MiniBudget: Industry is divided on a ‘fireworks’ budget

Some experts say the large number of tax changes will be a boost to Financial Planners but others are concerned about an expected big rise in government borrowing.

In early trading after the Budget the FTSE and the pound were down sharply.

Many commentators were surprised at the scale of the Mini Budget announcements, particularly the tax cuts. There was shock at the unexpected axing of the 45% income tax rate.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, said Mr Kwarteng had set off ‘fireworks.’

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She said: “Kwasi Kwarteng has set off fireworks with this budget, which collides with the Bank of England’s efforts to dampen down inflation, while sparking a firestorm of criticism about benefiting the wealthy much more than the poorer sections of society. 

“Scrapping the top rate of tax will return many thousands of pounds to high earners, while lifting the cap on bankers’ bonuses is likely to be hard to swallow for low paid workers on the picket lines, calling for pay rises to help them survive the cost of living crisis. Confidence in the UK economy has faded away further with sterling falling below $1.12.”

Sean McCann, Chartered Financial Planner at NFU Mutual, said: “This may have been billed as a ‘Mini-Budget’, but it delivered massive changes, as Chancellor Kwasi Kwarteng outlined the biggest tax cuts in 50 years in response to the cost-of-living crisis. It’s a bold set of initiatives that will put more money in taxpayers’ pockets in a bid to soften the blow of rampant inflation.”

Steven Cameron, pensions director at Aegon, said the axing of the 45% tax rate would help higher earners but there could be a “sting in the tail.”

He said: “The abolition of the additional rate of income tax will be very welcome news for those earning above £150,000, but it does come with a sting in the tail when it comes to personal contributions to pensions. These benefit from a ‘tax relief’ top-up at the individual’s highest marginal rate of income tax which means currently, high additional rate taxpayers can receive 45% tax relief. Put another way, a contribution of £550 out of take-home pay becomes £1000 when invested in a pension.

“In future, the highest marginal rate will be 40% so the same £1000 in a pension will cost £600 from take-home pay. Those in a position to do so may want to make additional pension contributions before April 2023 to make sure they benefit from the maximum tax relief.”

AJ Bell head of personal finance Laura Suter said the MiniBudget was much bigger than expected.

She said: “There was nothing mini about this Budget, with the new Chancellor announcing more changes to the nation’s finances than many previous full-blown Budgets. Just 17 days into his new job, Kwasi Kwarteng has wasted no time in undoing his predecessor’s work and adding his own stamp onto economic plans for the UK. 

“While many of the announcements were leaked to the papers beforehand, he still managed to produce a few surprises during his speech – with abolishing the highest rate of income tax being the biggest. 

“Whether the much-debated trickle-down economics works and we get a boom in UK growth as a result of the policy announcements remains to be seen, but in the meantime many people will have more cash in their pockets going into this winter. But no magic money tree exists and the scale of public borrowing to fund the new Government’s plan will be eye-watering.”

Many Financial Planning experts welcomed the scrapping of the 45% tax bracket and tax simplification.

Alastair Black, head of industry change at abrdn, said: “The removal of the additional rate tax band, along with the confirmation of the removal of taper relief on corporate tax, is a positive step forward in terms of simplifying the tax regime – something that will be welcome to advisers and their clients alike.”

Former Pensions Minister Steve Webb of pension consultancy LCP said the tax changes could boost planning activity.

He said: “There is likely to be a flurry of activity amongst Britain’s highest earners looking to make the most of the chance to get tax relief at 45% on their pension contributions.  Whilst many high earners are affected by caps on annual and lifetime contributions, they are likely to be taking advice on how best to make the most of this very high rate of relief which ends at the end of this financial year.  We could see thousands of top earners piling into pensions in the coming months”.

Jamie Jenkins, director of External Affairs at Royal London, also expected a rush for Financial Planning.

He said: “Financial advisers will have clients who are affected by a multitude of changes, and they will be looking for help in navigating their way through them over the coming months.”

Martin Brown, managing partner at national IFA Continuum, said: “New Prime Minister Liz Truss made it very clear during her campaign for the Conservative party leadership that she planned to reform several taxes and allowances, so many of the announcements in today’s emergency budget have not come as a surprise.

“Any changes in legislation and tax create disruption and uncertainty for clients, even should the change be positive for them. This disruption and uncertainty offers the opportunity for good independent financial advisers to demonstrate their value.” 

Hannah Gurga, ABI Director General, said: “As our country faces the toughest economic climate in a generation, we welcome the move to focus on growth and making our economy one of the most competitive in the world.  

“As the Chancellor recognised, more can be done to unlock investment and the insurance and long-term savings industry has a vital role to play as institutional investors. We have long called for regulatory change to enable our sector to invest more in infrastructure that supports growth and the transition to Net Zero, and we look forward to hearing from the Government on Solvency II reform later in the autumn. We will continue to work with HM Government, regulators and our members to ensure this final plan meets everyone’s objectives.”

Rachael Griffin, tax and financial planning expert at Quilter, said there would be significant benefits for higher rate taxpayers.

She said: “For many additional-rate taxpayers, earnings above £150,000 the abolition of the 45% rate will significantly reduce their income tax bill. Someone earning £175,000 will take home an additional £1,250 a year which increases to £3,280 if you include the government’s u-turn on the 1.25 percentage point national insurance hike. 

“Meanwhile a £250,000 earner will earn almost £8,000 extra from these reforms. Those earning £500,000 a year will have a whopping £17,500 in take home pay from the abolition of the 45% rate, which ups to £23,592 with the NI reversal included.”

Shona Lowe, Financial Planning expert at Abrdn, welcomed the earnings boost for many. She said: “The Chancellor’s growth plan could be considered good news for many. Scrapping the National Insurance rise will put more money directly into millions of people’s pockets, which will make a positive difference in the coming months.”

Claire Trott, divisional director – Retirement and Holistic Planning at wealth manager St James’s Place, said the Mini Budget may prompt more clients to get advice.

She said: “The announcement that the income tax reduction of 1% of the basic rate to 19% being brought forward may drive people to consider if now is the time to maximise pension contributions or if holding fire makes more sense. However, for those who are additional rate tax payers, the remainder of this year will be the last chance to get 45% tax relief. That said they won’t be paying 45% tax next year.

The Association of Investment Companies (AIC) has warmly welcomed the Chancellor’s announcement in his mini-budget that venture capital trusts (VCTs) will be extended beyond 2025.

Richard Stone, AIC chief executive, said: “This is a strong vote of confidence in VCTs and we applaud the government’s intention to continue the scheme beyond 2025.”

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