With the General Election a matter of weeks away, Chancellor of the Exchequer George Osborne’s 2015 Budget managed to hail the economic recovery, gloss over spending cuts and serve up a raft of measures designed to reward savers, support first-time house-buyers, prop up the oil industry and put further pressure on the banking sector. Even so, despite a certain amount of hype, the Office for Budget Responsibility (OBR) believes “the Coalition Government’s policy decisions in this Budget are not expected to have a material impact on the economy”.
The UK economy expanded more quickly than any other major advanced economy during 2014, registering growth of 2.6%. However, this was somewhat lower than the 3% growth forecast in the Autumn Statement of December 2014. The OBR’s forecasts for economic growth in 2015 and 2016 were raised to 2.5% and 2.3% respectively, while its forecast for 2017 was cut to 2.3%.
Debt as a share of GDP is falling more quickly than previously forecast and the Chancellor therefore intends to end the squeeze on public spending earlier than expected. From 2019/20, public spending is set to rise in line with economic growth.
The government is set to sell another £9bn-worth of shares in Lloyds and to dispose of £13bn-worth of mortgage assets from UK Asset Resolution, the holding company for the government-owned businesses of failed mortgage banks Northern Rock and Bradford & Bingley. The proceeds will be used to reduce the national debt. Nevertheless, the Institute of Directors (IoD) warned “the UK’s debt position remains perilous and there is much work yet to be done if we are to run surpluses after 2018”.
The personal tax-free allowance will rise from £10,600 in 2014/15 to £10,800 in 2015/16 and to £11,000 in 2016/17, a move the Treasury calculates will cut income tax for 27 million people. The threshold at which individuals begin paying higher-rate tax will rise from £42,385 to £43,300 by 2017/18. Meanwhile, schemes to avoid inheritance tax via deeds of variation are to be reviewed.
The Lifetime Allowance for pension contributions will be cut in April 2016 from £1.25m to £1m, saving the Treasury £600m a year. Looking ahead, the Lifetime Allowance will rise in line with inflation from 2018. According to the government, only 4% of imminent retirees have pension savings worth more than £1m.
Elsewhere, from April 2016, pensioners who have already purchased an annuity will be allowed to sell that income to a third party in exchange for a lump sum that will be taxed at their marginal rate instead of the “punitive” rate of 55%.
Support for savers
The Chancellor announced the launch of a new Personal Savings Allowance that will enable basic-rate taxpayers to earn up to £1,000 a year in interest on savings free of tax. Higher-rate taxpayers will only receive an annual allowance of £500, while those earning in excess of £150,000 a year will not qualify. Scheduled to come into force from April 2016, this measure is expected to abolish income tax on savings for 17 million people.
Osborne also introduced new flexibility for ISAs that will allow savers to withdraw money and replace it – in the same tax year – without forgoing any of their tax-free ISA allowance. At present, however, this provision will apply only to cash ISAs. This change is expected to take effect in the autumn, following consultation with ISA providers
New measures designed to help first-time house-buyers were revealed as well. Through a new type of ISA, the government will add a further 25% to the saver’s contribution – to a maximum of £3,000 on £12,000-worth of savings. The IoD described this ‘help-to-buy’ ISA as “superficially attractive”, but suggested it could be difficult for the financial services industry to implement.
Squeezing banks, supporting oil
The annual levy on the balance sheets of banks is to rise from 0.156% to 0.21%, raising an additional £900m a year. Banks will also be prevented from deducting customers’ compensation payments for mis-sold products from their corporation tax liability.
In a move intended to alleviate the negative effects of the lower oil price on the industry, the supplementary charge imposed on North Sea oil producers will be reduced from 30% to 20%, and petroleum revenue tax will be cut from 50% to 35%. The OBR expects these measures to boost production by 15% by the end of the decade.
With the 7 May General Election looming, considerable uncertainties remain. Many of the measures announced in the Budget are only at the consultation stage, while others – including the Personal Savings Allowance – are set to form part of a future Finance Bill.
The Confederation of British Industry (CBI) hailed the Budget as “a clear plan for fiscal growth and health”, but warned that the recent host of modifications to pensions should be followed by “breathing space for the industry and consumers to get to grips with all the changes”.