Budget 2021: what could it mean for your personal finances?

With the March Budget less than a week away, interactive investor shares thoughts on what might be in store.

With the March Budget less than a week away, interactive investor share thoughts on what might be in store for your personal finances.

On the prospect that the Chancellor will freeze the Lifetime Allowance on pensions at £1 million: 3% of interactive investor SIPP customers currently have balances over £1 million.

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “Freezing the Lifetime Allowance will do what all frozen thresholds do: lead to more people paying taxes over time, as everything else, including wages, inflation and pension contributions, rise steadily. It’s a tax on doing the right thing for your future.

“A £1 million pension pot might sound like a lot, but it’s an achievable amount for some people who prioritise their retirement goals early on and who benefit from strong investment growth. A Lifetime Allowance freeze will impact higher earners more, but it could also affect those who are not very wealthy and chose to focus on their pension above all else throughout working life.”

ISA allowance

Becky O’Connor, says: “A sneaky move, in a country where millions of people have built up substantial savings and investments during the pandemic, would be to trim the ISA allowance or the personal savings allowance, which only those with substantial savings currently pay.

“While such a move wouldn’t affect the vast majority, who barely get close to their allowance limits in a year, it could start to generate tax revenue from those with more substantial assets.

“Cuts to these allowances haven’t been mooted – the Treasury has consistently increased rather than decreased savings-related allowances over recent years.

“But it would be one way to make some revenue from wealthier people without introducing a so-called wealth tax.

“It would penalise older people with retirement pots that include ISAs and cash savings accounts and it would, over time, result in more people reaching their tax-free savings thresholds.”

Wealth tax or no wealth tax?

Myron Jobson, Personal Finance Campaigner, interactive investor, says: “It is no secret that the government needs to raise a significant amount of money to address a WW2-sized public borrowing bill for tackling the virus. The reality is we will have to pay for it some way or another - either by taxes going up or by public spending being cut or, most likely, a combination of both. Whether that comes in the Budget is another matter, since the Chancellor won’t want to choke a recovery.

“December’s Wealth Tax Commission report, which mooted the UK introduce a wealth tax, was never going to be universally welcomed. But nor has it been universally unpopular.

“A poll byinteractive investor website visitors*, ahead of the Spending Review in November, found that 34% of investors were opposed to a wealth tax. But many were open to the idea – it is the threshold that was more likely to be contentious, with 22% supporting a threshold of £1 million, and 20% supporting a £2 million threshold. The other issue is whether property would be included, which while a first world problem, would be tough for the ‘asset rich, cash poor’. Whatever your views, the most important thing is for all savers to make as much use of tax-free allowances as they can.”

Capital Gains Tax

Capital Gains Tax (CGT) remains firmly in the Government’s sights following a review of the tax by the Office of Tax Simplification. And the Government has done little to dispel the impression that nothing is off the table to balance the books. That means inheritance tax, income tax and even the pension tax relief could be in the firing line, among others.

Myron Jobson says: “Given the generosity of the annual ISA and pension allowance (let’s not forget the JISA allowance, either), CGT is an issue mostly consigned to the lucky few. But for those who do use it, now could be time to consider a Bed & ISA transfer. It means selling investments from your trading account and buying them back within your ISA. Bed and ISA needs to be done in a managed way to avoid CGT on the sale and you are only in a CGT exempt environment once in the ISA.

“interactive investor’s website visitor poll also found that just under a third (31%) said if they could preserve just one tax allowance, it would be the ISA allowance, ahead of income and capital gains taxes in joint second place (16%) and inheritance tax (15%) in third. In the 2019/20 tax year, 50% of interactive investor customers fully utilised their ISAs allowance (44% of JISAs).

“While social lockdown restrictions appear set to end in the summer, the economic reverberations of the pandemic are likely to linger for some time. A great number of people are still feeling the Covid pinch, so no change to the taxation regime remains a strong possibility.”

Scams

Myron Jobson says: “The pandemic has been a perfect storm for scammers, with unscrupulous individuals taking advantage of the disruption to both businesses and their customers brought about by the outbreak. In January, the Finance Conduct Authority (FCA) issued a warning to the public as reports of ‘clone firm’ investment scams increased by 29% in April 2020 compared to March, when the UK went into its first lockdown. 

“The FCA has launched several anti-scam campaigns over the years including ScamSmart, its flagship initiative. But the City watchdog believes more can be done with more funding. Earlier this year,  Mark Steward, the city watchdog’s director of enforcement and market oversight, told MPs on the Work and Pensions Committee that it needed more funding to tackle pension scams.  Whether the Government will oblige remains to be seen, but it is clear from the statistics that more needs to be done to tackle the scourge of financial scams.”

Furlough scheme

Myron Jobson says: “While the light at the end of the tunnel might be in sight for coronavirus social restrictions, the nation is still not out of the woods when it comes to the impact of the pandemic on employment. The UK unemployment rate reached a five-year high of 5.1% in the three months to December - but Government’s furlough scheme continued to prevent a steep rise in job losses in the run-up to Christmas.

“According to the ONS’s Business Impact of Coronavirus Survey, the proportion of businesses' workforce on furlough increased by 11 percentage points to 18% between October 2020 and January 2021.

“With much of the economy still in enforced hibernation, there’s been little change in the fortunes of ailing businesses. As such, the furlough scheme is still needed to prevent a wave of redundancies as social lockdown measures are gradually lifted.”

Extension to Universal Credit coronavirus top-ups

Myron Jobson says: “The impact of the pandemic on household finances have been widely documented, and there are fears that the nation’s most vulnerable will plunge off the financial cliff edge when the £20 per week increase in Universal Credit (UC) and Working Tax Credit, introduced to support families during the coronavirus pandemic, comes to an end in April.

“The Work and Pensions Committee has recently called for year-long extension of increase ‘at the very least’. It notes since March the number of people claiming UC has doubled to around six million, while job vacancies remain far below pre-pandemic levels.

“It is difficult to envisage a significant change of their financial circumstances to warrant the loss of the coronavirus top-ups come May.”

Stamp duty holiday extension

Myron Jobson says: “The Chancellor is also facing pressure to extend the current stamp duty holiday which exempts the first £500,000 of all property sales from stamp duty until 31 March 2021. The initiative, introduced back in July last year, has been widely praised for getting more people on the property ladder at a time where the housing market mechanism has been stymied by the pandemic.

“The worry is that purchases that are part way through the process will become subject to tax once the stamp duty holiday comes to an end. However, another extension could result in a similar situation. MPs have called for some protection on the sale process to prevent this from happening.”

Notes to editors

*The poll was conducted among interactive investor website visitors, attracting 1,582 responses between 08:30 24 November and 11:30 25 November.