The Office for Budget Responsibility (OBR) has downgraded growth in 2027 and slightly upgraded it in 2029 and 2030. This isn't really the OBR saying Britain's long-term growth prospects have suddenly deteriorated, because they are sticking to long term average growth rates.
What they are saying is that higher energy prices will squeeze household incomes which can dampen growth. Higher inflation also keeps interest rates higher for longer. Higher energy prices also increase costs for businesses and feed through into things like transport, fertiliser and ultimately food prices.
Therefore, the OBR expects those effects to bite hardest next year, before growth recovers.
Clearly these forecasts are vulnerable to change, particularly if there is a resolution of the conflict with Iran. If tensions in the Middle East ease and energy prices fall back more quickly, inflation could come down faster and growth could be stronger than the OBR's central forecast. In fact, the OBR's own orderly-recovery scenario has 2027 growth at around 1.5% rather than 1%.
This article is for information only and not personal financial advice. Investing can help your money grow, but the value of investments can rise and fall, so you could get back less than you put in. Pension, ISAs and tax rules can change and benefits depend on circumstances. Investing is for the long term, typically 5 years or more.
If you’re not sure whether investing is right for you, a financial adviser can help.
Bank surcharge back up, but it's temporary
The Chancellor has raised the bank surcharge by 3 percentage points for 15 months. That takes it back towards its pre-2023 level and widens the gap between UK banks' tax burden and that of other financial centres, with London already among the most heavily taxed of the major hubs.
Who's hit?
The impact follows UK exposure.
The domestic lenders, Lloyds and NatWest, are hit hardest, though it's only a low single-digit percentage of annual profit based on our model. Barclays is less exposed, and for the international names, HSBC and Standard Chartered, it's only a small dent.
Because the measure runs for just 15 months, it's a short-term cost rather than a permanent change to earnings.
Our take
The hit is real but manageable, and it's at the less damaging end of what the sector feared. A permanent change to how the Bank of England pays interest on reserves would have done more lasting damage, given how much the domestic banks have earned on reserves in recent years.
A time-limited tax rise is easier to absorb and for investors to look past. The bigger question is whether temporary really means temporary.
What does the Budget mean for pensions?
Today’s Budget has been quiet from a pensions point of view.
The key announcement has been the raising of the personal allowance for pensioners whose total income is up to the value of the full new state pension. This is slightly different to pre-Budget reporting which suggested the increased allowance would only cover those whose sole income was the state pension.
It’s the result of years of frozen tax thresholds that mean from April 2027, a full new state pension will breach the personal allowance.
The news will be greeted with a sigh of relief by those worried about the extra squeeze on their income and having to fill out more assessment forms. However, it looks set to increase complexity in an already complex system.
The new allowance is set to run from next April until 5 April 2030, with a taper in place to remove the allowance in stages for those whose income exceeds the value of the full new state pension. We await more detail on how it will work in practice.
The already announced inheritance tax change
Another already announced key change coming down the line is the inclusion of unused defined contribution pensions in estates for inheritance tax (IHT) purposes from April 2027. It’s a move that will drag many more estates into the IHT net and could have a big impact on your retirement planning.
Currently pensions can usually be passed on free of IHT. If death occurs before the age of 75 there’s no income tax to be paid either. After age 75, income tax becomes payable at the beneficiary’s marginal rate. It’s a system that has led to many opting to spend down other assets first and leave their pensions untouched for as long as possible so they can be passed to loved ones.
This will now likely change.
What else do you need to prepare for?
The amount of tax we pay on our savings interest is also about to change with the Chancellor announcing a two-percentage point increase from April 2027.
This means that a basic rate taxpayer will face a 24% charge on interest earned over their £1,000 allowance, while a higher rate taxpayer would have a 44% charge on any interest over their £500 limit.
Additional rate taxpayers will be especially squeezed as they have no personal savings allowance so face a 49% on all their savings interest. It’s a move that makes it especially important to make the most of any ISA allowances as they shelter your money from such tax.
Scrapped ISA reforms
The Chancellor also announced the cancellation of the planned ISA reforms from the previous Budget. These were aimed at encouraging people to invest more, but in reality, they risked bringing complexity to a regime that is loved for its simplicity.
These reforms would have meant savers and investors had big decisions to make before the end of the tax year and we welcome the decision to reverse the implementation and give people reassurance on how best to build their wealth long-term.
For those interested in investing, learn more about Stocks and Shares ISAs.
For those interested in savings, learn more about Cash ISAs.
