Goldilocks Budget – But will it be Osborne’s last?

Goldilocks Budget – But will it be Osborne’s last?

Welcome to our latest Newsletter which focuses exclusively on Wednesday’s Budget. We have referred to it as the Goldilocks Budget as generally the Chancellor of the Exchequer announced a package of measures which are ‘not too hot’ and ‘not too cold’. Of course the famous children’s fable is a work of fiction, but one of the central tenets of the budget may similarly be from the realms of fantasy as we discuss later in the commentary.

With only 50 days until the General Election, George Osborne could easily have thrown in a few pre-election sweeteners. The fact that he resisted this and chose a line of prudence is admirable but there was no mistaking the election angle within the budget since many of the measures announced were explicitly targeted at key electoral segments such as pensioners, savers , middle-income earners and (first time) home-buyers.

This contrasts with curiously no mention being made about the NHS, a key election battleground, and this was seized upon by Ed Miliband.

Below are some of the more attention-grabbing highlights of the budget and our initial commentary but as always the devil very often is in the detail and it may be a little while before we can understand quite how some of the plans will play out in practice. The changes are presented in three broad categories – The economy and business, pensions and savings, with the final one being taxation. Naturally if you would like to discuss any issues arising directly (or indirectly) from the budget, please do give your adviser a call and they will be delighted to help.

The Economy and Business

Economy forecast to expand by 2.5% in 2015, up from 2.4% predicted in December, followed by 2.3%, 2.3%, 2.3% and 2.4% in the next four years to 2019

Record employment in the UK, with jobless rate to fall to 5.3% this year

Borrowing forecast to fall from £97.5bn in 2013-14 to £90.2bn in 2014-15, £75.3bn in 2015-6, £39.4bn in 2016-7, £12.8bn in 2017-8 before reaching a £5.2bn surplus in 2018-9

Debt as a share of GDP to fall from 80.4% in 2014 to 80.2% in 2015-16 before falling in every year, reaching 71.6% in 2019-20

CDC CommentThe forecasts released by the Office for Budget Responsibility (OBR), whose projections the Chancellor referred to several times, seem ambitious. Whilst claims of a return to a budget surplus by 2018-19 for the first time in 18 years will make great headlines and will be useful for wooing potential voters, we believe these numbers are unlikely to be achieved. The assumptions embedded in the projections are for the economy to grow in real terms but at around2.3%, when the average of the last 5 years is nearer 1.8%. Additionally Mr Osborne is looking for a tailwind from inflation (projected to fall to 0.2% in 2015) rising to 2% and this too might be optimistic.

Additional £30bn savings needed in next Parliament

Public spending squeeze to end a year earlier than planned in 2019-2020, with spending from then to grow in line with total economic growth

The annual bank levy is to rise to 0.21%, raising an extra £900m. Banks will not be permitted to deduct compensation for mis-selling from corporation tax

CDC CommentThe rate has risen regularly since the levy’s introduction in 2011 and is now over four times higher than originally. The Government had previously stated its intention of obtaining an annual yield of £2.5 billion from the levy, with previous increases in the rate being primarily intended to maintain this yield in the face of shrinking bank balance sheets. The latest rise goes further, however, producing a forecast annual yield of £3.7 billion from 2017/18

The supplementary charge on North Sea oil producers will be cut from 30% to 20% from Jan 2015 and  while petroleum revenue tax will fall from 50% to 35%, effective from 1st Jan 2016. A new Investment Allowance which has been subject to consultation over the last few months will be introduced from 1 April 2015

Pensions and Savings

The lifetime allowance for pension savings that can be accumulated free of tax will be cut from £1.25m to £1m from April 2016, saving £600m annually

CDC CommentThis was anticipated, largely because Labour had made no secret of their desire to reduce the allowance, so there is an element of Mr Osborne stealing their thunder. The surprise was that the annual allowance was not reduced and remains unchanged at £40,000, although this does fall to £10,000 for those taking advantage of the new pension freedoms in the new tax year. As with previous reductions in the lifetime allowance, protection measures will be introduced to protect those who have built pension savings in excess of £1m prior to April 2016. This will potentially impact many of our customers so your adviser will be in touch if any planning is needed.

Pensioners will be able to trade in their annuities for cash pots, with the 55% tax charge abolished and tax applied at the marginal rate

CDC CommentThe government believes people who have already bought an annuity should be able to enjoy the same flexibilities as those retiring from April 2015. The government will therefore change the tax rules in a future Finance Bill to take effect from April 2016, which will allow people who are already receiving income from an annuity to sell that income to a third party as and when they choose. Here the devil is in the detail as plans are still being formulated. A consultation has been published to look at how best to remove the barriers to the creation of a secondary market in annuities.

Widows of police officers and firefighters who choose to marry again will have their existing pensions protected

A new personal savings allowance is being introduced whereby the first £1,000 interest on savings income to be tax-free for basic rate taxpayers and £500 allowance for higher rate tax ratepayers

CDC CommentFrom 6th April 2016 a tax-free Personal Savings Allowance of £1,000 (or £500 for higher rate taxpayers) will apply to savings interest. To be eligible for the £1,000 tax-free Personal Savings Allowance taxable income needs to be less than £42,700 a year. To be eligible for the £500 tax-free Personal Savings Allowance taxable income needs to be between £42,701 and £150,000 a year. The Personal Savings Allowance will not be available for additional rate taxpayers. It is estimated that combined cash balances of £60,000 or more will be necessary to extract maximum benefit.

Annual savings limit for ISAs as previously announced will increased to £15,240 in the new tax year

“Fully flexible” ISA will allow savers to withdraw money and put it back later in the year without losing any of their tax-free allowance

CDC Commentthis has been criticised by several financial advisers in the press on the basis it weakens the case for ISAs being seen as long term saving instruments. We actually see this as a pragmatic solution to a problem people have when they need to dip into savings for the short term. It is also very much in keeping with Mr Osborne’s ethos of people having accessibility to and flexibility around their saving. It is true the rules will create a headache for ISA providers which might account for the luke-warm response. It appears the changes apply only to cash ISAs.

New “Help to Buy” ISA for first-time buyers will allow government to top up by £50 every £200 saved for a deposit

CDC CommentWe like this initiative and is in keeping with the innovation George Osborne has tried to bring to the savings and investment arena. The Help to Buy ISA is designed to assist individuals who are saving to buy their first home. It will be available, through banks and building societies to individuals (minimum age of 16) who are first time home buyers. Each person can have one Help to Buy ISA (rather than one per house purchased) so those buying together can each have a separate Help to Buy ISA with its own limits and qualification for the Government bonus. Whilst an initial maximum deposit of £1,000 can be saved at point of opening, the maximum monthly saving permitted will be £200, with the Government contributing 25% of the amount saved. The maximum Government contribution will be capped at £3,000 with the contribution being calculated and paid when the holder buys their first home.


The tax-free personal allowance to rise from £10,600 in 2015-6 to £10,800 in 2016-7 and £11,000 in 2017-8

The threshold at which people start paying 40p income tax to rise by above inflation from £42,385 in 2014-5 to £43,300 in 2017-8

CDC Commentthis is unquestionably motivated by the forthcoming election. More and more people on ‘middle incomes’ have found themselves paying 40% tax, largely due to fiscal drag (tax allowances and bands not keeping pace with inflation, or frozen). This move unashamedly tries to remedy this and is targeted squarely at those earning one or two times the average wage. Eye-catching but the electorate might feel this has happened just a fraction too late and see its proximity to the election as a bribe.

Annual paper tax returns to be abolished, replaced by digital accounts.

CDC CommentThe intention of the new system is to allow taxpayers to have an overview of all their tax affairs, including PAYE and VAT where relevant, in one place. Accounts will be pre-populated with data already held by HMRC (for instance, PAYE information submitted by employers), and with ‘new data from third parties’. Ultimately, the intention is that small businesses will be able to link their accounting software to their personalised tax account, removing the need for the submission of an annual tax return. Making use of existing data in this way, and giving taxpayers easier access to their tax information, will have clear benefits, particularly for individuals and small businesses with relatively straightforward tax affairs who currently submit Self-Assessment returns. There are challenges for HMRC, however, both around delivering a user-friendly and technologically robust system – areas in which they do not tend to excel!

Transferable tax allowance for married couples to rise to £1,100

Class two national insurance contributions for self-employed to be abolished in next Parliament

Review of inheritance tax avoidance through “deeds of variation”

CDC CommentWith proper planning in advance, the deed of variation route becomes redundant in any case, however, it is a little disappointing that the recently reported introduction of further IHT allowances on main residences failed to materialise, however, there was some suggestion that this would not form part of the budget but rather be raised in the Conservative’s manifesto, we await with baited breath.