UK Budget 2021 – what investors need to know

Yesterday the Chancellor, Rishi Sunak, delivered the UK’s 2021 Budget detailing the government’s tax, spending and coronavirus recovery plans.

Here are the main takeaways and what the Budget could mean for you and your money.

This article isn’t personal advice. Unlike cash, the value of investments can go down as well as up so you could get back less than you invest.

What the Budget could mean for the UK economy

George Trefgarne

After weeks of media speculation, the Budget turned out to be both worse and better than expected.

The good news is that the colossal borrowing required to support the economy during the pandemic is coming in £39bn lower than expected at £355bn, or 17% of GDP. That is still a peacetime record and the chancellor remains worried about the long term vulnerability of the public finances to inflation and higher interest rates.

The Office for Budget Responsibility now thinks the economy will rebound faster than expected to pre-pandemic levels by the middle of next year – six months earlier than it previously forecast.

Businesses will benefit from a super-deduction allowance against their corporation tax in the short term. But this will be phased out from 2023, to be replaced by a steep rise in corporation tax from 19% to 25%.

So in the short term, we can expect a very rapid economic recovery, but in the longer term a squeeze on the attractiveness of the UK for business. The long-term competitiveness of the UK economy has not been addressed.

George Trefgarne is CEO of Boscobel & Partners, a political consultancy. Hargreaves Lansdown may not share the views of the author.

Company taxes – corporation tax and the “Super-Deduction”

Nicholas Hyett, Equity Analyst

While corporation tax will rise to 25% from 2023, the government has said it will remain the lowest rate in among G7 economies. But there’s no getting away from the fact a higher rate of corporation tax will reduce profitability.

That sets a higher bar for investment returns before projects get signed off, and reduces the amount available to pay dividends or reinvest in future growth plans. Not good news for investors or general levels of investment in the economy.

However, it’s worth noting that the consequence of this change won’t be evenly spread.

Lots of UK listed companies, particularly the bigger ones, pay relatively little UK corporation tax. That’s because companies that operate all over the world also pay tax all over the world.

Some companies, like cyber-security group Avast, aren’t really UK businesses at all but simply have their shares traded on the London Stock Exchange. Others, like mining groups, run operating companies in the countries they operate in and pay taxes there.

The effect of a higher rate of corporation tax will therefore be felt most strongly by UK focussed businesses. This would normally include large UK banks, but they’re set to receive some relief from the rise anyway. Therefore the extra burden is likely to fall on medium sized businesses that are members of the FTSE 250 more heavily than the FTSE 100.

FTSE 100, 250 and All-Share – what’s the difference?

The other major change to company taxation in the Budget is the so-called “Super-deduction”. This will let companies benefit from a “130% first-year capital allowance” on new plant and machinery, allowing them to cut their tax bill by up to 25p for every pound they invest.

This is good news for companies overall, encouraging investment in future growth at a reduced cost. The Treasury expects the policy to cost nearly £25bn over 2021/22 and 2022/23, implying eligible capital spending of around £100bn.

However, there are a few oddities to the proposal.

Firstly, it’s only applicable to “plant and machinery” so investment in new software won’t be included. That seems like a strange exemption to us, given the increased emphasis on digitisation that we’ve seen over the crisis.

Secondly, in order to claim a tax allowance you need to be generating a profit to pay tax on. Companies that have been hit hard by the crisis, like airlines, will struggle to make enough profits in the coming years to offset the substantial losses they made in 2020. That would leave them not paying tax and unable to benefit from the super-deduction.

Where does the Budget leave Retail and Hospitality?

The Retail and Hospitality sectors have again been on the receiving end of significant government support.

Non-essential retailers are in line for grants of up to £6,000 per shop when they reopen, while the hospitality sector is eligible for up to £18,000 per premises. On top of that existing VAT and business rate reliefs, introduced last year, are set to be extended until later in the year.

This will be a useful boost for sectors hit hard by the pandemic. However, nothing here is transformative. Ultimately this is just keeping the sector afloat, and it’s the timing and pace of reopening that will be crucial.

What about personal tax allowances?

Isabel McDougall, Pensions Writer

Tax is important in every economy, and when the government borrows so much there will come a point where taxes will be needed to help balance the books.

In yesterday’s Budget the chancellor announced plans to freeze the lifetime allowance, income tax thresholds and capital gains allowance until 2026.

Although these weren’t the huge tax hikes we were all dreading, over time they’ll still impact pension savers, investors and anyone who’s employed.

Lifetime allowance freeze – the lifetime allowance (LTA) is the maximum amount someone can build up in a pension without incurring a tax charge. It’s currently £1,073,100 and it usually rises in line with inflation. It was expected to rise by £5,800 in April, however during the Budget, the chancellor confirmed it’ll remain at its current level.

This freeze won’t just affect very high earners. Committed and consistent pension savers risk running into the LTA limit, and being punished for their efforts to save for the future.

Income tax threshold freeze – threshold income and the personal allowance normally rise every year so that people can earn more without paying more tax.

Plans to increase the personal allowance (the amount you can earn tax free) to £12,570 and the higher rate threshold to £50,270 are still in place this year. But after that they’ll be frozen for five years. This could result in millions of people paying more tax. It’s been forecasted that families could miss out on a £250 a year saving by 2024/25.

Capital gains tax freeze – despite the rumours, there were no radical changes to capital gains tax. Instead the rates will stay the same, although the tax-free allowance, which is the gain you can realise each year before tax will be frozen at £12,300 until April 2026.

Each year we usually we see the tax-free allowance rise. Since the 2017/18 tax year, it’s risen by £1,000 (from £11,300 to £12,300). While this has little immediate impact, over time it could mean that more people start to get drawn into paying it. The good news is that it's possible to sell up to £12,300 each year to help manage how much tax you need pay. If you use ISAs or pensions your investments already grow free from any capital gains tax.

Tax benefits depend on individual circumstances and as we saw yesterday, rules can change. You can’t usually take money out of a pension until you’re 55 (57 from 2028).

An opportunity to save sustainably

Sarah Coles, Personal Finance Analyst

The Budget also showed the government is hoping to cash in on the demand for sustainable savings, with the launch of a green savings bond through NS&I. It’s offering a winning combination of helping savers support green projects, while protecting them with the strength of the NS&I name.

With 100% government backing, it should also help hit the UK’s target of being net-zero for carbon emissions by 2050, while creating green jobs.

What are green bonds?

At the moment, we don’t know what term the green bond will run for, or what rate it will pay. There’s hope NS&I will take the opportunity to expand its range by offering something really attractive.

Savers wanting to support green projects already have some competitive options. This includes a green savings bond, offering 0.55% (EPR*) for one year, 0.75% (EPR*) for two years and 1.40% (EPR*) for five years. Hopefully this new bond will be able to compete with those rates.

From the government’s perspective however, there might not be as much of an incentive to offer competitive rates. Funding is cheap at the moment, and during lockdowns, people have generally been able to save more, so it doesn’t make sense to pay over-the-odds.

Unfortunately, there’s every sign the rest of NS&I’s savings rates will continue to disappoint for the next financial year. Their financing target for next year is just £6 billion – a dramatic drop from this year’s target of £30-£40 billion. The green bond isn’t included in this target, so it’s a strong indication that we’re unlikely to see any strong rates from NS&I in the coming year.

*Expected profit rate – Islamic banks offer an expected profit rate, rather than interest on their savings products, in order to comply with Sharia banking principles. Banks and building societies will normally quote savings rates as Gross rate or the AER.

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Article image credit: Tolga Akmen.