On Wednesday, the UK Chancellor, Rishi Sunak, will reveal the government’s tax and spending plans in the 2021 Budget. Some commentators think he will focus on support for businesses and individuals in the aftermath of COVID 19.
Spreading the wealth around the UK with the government’s ‘levelling up’ promises, as well as its plans for greener energy and reducing greenhouse emissions to zero by 2050, will also feature, as will plans to reduce VAT on energy bills by 5%.
It is anticipated that government spending will rise next year, especially in areas like schools and health. There is likely to be a rise in minimum wage by 5.7% to £9.42 / hour, from the current rate of £8.91. At face value this paints a rosy picture of a government investing in vote winning policies, designed to kick-start an ailing economy after the COVID-induced ‘Great Pause’. The big question however, is how will Sunak pay for all this?
Rockier and harder than usual
Chancellors tend to spend most of their lives between a rock and a hard place, and Sunak faces the Budget with things looking both rockier and harder than usual.
The government has been left with an enormous amount of debt after record peace-time government spending to tide us over during the crisis. Sunak has already announced higher NI to help pay for it, and made it clear that he’s not keen on any more tax rises at the moment. And yet, the threat of inflation means he can’t rely on cheap borrowing as his get-out-of-jail free card forever either.
Jason Cozens, CEO of Glint, observes: “Every day we are witnessing rising energy bills and higher-priced groceries, as well as hikes in other household costs. The combination of high inflation, caused by out of control quantitative easing and low interest rates are visible to all of us. Your money simply doesn’t go as far as it used to, but if you’re on a low income and don’t have the benefit of savings, you’re going to feel the pinch even more.”
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In the last financial year, the UK government borrowed more than £320 billion, the greatest amount of borrowing since the Second World War; it will probably borrow half this amount again this year. So, in an economic atmosphere where all of us are looking for ways to save, many will be asking the Chancellor how his Budget will help UK savers to protect their hard-earned money from the government debt and overspending of the last year.
In an effort to balance the books, Sunak has already frozen public sector pay and income tax thresholds, he’s cut foreign aid and we are likely to see income tax increase by a further 6% from 2023; he’s also unveiled plans for further taxes on both workers and employers.
New levies on the struggling high street?
Bricks and mortar shops and business premises are likely to receive new levies and there are rumours that the Chancellor intends to ask graduates to repay student loans earlier, and cutting the threshold from paying 9% on everything they earn over £27,295 per year, over thirty years, to everything over a potential £20,000, costing them approximately £656 a year more; some ministers have even proposed a threshold of £23,000 and extending student loan repayments to over forty years – so keeping them in debt for an additional ten years.
“There’s going to be a temptation to use this Budget to find alternative ways to spend less, and there’s a risk that in the process it could put more barriers in the way of people doing the right thing, by saving and investing for their future,” comments Sarah Coles, personal finance analyst at Hargreaves Lansdown.
Whether it’s rising inflation, minimal interest rates, increased taxation on your pension savings; raises in income tax, Council tax or capital gains on your property, this high spending Budget is likely to see increased debt across the UK’s population. Fiat money is going to be stretched further as it becomes worth less and less; first time buyers are going to continue to swim against the tide – once they’ve saved enough for their deposit, they are likely to find out that it’s no longer enough to secure the home they were saving for.
Watch out for that dividend allowance
There a couple of areas active investors will be concerned about. The dividend allowance has only been around since 2016 and has already been cut from £5,000 to £2,000 in that time. Cutting it further would be a mistake, not least because the rate of this particular tax is already set to rise by 1.25 percentage points in April.
It would be a major blow for people running their own businesses and paying themselves in dividends. They’re already one of the groups who had least help in the crisis – cast out of the self-employment grant and furlough schemes. Many of them have already taken a serious dent to their financial resilience, so this would be adding insult to injury for a group that’s suffered enough.
It would also make ISA investments even more essential. The big advantage of sheltering investments within an ISA from day one is that it protects you from unexpected tax bills – however the government chooses to tinker with taxes on investment.