-employed

As ever once the detail comes out the COURTIERS team will be analysing this further and giving their expert views and opinions on how this affects you and your family.

Written commentary from Graeme Clarke.

Corporate Client Team

There were no major surprises with regard to pensions or other employee benefits, thankfully.

Following a period of consultation after the Autumn Statement, the Money Purchase Annual Allowance is coming down from £10,000 to £4,000 from April in a bid to curb the worst excesses of pension tax-relief recycling. Fewer than three percent of pension savers contribute more than £4,000 anyway so this is likely to slip in under the radar. The new limit will apply to anyone who has flexibly accessed a pension since the new rules came into force in 2015.

The tax advantages of salary sacrifice arrangements have been withdrawn for all but the most popular of employee benefits; pensions, childcare vouchers, cycle-to-work schemes and ultra-low emission vehicles. We’re pleased to see that the government remains committed to salary sacrifice as a means of promoting positive benefits and we remain optimistic that this isn’t just the opening salvo in a wider attack.

Mr Hammond has instigated an aggressive crackdown on overseas pension transfers where the aim is principally tax avoidance. Until now UK pension members could transfer funds to overseas pensions provided they met strict HMRC guidelines around taxation and access. New rules announced today will see such transfers taxed at 25% unless:

  • both the member and the new pension are situated in the EEA, or
  • they are outside the EEA but the member and the new scheme are located in the same country, or
  • the new scheme is an occupational pension provided by the member’s employer.

The aim here is clearly to allow transfers to proceed where there is a legitimate reason, such as a member emigrating from the UK to Australia, whilst preventing people who are still living in the UK from transferring to an overseas pension solely to take advantage of a better tax regime. The implicit deal with UK pensions is that the government gives us generous tax advantages on contributions in the expectation that it will recover most of that tax when pensions are drawn at retirement. Transfers to overseas pensions usually result in a loss to the Exchequer so I can understand this move. It may also serve to protect individuals from some of the myriad of pension scams that lurk out there.

Finally, Mr Hammond is clamping down on disguised remuneration schemes, which should come as a surprise to no one. As the name suggests, these are schemes employed by firms to provide a salary-like benefit to employees but without the tax liability. The message is clear – where HMRC spots them, it will close them down and pursue those responsible. We have always advocated an open and honest approach with HMRC so I would not expect this to cause any difficulties for our clients.

Written commentary from Jonathon Howard

The Investment Team

Earlier today Philip Hammond delivered his first Budget as Chancellor of the Exchequer. He began by pointing out that the British economy grew faster than almost all other major advanced economies last year, second only to Germany. He mentioned that employment is at a record high, with over 2.7 million more people in work than in 2010, and – in an appropriate statistic for International Women’s Day – there is now a higher proportion of women in work than ever before.

He went on to reveal the all-important growth forecasts for the UK economy. The 2017 forecast has been upgraded from 1.4% to 2%, but in subsequent years it has been downgraded to 1.6%, 1.7% and 1.9%, before settling at 2% in 2021/22. Inflation, which is currently at 1.8% according to the Consumer Prices Index, is forecast to rise to 2.4% in 2017/18 before falling to 2.3% and 2.0% in subsequent years.

The government is determined to reduce the country’s debt, which currently stands at around £1.7 trillion. Public sector net borrowing is predicted to fall from 3.8% last year to 2.6% this year. In five years’ time it is expected to be at 0.7% - its lowest level in two decades.

Hammond mentioned in his Autumn Statement that a key issue facing the UK was productivity, which lagged that of the US and Germany by 30 percentage points. He unveiled a £23 billion fund to be spent on innovation and infrastructure in the next five years. Today he expanded on his spending plans for this sector, including £270 million on new technologies and £200 million for local broadband networks.

In another bid to increase future productivity, the Chancellor has focussed on education. Investment in schools is set to increase by £216 million. A further £300 million has been pledged to support PhD places and fellowships in technical subjects such as maths and science.

Reaction to the Budget appears to have been positive. Since the Chancellor began his speech at lunch time, the FTSE 100 index has risen 0.4%.

Written commentary from James Timpson.

Warning – the views expressed by Courtiers in this summary and any video and video transcripts, are reached from our own research. Courtiers cannot accept responsibility for any decisions taken as a result of reading this document, watching the featured video or reading the video transcript and investors are recommended to take independent professional advice before effecting transactions. The price of stocks, shares and funds, and the income from them, may fall as well as rise. Past performance is not necessarily a guide to future returns.

We do not endorse nor accept responsibility for the content of any website not operated by Courtiers which you may visit by following a link from this article.

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