If you caught any media over the weekend, you’ll already have the gist of the ‘fiscal event’. Essentially this is a turbo charged return to Thatcherite & Reaganite ‘trickle down’ economics. The theory being that if you unleash the earnings potential of high earners and businesses whilst slashing regulation and planning controls, you stimulate economic growth. The money earned from this growth by the wealthy and big business then trickles down in the form of increased discretionary expenditure, investment and jobs to the rest of the economy – thereby supporting rising incomes for all (and so rising tax take from the economy as a whole).
This budget does this by abolishing the additional rate tax for earners over £150,000, removing the earnings cap on bonuses for City traders, reducing the basic rate band to 19%, adjustments to stamp duty, dividend tax rates, creating low tax investment zones and reversing a series of recent or planned tax rises, including corporation tax and national insurance.
Somewhat worryingly (and noted as a potential contributor to Monday’s market reactions) Kwasi Kwarteng indicated that he’s not done yet and the full budget statement due in November could bring further changes into play, especially in the field of pension relief, loosening of further limits on income and pension allowances for high earners and changing the regulatory environment in Financial Services.
To pay for this, there is tightening on Universal Credit for part-time workers, the removal of the green levy on energy bills but mainly borrowing the money from global investors – until the planned growth comes along.
In theory this works, in practice (and it has been done before) the evidence suggests that the trickle down doesn’t work. If it happens, it tends to be in the form of ‘McJobs’ which tend to lead to precarity of income through zero hours contracts and minimum wage income. What does tend to happen is that the wealthy pay down debt and store the surplus – often in tax havens. It’s this and the mass privatisation, globalisation and outsourcing of the last forty years that have led to growing inequality in world economies.
The most marked issue about adopting this strategy and application of this budget in particular, is that it’s been done against a background of an already squeezed economy due to spiralling inflation and an energy crisis, with monetary tightening impacting on credit and increasing borrowing costs – not to forget a major conflict in Europe. The status of the ‘fiscal event’ meant that the mini-budget was not subject to independent scrutiny by the Office for Budget Responsibility (OBR). However, it seems as though the market has already made up its mind, hence the developments in the last few days.
So what does this all mean for you and your investments?
We have prepared a separate summary of key issues, outlining the details, (as far as we know it – because full details are sparse) of specific statements in the budget, but we have noted some key takeaways for you:-
- For the majority of our clients (i.e. those that live in Scotland) – most of this budget is not for you!
- If you live in Scotland then Income tax, stamp duty and planning controls are devolved powers and the changes to these do not apply to you.
- Scottish policy will be confirmed in the budget statement later in the year, to be confirmed after the financial settlement for devolved nations is agreed.
- This sets up an interesting situation where there is clear water between the Scottish income tax banding and that which applies in the rest of the UK.
- The devolving of fiscal power is not complete though and some issues will make a direct impact on anyone in Scotland too:-
- National Insurance changes will apply to all – the recent increase will be reversed.
- Corporation tax changes will also apply to Scottish based businesses
- If you were a contractor working under IR35 rules but changed to become an employee because of recent tax rulings – you may also wish to review your status.
- Complications lie ahead with regards to pension relief for Scottish citizens.
- Notionally 20% relief is granted on most contributions but not clawed back for 19% tax payers, whereas 21% tax payers and above can claim the additional relief from HMRC.
- From 2024 the default rate will be 19%, so if our rates pertain – will we all have to make an additional claim to HMRC or be penalised?
- The conundrum on non-income tax rates continue to apply to savings and investment for Scottish clients.
- Scottish income tax rates only apply to earned/employment income.
- Income on savings and investment is taxed with reference to UK rates
- For income and gains arising from investments, then the reference threshold for higher rate tax is the UK rate not the Scottish one.
- The chancellor has announced that the effective ban on onshore wind farms is to be lifted, and the poorest households will regain access to insulation and energy efficiency measures.
- This gives a modest boost to the onshore wind industry – although it now needs to compete for capital with fracking and increased oil & gas exploration.
- Additional unintended consequences - the Bank of England have indicated they will act to shore up confidence in the pound and continue to raise rates to combat inflation potentially stoked by a surge in growth :-
- Expect a rise in your mortgage rate if on variable rates
- Expect a rise in credit card rates and loans
- Expect a rise in savings rates – but be careful with fixed rates – there might be a better one around the corner if rates keep rising.
- Expect continued stock market volatility – especially in UK invested funds
It is important to take professional advice before making any decision relating to your personal finances. Information within this article does not provide individual tailored investment advice and is for guidance only. We cannot assume legal liability for any errors or omissions it might contain. Ethical Futures llp is authorised and regulated by the Financial Conduct Authority.