The last blue Budget for a while?

Our thoughts on this week's Budget

When we sat down to write this budget summary the first word which came to mind was “uninspiring”. In part this reflects the modern day trend of briefing the media in the days before budget day with the big ticket items.

Directors in discussion about the blue Budget

Perhaps it felt uninspiring because faced with weak economic growth, a set of public services short on funding, and no clear green or industrial strategy to help us compete internationally, it all felt a little piecemeal?

After 14 years in government the Conservatives are looking a little short on ideas and, with a 20 point deficit in the polls, they are facing an enormous challenge to avoid defeat in what is almost certainly going to be an election year. As such it is perhaps not a surprise that they have taken some of Labour’s ideas and adopted them for their own. In particular, the proposals to scrap the favourable tax treatment for ‘non-doms’ and extend the windfall tax on energy profits from oil and gas exploration and production. Whether the policies announced by Chancellor Jeremy Hunt will move the political dial is anyone’s guess.

What is clear to most economists is the Chancellor has very little room to manoeuvre and whoever forms the next Government will face a particularly tough economic situation with taxes already at a post war high. Fundamentally, the trend in recent years of anaemic economic growth and stalled productivity makes it much more difficult for politicians to improve public services without the need for tax rises.

There are plenty of ‘guides to the budget’ on the internet – so we have identified those budget announcements likely to be of most relevance to our clients, along with those which may favour the investments and sectors our clients currently invest in… including some positive news on renewable energy.

National Insurance and Income Tax

Although rumoured, there was no reduction to Income Tax rates.  Instead, the Chancellor announced decreases in National Insurance Contributions (NIC).  Employees Class 1 NIC rates will reduce from 10% to 8% from 6th April (on top of the reduction from 12% to 10% that took effect in January this year).

For an employee on average full-time earnings of £35k, these two NIC reductions represent a tax-cut worth some £900 a year.  That said, with income tax thresholds remaining frozen, only about half of employees will be better off overall… For those earning below £26k, or above £60k, the NIC cuts will be more than offset by increased income tax (figures from the IFS).

High Income Child Benefit Charge (HICBC)

Under the current rules, Child Benefit effectively decreases based on the earnings of the higher earner in the household.  This means that a couple (or single person) with one income above £50K see their child benefits reduced, but a dual-income couple both earning up to £50k see no reduction.  From April 2026, the government plans to change this, so that the child care reduction will be – more fairly – based on the combined household income.

In the meantime, as an interim measure, the Chancellor announced that the HICBC threshold will be raised from £50k to £60k, and the rate of reduction will be halved.  Families where the higher earner earns up to £60k will now retain all their child benefit  – and families will not lose all their benefits until the higher earner reaches £80k.  The government estimates that 485,000 families will gain an average of £1,260 in 2024-25 as a result of these changes.

Abolition of Non-UK Domiciled Status

A ‘Non-Dom’ is a UK resident whose permanent home – or domicile – for tax purposes is outside the UK.  Non-doms only pay UK tax on the money that they earn in the UK, not money made elsewhere in the world.  Non-dom status allows qualifying wealthy individuals to pay tax in a lower tax country, enabling major savings.

The Chancellor announced that the Non-Dom tax regime will be changed to a regime based on residency.  From April 2025, individuals will not pay UK tax on foreign income during their first 4 years of UK residence – but after that they will be taxed on a worldwide basis.  There will be various transitional arrangements for existing non-doms.

A new ‘UK ISA’

The Chancellor announced plans to introduce a new ‘UK ISA’ – to allow savers to invest up to £5k a year into UK companies.  With existing ISA allowances frozen at £20k since 2017, and capital gains and dividend allowances being further reduced from April 6th, any additional opportunity for tax-free savings is welcome.

That said, there is quite a lot of uncertainty about how a UK ISA will work in practice – such as how will a “UK company” be defined?  Given the potential administrative complexity, it’s not certain that providers will be that enthusiastic to develop and offer this new product to their customers.  We also foresee that, with the UK ISA focused on UK investments, savers might – in order to manage risk in their overall profile – concomitantly reduce allocations to UK assets in their main ISA.  Combined with the fact that the large majority of savers (85%) do not currently use their full £20k ISA allowance, let alone an extra £5k, it’s not clear how significant overall additional UK investment might be.  The Government has launched a consultation on the details.

 

Investing Ethically | Wind farm

Wind farm

Budget announcements on Sustainability

The Chancellor made a number of announcements of additional interest to ethical investors, that we feel are worth highlighting.

Increased adoption of renewable energy will be key in tackling climate change.  In the UK, companies take part in auctions to win the right to develop renewable infrastructure – such as wind farms.  The government guarantees a minimum “strike price” for the future energy generated.  For offshore wind, a key component of the UK’s energy strategy, the auction in 2023 attracted no bidders… because the prices being offered by the government were felt to be too low (and hence projects were too risky for investment).

In the Budget, there was positive news – with the government announcing a record £1B annual budget for the upcoming 2024 auction… four times the amount compared to last year, including £800M earmarked for offshore wind projects.  The announcement has been welcomed by the renewables industry, as helping re-establish the UK’s standing in offshore wind generation.  It remains to be seen whether the additional money will be enough to stimulate the scale of investment needed – to meet the government’s target of 50 gigawatts (GW) offshore wind by 2030.

There was an additional £120M announced for the Green Industries Growth Accelerator – a now £1B fund for low carbon manufacturing, including supply chains in offshore wind and electricity networks, carbon capture and hydrogen.  There were also reforms announced to the planning system, to accelerate decisions on Nationally Significant projects such as renewable infrastructure.

The Budget confirmed the government’s plans to regulate the providers of environmental, social, and governance (ESG) ratings on companies.  This is an important issue, given investors’ rightful concerns about ‘greenwashing’  – so it’s disappointing that no specific timescales were announced.

On fossil fuels, the government introduced a windfall tax – the Energy Profits Levy – in 2022 – based on the extraordinary profits being realised by North Sea oil and gas producers.  The Budget extended this tax for an extra year, until 2028-29.

Finally, the decade-long freeze on fuel duties on petrol and diesel will continue.  Indeed, the temporary 5p a litre duty-cut, introduced in 2022, has been extended for a further year.  Of course, what is ‘good news for the motorist’ remains ‘bad news for the planet’.  CO2 emissions from UK road transport were 107Mt in 2022 (making it the biggest direct contributor to our national emissions).  If we are to achieve the UK’s Net Zero target by 2050, much needs to change… though revising fuel duty was – perhaps not surprisingly – not on the Chancellor’s agenda in an election year…

 

So, while we didn’t find the Budget too inspiring, we hope you find this article useful.

If you’d like to discuss any of the details, or are more generally looking for advice on your finances, please get in touch.

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Investing Ethically
07 March 2024

This article is for information purposes only. None of the content should be considered a personal recommendation to invest in any of the companies or funds listed. You should seek personal financial advice before considering investments.

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