Autumn Budget & Spending Review 2021

Foreword

Each year the Chancellor of the Exchequer presents a Budget and on occasion, as done this week, it is presented in conjunction with a Spending Review as well. Rishi Sunak has been busy this year with this his second Budget in 2021 and the announcement of the Health & Social Care Levy in September as important as any Budget statement.

This article highlights the detail of the Budget statement made on Wednesday 28th Oct plus brief references to the important tax and spending announcements already made this year. With respect to the Spending Review the major themes have been outlined plus some of the individual projects but no review can cover government spending in all its huge and record-breaking breadth in spite of the Chancellor's likely principled regard to balancing the books.

The Budget naturally prompts a lot of analysis and many organisations such as the Institute for Fiscal Studies have provided more detailed analysis about how these changes impact individuals and couples at different income levels.

How will this impact your finances? Like many before it, this Budget highlights the need for accessible, professional financial advice enabling families, business owners, trusts, and charities to reach their goals and aspirations whilst being in a trusted, safe pair of hands.

Here’s your roundup of what was included in Wednesday’s budget (and what wasn’t)

Higher growth, lower debt ,higher inflation ,greater tax burden & less Covid Scarring

The Chancellor committed to increase departmental spending to 42% of GDP having already paid back some borrowing. Realistically, inflation will increase to 5% next year and won’t return to 2% until 2024. We’re left with a 34% to 36% tax burden, with more tax being raised by Rishi Sunak than any Chancellor since 1993. Covid scarring is down thanks to the vaccine and Covid support programs.

Major Fiscal Measures Already Announced in 2021

Personal tax is frozen for the next 4 Years effectively raising more tax as allowances stay the same and any rises in the value of investments, properties or pay will push more people over these thresholds.

The Personal Allowance will rise to ￡12,570 in April 2021. The higher rate threshold remains at ￡50,270 and Capital Gains Tax Exemption stays at ￡12,300. The IHT Nil rate bands and Pensions Lifetime Allowance are also unchanged at ￡325k and ￡1,073k respectively.

Corporation Tax will increase to 25% from April 2023 (for businesses with profits exceeding ￡250k) and 19% for companies with profits under ￡50k. Companies will also be able to benefit from a 130% first-year capital allowance for 2 years from April 2021.

Major Health Fiscal Measures Already Announced in 2021

The budget included additional health funding of ￡11.2bn in 2022-23, ￡9bn in 2023- 24 and ￡5.6bn in 2024-25. That includes an extra ￡1.8bn per year for Social Care. There will also be a cap on an individual’s lifetime social care spend of ￡86k. This measure will also see the upper asset threshold rise from ￡23,250 to ￡100k.

The social care spend will be supported by a National Insurance Rise of 1.25% (Health & Social Care Levy), commencing in April 2022. This will apply to both employer and employee contributions and will also be payable on Dividends. ?Working pensioners will also pay this rate from April 2023. (This is estimated to affect 1m people.)

What was Not Announced in the Autumn Budget

There is no additional help on energy bills. The Winter Fuel Allowance stays the same as does VAT, despite the rumoured 5% VAT reduction.

There was no formal state pension announcement, although this will increase by 3.1% in April 2022. This represents a ￡5.4bn saving per year using the one-off “double-lock”, after the “triple-lock” wasn’t ?applied because of significant annual earnings growth figures seen as anomalous.

There are no current changes to CGT and IHT tax structures.

There’s also no firm commitment to higher International Development Aid spending.

There are no changes to pension tax relief including tax on funds received before death at 75.

There was also no announcement on climate change (in fact neither word was mentioned in the budget speech!)

Economic & Fiscal Outlook – Fiscal Rules, Debt & Growth

The Charter for Budget Responsibility gives us new fiscal rules aimed at creating a balanced current budget with spending=taxes. The plan is to only borrow when we’re intending to invest to create declining Public Sector National Debt as a percentage of Gross Domestic Product.

Borrowing and debt are both down! (Forecast was 93.8% and is now 85.2% of GDP in March 2022.)?Debt is currently still ￡2.2tn.

Growth of 6.5% is forecast for 2021, with the economy on track to return to Pre-Covid levels in January 2022. The OBR Covid Scarring assumption is 2% down from 3%. The impact of Brexit on the economy is forecast at 4%.

Economic & Fiscal Outlook - Inflation

Inflation is currently at 3.1%, but the OBR average forecast is 4.4% in the next year, but will quite possibly peak at 5%. There is still a constrained supply chain and high global energy demand while wholesale energy prices have doubled in the last few months.

The Bank of England remit to maintain low and stable inflation is confirmed, aiming for 2% in 2024. Based upon this it is questionable whether inflation will indeed be transitory?!

A 1% rise in inflation and interest rates adds ￡23bn to annual interest payments, particularly significant when there is lots of inflation linked debt.

It’s predicted that unemployment will peak at 5.2%, while wage growth of 3.5% is anticipated.

Tax Reductions - Universal Credit Taper & CGT

The Chancellor’s stated goal is to reduce taxes and create a society that rewards work.

In a Budget with few major tax headlines alterations to the Universal Credit taper came into the spotlight even though this is strictly speaking a benefit improvement. The ￡20 temporary uplift has already been cancelled and was confirmed by the Chancellor. The impact of the taper reduction will only be felt by those in work. There is no help for non-workers.

Under the current taper every additional ￡1 earned is levied at 63p. Under the new proposals every additional ￡1 earned will be levied at 55p. This will come into effect no later than 1st December 2021. The whole scheme will cost ￡2bn but doesn’t fully compensate workers for the ￡20 reduction that cost about ￡6bn.

Meanwhile any CGT liability payment for residential property disposal has been extended from 30 to 60 days.

Tax Reductions - Other Taxes

The tax relief anomaly on low-earning pension contributions to net-pay schemes is to be fixed, but only in 2024-25.

The NI Lower Earnings Limit (2022-23) will be raised by Sept CPI (i.e., 3.1%). The same rise will apply to self-employed Class 2 contributions. The Upper Earnings threshold remains frozen at ￡50,270.

ISA & JISA limits also stay the same at ￡20k for ISAs and ￡9k for JISA.

The Annual Investment Allowance of ￡1m was due to end in December 2021 but has been extended to March 2023.

The Banks profits surcharge will also be cut from 8% to 3% from April 2023.

Council Tax

Council Tax bills can also increase by up to 2% in 2022-23 without a local referendum. The Social Care precept can also increase by 1%.

Tax Measures – Fuel, Air & Alcohol Duties

Unsurprisingly, the Fuel Duty rise has been frozen again. There have been estimated savings of ￡1900 per driver since the freeze began 11 years ago.

There are also changes to Air Passenger Duty, with duty on internal domestic flights reducing by 50% from April 2023. This will certainly help regional airports, but there doesn’t appear to be any encouragement to use rail. There are also plans for a ultra long haul rate of ￡91 (for economy passengers) from April 2023, for flights of over 5500 miles. This would include routes such as Japan and South Africa. The overall cost will be ￡35m with a saving of ￡1.50 per passenger.

Alcohol Duty rates were reduced from 15 to 6 (broadly speaking, the stronger the drink the higher the rate!) Small producer relief will now include cider producers and duty on fruit ciders has also been reduced. There’s good news for Prosecco fans as sparkling wine rates will now be the same as still wine. Draft Relief lower rate has been reduced by 5% on draft drinks (served from containers of more than 40 litres), which equates to about 3p a pint. A planned duty increase has been cancelled at a cost of ￡3bn. This is great news for pubs, but not so good for public health.

Tax Measures – Business rates, Vehicle Excise & Shipping

The Business Rates Plan aims to raise ￡25bn per year but radical reform has been ruled out.

Revaluations will ocurr every 3 years (previously 5 years) from April 2023. There will also be Business rates improvement relief from April 2023 and no extra rates for 12 months. The multiplier increase has been cancelled and there will be a 50% discount on rates for retail, hospitality and leisure sectors (up to a max of ￡110k). These discounts will be applied over the next 12 months, creating a ￡7bn saving for the High St over next 5 years.

Vehicle Excise Duty has been frozen but will rise in line with CPI from April 2022, however HGV tax rates are frozen for hauliers.

There will also be savings from the obscure shipping tonnage tax for companies who adopt the Red Ensign.

Government Departments & Spending (Pre-Budget Announcements)

Pre-Budget announcements were made over the weekend prior to the Budget including ￡5.9bn to reduce NHS waiting lists, ￡2.6bn for children with Special Educational Needs, ￡3.0bn for skills training, ￡6.9bn for city transport outside London, giving a total figure of ￡23.1bn. Unfortunately, all of these announcements are pretty meaningless or at least impossible to pin down when delivered in a press release rather than as a part of the Budget statement and both the Speaker and Deputy Speaker of the Commons expressed their displeasure with the latter inviting the Chancellor to deliver his “remaining” Budget statement.

Government Departments & Spending

Health accounts for almost 40% of our day-to-day spending and this is predicted to increase to ￡177bn by the end of this parliament.

The budget provided for a 3% real term rise in spending across every department. (Totalling ￡150bn by 2024.)

Here’s some examples of where that spending is going:

Education: Nearly ￡2bn for education catch-up, increasing to ￡4.7bn by 2024-25.

Transport: ￡620m for Electric Vehicle public charging infrastructure and grants.

International Development: A return to 0.7% Development spending might be possible in 2024/25.

Property development: ￡5bn for cladding was previously announced and will be funded by Residential Property Developer Tax of 4%.

Culture: There will be an extra ￡850m over 3 years for museums and Tax relief (on exhibitions) is also extended to March 2024 (equating to about ￡0.25bn.)

There will be funding for a Beatles exhibition in Liverpool.

For the footballer’s amongst you the UK’s bid to host 2030 World Cup will receive an additional ￡11m

R&D: The aim is for investment of ￡22bn by 2026-27 (2 years later than planned) ?and ￡20bn by the end of this Parliamentary term. The Government aims to incentivise local R&D spending by April 2023 thereby excluding overseas costs from claims.

Environment: There is a Net Zero strategy in place, however precious little detail was provided in the Budget statement to flesh out some of these costs alongside potential COP26 obligations.

Cost of Living and “Levelling Up” – the Positives

The National Living Wage will increase by 59p to ￡9.50 per hour for adults over 23. This is equivalent to an increase of just over ￡1000 for a full-time worker.

The one-year public sector pay pause will end, but actual percentage increases will be determined by independent pay review bodies. A ￡1.4bn global Britain Investment Fund will be created and there will also be changes to the regional block grant.

There will also be an extra ￡6.9bn for transport schemes outside London in a bid to cut commuting.

The MULTIPLY scheme is designed to improve poor numeracy skills – this scheme will cost ￡560m over the next 3 years.

Cost of Living and “Levelling Up” - the Negatives

Inflation is currently at 3.1%, but the OBR average forecast is 4.4% in the next year, but will quite possibly peak at 5%.

Household After Tax Income will be squeezed and we may not be back to pre-covid levels until 2023 after 18 months of stagnation. We may only see 0.8% growth over the next 5 years.

The end of the temporary ￡20-a-week uplift in Universal Credit for all will not be fully compensated by the reduction in the taper.