Budget 2020 – our view on what it means for your money

Yesterday the new Chancellor, Rishi Sunak, delivered his first Budget detailing the government’s tax and spending plans.

Our experts summarise what it could mean for you and your money.

This article isn’t personal advice. Tax benefits depend on individual circumstances. The value of investments can go down as well as up in value so you could get back less than you invest. You can’t usually take money out of a pension until you’re 55 (57 from 2028).

National Living Wage

Nicholas Hyett, Equity Analyst

Alongside the Budget the government has announced changes to the National Living Wage (NLW). While certainly good news for workers, the changes will be less welcome for companies in industries that rely on large numbers of low paid employees.

The NLW will rise by 6.2% from April to £8.72, in line with the government’s current target to reach 60% of median earnings by 2020. However, the government has gone further and said that it will now target an NLW equal to two-thirds of the national median by 2024, and extend it to workers aged 21-24. If things stay as they are that would mean a NLW of over £10.50 in 2024.

We suspect the retail and leisure industries will be particularly uncomfortable with the change. Tesco, for example, has promised to raise the hourly wage of shop floor staff to £9.30 an hour by October this year. That suggests inflation busting pay rises of just over 3% in the coming years – great for staff, not so good for margins.

It’s not just the take home pay that will be increasing either. Automatic enrolment means pension expenses will increase too as increased salaries mean increased employer contributions.

National Insurance threshold increase

Sarah Coles, Personal Finance Analyst

One of the most far-reaching changes is the raising of the National Insurance (NI) threshold to £9,500 (from £8,632), which benefits 31 million taxpayers. It means a typical employee will save £104 a year, and the average self-employed worker will save £78. Rishi Sunak was very keen to stress that this was an example of the government delivering on its promises, which bodes well for pledges to eventually increase it to £12,500.

Fortunately, anyone newly lifted out of paying NI altogether won’t have to worry about any potential impact on their National Insurance record. As long as they’re earning over the Lower Earnings Limit of £6,240 it’ll be counted as another year towards qualifying for the state pension, even if they don’t pay a penny in NI.

Junior ISA limit more than doubles to £9,000

Nadeem Umar, Research Editor

The amount which can be added to a Junior ISA (JISA) next tax year is going up from £4,368 to £9,000. That’s the highest it’s ever been and is fantastic news for families.

A Junior ISA is a tax-efficient savings account aimed at encouraging families to save and invest for their children’s future. Designed to increase long-term saving, doubling the allowance will allow families to build a significant pot of money for children without having to pay any UK tax. And with money locked away until their 18th birthday, this increase maximises the power of compound growth.

With university costs so high along with house prices continuing to rise, this increase could make a huge difference to a child’s future.

Business rate cut

Sophie Lund-Yates, Equity Analyst

The big piece of news for the retail sector was business rate cuts, a tax applied to commercial properties. The chancellor announced that for one year small retail, leisure and hospitality businesses won’t pay any business rates. The idea is that by lowering costs they’ll be able to better absorb disruption to supply chains, work forces and customer demand amid the coronavirus outbreak. Smaller pubs have also been thrown a lifeline.

The government’s been under pressure to reform business rates for a while. UK high streets have been struggling with changing consumer habits, including higher spending online, leading to a record number of shop closures in recent years.

The current business rate system is seen by some, including the British Retail Consortium, as unfair. The government are collecting 25% of all its business rate income from retailers, despite the sector only making up 5% of the economy. This tax can be the difference between a struggling shop scraping through or failing.

However, it’s worth noting that this tax break is aimed squarely at smaller companies, targeting lower value real estate. While some large retailers might benefit, investors in UK listed retailers should be more interested in the announcement of a wider business rate review in the autumn. Another review in the pipeline signals the possibility of wider-reaching change coming through later.

The infrastructure Budget

William Ryder, Equity Analyst

The UK’s productivity has lagged other developed nations for some time now. Longstanding under-investment in the country’s infrastructure could be partly to blame. Our time and resources are consistently wasted in traffic jams, repairing cars damaged by potholes, and by the tumult inflicted by floods.

The chancellor has therefore announced a big increase in infrastructure investment over the course of this parliament. The government plans to spend around £640bn by 2024, equating to triple the average of the last 40 years by the end of the parliament. This includes £27bn on roads, £500m a year for potholes, and £5.2bn for flood defences.

The money must be spent wisely though, so we’ll be looking out for more details in the new National Infrastructure Strategy due later this spring.

The new spending is definitely good news for the UK’s construction sector. However, as we’ve discussed before, razor thin margins in the industry mean investors are unlikely to see much of the new cash.

Pensions in the Budget

Nathan Long, Senior Pensions Analyst

Higher earners, having been largely frozen out of pension savings, were brought in from the cold yesterday with news that they’ll keep their full annual pension allowance of £40,000. This is unless their total income (including salary, bonus, dividends and rental income) plus employer pension payments tops £240,000 where the allowance still reduces by £1 for every £2 of income above this level. However those who have a total income minus personal pension contributions lower than £200,000 are unaffected by this.

Previously, the tapered annual allowance bottomed out at £10,000, now this will be £4,000. But to have this £4,000 allowance you would need to have an adjusted income of over £312,000.

These are welcome changes as they largely fix the problems of NHS consultants turning down work to avoid tax penalties, but also mean higher earners in other sectors have greater opportunity to save for their financial future. And there is another benefit as the maximum you can build up in a pension (Lifetime Allowance) is increasing to £1,073,100, from £1,055,000 in 2019/20.

The government’s also asking for views on how to fix the wrinkle that leaves 1.3 million lower-paid workers without a pension top up from the government despite being eligible. This problem needs to be fixed quickly, as it’ll only get worse as planned National Living Wage rises bring more people into saving.

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