Stock market:
• Pub groups sharply higher
• Housebuilders gained ground
• Airlines ticked up but mixed reaction for banking stocks
Personal finance:
• Good news for people in net pay pension schemes
• Increase in National Living Wage from £8.91 per hour to £9.50 per hour
• Public sector pay increase
• Disappointment on NMPA
£75 billion giveaway over the next five years
Laith Khalaf, head of investment analysis at AJ Bell:
“This was a Budget for lower paid workers, drivers and boozers, with a large increase in spending on public services. In many ways it was like watching austerity in reverse. Overall the policy decisions represent a £75 billion giveaway over the next five years. Make no mistake there is a cost to this, but many of the painful decisions that paved the way for the Budget bonanza had already been announced, in particular the new Health and Social Care levy, the temporary pause in the state pension triple lock, the increase in corporation tax and the freezing of personal tax allowances. Indeed, the OBR categorically states that the tax burden is now at its highest level since the 1950s, when Clement Attlee was in power.
“The OBR has also delivered a massive windfall for the Chancellor through higher economic growth forecasts, freeing up around £35 billion a year. That means the Chancellor has been able to increase spending substantially, and also reduce borrowing. It’s an absolute dream forecast for a Chancellor, but Sunak has been both bold and measured by spreading his windfall across investing in public services, providing some tax relief to stressed parts of the economy, and cutting government debt.
“For savers and investors, there was no feared CGT increase, though dividend tax is increasing by 1.25% as part of the government’s plans to fund Health and Social Care, and this is expected to raise over £3 billion in taxes over the next five years. Almost everybody in the country needs to be on red alert for fiscal drag, because inflation has turbocharged the Chancellor’s decision to freeze personal tax allowances, which was announced in the last Budget. Working taxpayers are going to find themselves paying significantly more tax as they earn more, and that’s set to be the case for the next five years. This, of course, makes it more important than ever to use tax shelters like ISAs and SIPPs to their maximum effect.
“Inflation raised its head in the Budget speech pretty early on, and the Chancellor took the unusual step of using the despatch box to reaffirm the Bank of England’s inflation target. The pressure is now cranking up on the interest rate committee, because not only is inflation already above target, but the Chancellor’s now announced a further round of inflationary policies, such as increases to the minimum wage and public sector pay packets. That now makes an interest rate rise this year even more likely.”
Stock market reaction
Russ Mould, investment director at AJ Bell:
“As perhaps you would expect, when the Budget had been so comprehensively leaked in advance, financial markets largely took their statement in their stride. However, amongst the headline calm there have been some dramatic price moves:
• Pub groups have moved sharply higher, buoyed by the scrapping of planned alcohol duty increases, a new alcohol duty regime, cuts to levies on draught beers and ciders worth about 3p a pint and the one-year, 50% cut in business rates for retail, leisure and hospitality venues. By the time the Chancellor had sat down, JD Wetherspoon was up 10%, Revolution Bars 6% and Mitchells & Butlers and Marston’s by 5%.
• Housebuilders gained some ground as the Government pressed ahead with its drive to increase the number of houses that are being built and the 4% Residential Property Developers Tax on housebuilders’ profits above £25 million proved no worse than expected. This will come into force on 1 April to help fund remediation work on cladding in the wake of the Grenfell Tower fire. Crest Nicholson and Vistry are both up by 2-3% and Barratt, Persimmon and Taylor Wimpey are the biggest gainers in the FTSE 100, with gains of around 1.5% to 2%. However, AIM-quoted Harworth does not seem particularly moved by £1.8 billion set aside for the redevelopment of brownfield sites, even though that is the Northern firm’s specialty, and its shares are unchanged.
• easyJet is up 2% and Jet2 and International Consolidated Airlines by 1% after cuts to air passenger duties.
• The big banks are flat to down, with Barclays the largest faller after a 1.5% drop, as the Chancellor retained the 3% surcharge on bank profits over and above corporation tax. However, Mr Sunak did increase the annual allowance on this levy for challenger banks to £100 million and shares in OSB are responding positively to that, with a 2% gain.
“The 6.6% increase in the National Living Wage, public sector pay rises, £130 billion infrastructure investment programme and Net Zero initiatives had already been well trailered and do not seem to be making much of an impact, from the narrow perspective of financial markets, even if they may be welcomed by many.
“No doubt consumers will also be pleased by the decision to scrap the planned increase in fuel duties, which will keep those unchanged for the 12th year in a row. Whether this fits comfortably with the green agenda that will be proposed at next week’s COP26 summit in Glasgow – and indeed the Government’s own Net Zero agenda – will doubtless become a matter for debate, as it hardly encourages habitual drivers to change their behaviour. But it does show how any Government will have to try and balance the long-term goal of Net Zero with short-term economic impacts upon those who live rurally or work out of town and no choice but to drive.”
Personal finances
Tom Selby, head of retirement policy at AJ Bell:
Good news for people in net pay pension schemes
“The Government’s flagship automatic enrolment reforms risked being fundamentally undermined by an anomaly in the system which means well over 1 million of the UK’s lowest paid workers miss out on pension tax relief each year.
“This anomaly exists because certain pension schemes operate on a ‘net pay’ basis, meaning pension contributions are paid directly from people’s salaries before tax has been applied. In theory, this should ensure they receive tax relief at their marginal rate automatically.
“This approach simply doesn’t work for those earning below the personal allowance (currently £12,570) as their marginal rate of tax is 0%.
“Today’s solution will mean that, from 2024/25, HMRC will top-up pension contributions for those who miss out on the tax relief they are entitled to. An estimated 1.2 million people will be able to reclaim £53 on average in 2025/26 as a result of the shift.
“While the fact the Treasury has settled on a solution to this scandal should be welcomed, the slow pace of delivery will likely be criticised.
“It is also not exactly clear what information those affected will need to provide to HMRC in order to get their average £53 rebate. It is vital this process is as made as straightforward as possible to ensure maximum take-up.”
Increase in National Living Wage from £8.91 per hour to £9.50 per hour
“Confirmation of a 6.6% rise in the National Living Wage to £9.50 per hour was hardly a surprise but should provide a welcome boost to lower paid workers. As a result, a 23-year-old working a 37.5-hour week will earn at least £18,525 in 2022/23, compared to £17,374.50 in 2021/22.
“The impact of this pay hike will be tempered by inflation, with CPI currently standing at 3.1%. If price increases continue at this level, the ‘real’ increase in the National Living Wage will be 3.5%.
“However, with official projections pointing to inflation of 4% in 2022, the impact of this wage increase will likely be dampened still further.
“And while clearly the knock-on impact of increasing the Living Wage remains highly uncertain, it is possible it will spark a ‘wage-price spiral’, with rising earnings fuelling higher inflation and pushing the Bank of England closer to increasing interest rates to keep rising prices in check.”
Pensions impact
“The National Living Wage rise will also have an impact on people’s pensions as minimum contributions under automatic enrolment will also go up.
“Someone earning the National Living Wage in 2021/22 who was auto-enrolled at the minimum of 8% of relevant earnings would pay employee contributions of around £445 over the course of the year, with their employer paying in £334 and a further £111 coming from basic-rate tax relief.
“Assuming relevant earnings remain the same in 2022/23, minimum employee contributions will rise to around £491, with their employer adding £367 and a further £123 coming via tax relief*.”
*Figures rounded to the nearest £1; assumes worker is automatically enrolled at the minimum with contributions based on earnings between £6,240 and £50,270
Public sector pay increase
“Given the challenges faced by public sector workers in the past 18 months, a pay boost felt like the least the Chancellor could offer today – particularly after the Government “paused” public sector wage increases last year.
“Indeed, given the role frontline workers such as nurses and teachers have played in getting the country through the pandemic, failing to reward this with a real-terms wage increase would likely have sparked a full-on revolt from trade unions.
“However, as with the rise in the National Living Wage, the impact of inflation has to be taken into account when assessing the generosity of these pay deals.
Disappointment on NMPA
“Plans to increase the minimum pension access age to 57 are wrong-headed and risk hard-wiring unnecessary complexity into an already too complicated pensions system for decades to come.
“We had hoped the Chancellor would use today’s Budget to announce a much-needed rethink on a proposed ‘protection’ regime that means some people will randomly be able to retain a ‘normal minimum pension age’ of 55 from April 2028 while others will see their minimum access age rise to 57.
“The proposals, if introduced, will inevitably lead to increased activity from scammers, who will attempt to use the confusion caused to fleece people of their hard-earned retirement savings.
“What’s more, this complexity risks undermining other Government initiatives designed to improve the pensions system, including the introduction of new Pensions Dashboards designed to allow people to see all their retirement pots in one place online.
“Time is fast running out for the Treasury to see sense and, at the very least, pause the planned increase in the minimum access age until a more sensible solution can be figured out."