2021 UK budget: spend now, pay later

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Personal Investing

While the measures in Chancellor Rishi Sunak’s second budget look generous, longer term we believe these will have to be paid for.

In delivering his second budget, Chancellor Rishi Sunak, overall, showed his more generous side. The new measures he unveiled should, in our view, be enough to support both the UK consumer and bolster investment levels as the UK economy gets back to something that approaches normal.

With measures aimed at boosting the housing market and the furlough scheme extended until the end of September, the chancellor promised to do “whatever it takes” to help protect jobs and livelihoods. But further down the line his targeted giveaways, we believe, will come at a cost – most likely in the form of higher taxation.

Introduction of a savings product to tackle climate change

For the personal investor, some of the savings and investments measures he included were:

  • A ‘green’ retail savings product to be launched in 2021 via National Savings & Investments, giving all UK savers the chance to support green projects in an effort to tackle climate change
  • No change to the thresholds for Individual Savings Accounts (ISAs)* with annual savings limits held at £20,000 for adults and £9,000 for Junior ISAs (JISAs)

He gave but he’ll take away … eventually

Yet given the unprecedented sums of money which the chancellor has had to part with during the pandemic, we believe it only a matter of time before measures are taken to restore the health of public finances. Our view is that he is more likely to focus on higher taxes rather than lower spending.

A one-off UK wealth tax?

But rather than taking the highly unpopular decision to increase rates on the big revenue generators such as income tax, national insurance and VAT, possible alternative options for Chancellor Sunak may include a one-off wealth tax.

According to a report by the Wealth Tax Commission[1], members of the public stated a clear preference for any tax increases to affect wealth rather than income. That said, the chancellor has reportedly stated that there never will be a time for a wealth tax. It is therefore highly unlikely that this would happen under his watch.

Proposed increased in tax on company profits

For the moment, the chancellor has already announced a proposed increase in corporation tax (a tax on company profits) from 19% to 25% for those businesses making profits of £50,000, or more, a year - although this won’t take effect until 2023[2]. As a higher tax on company profits could impair a UK company’s ability to pay dividends, this is another consideration which both UK and international investors will have to factor in when looking to invest in the UK stock market.

All in all, in the face of record-high borrowing, we believe the attempts at tightening the public purse strings look light-touch. Combined with a generous response from policymakers in the face of the pandemic, we believe the outlook for the UK economy, for now, is looking healthy. For many of us, let’s enjoy it while it lasts.

 

[1] Wealth Tax Commission, as at December 2020.

[2] HM Treasury as at March 2021.

*Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest. Recommended investment period: medium to long term, ideally five years or more.

It’s important to remember that the way the government treats tax on ISAs may change in the future. The value of the tax advantage depends on your individual circumstances.