What Do Investors Need to Know About the Budget?

Budget 2021: Everything's frozen - Isa allowances, pension lifetime allowances, CGT - but savers may be tempted by the new green bond, while housebuilder shares are on the up

James Gard 3 March, 2021 | 3:05PM
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Rishi Sunak Chancellor

The 2021 Budget contained much more detail relating to personal finance and investing than last year’s, much of which had been heavily trailed in the run-up to the speech by Chancellor Rishi Sunak. But there were some unexpected announcements and some – such as the expected rise in Capital Gains Tax – that did not materialise. Here’s what investors need to know:

The Big Freeze

Faced with a substantial bill for supporting the economy through the pandemic, the public had been braced for income and other tax rises. But freezing a range of allowances was the key theme of this Budget, meaning tax bands and allowances won’t keep up with rising inflation for five years. The Chancellor also confirmed that increases slated for this year will go ahead, including the raising of the higher-rate tax band to £50,000 and the personal allowance to £12,500. Investors could consider this a let-off, says Darius McDermott: managing director of Chelsea Financial Services. “Personal allowances have been frozen, which many will call a stealth tax – as time goes on, we will all pay little more. But given some allowances have almost doubled in the past decade, I think we have been spared far worse.”

Pensions and Isas

As well as holding basic and higher rate tax thresholds until April 2026, the Pensions Lifetime Allowance (LTA) will be frozen at £1.07 million over the same period. The Lifetime Allowance is the upper limit on the total value of payouts that can be taken from all of your pension schemes without a tax penalty.

Some have criticised the move as a "tax on good investment decisions" and James Carter, head of pension products at Fidelity International, says there needs to be a full review on pensions and tax: "We know there is already a significant savings gap, and a lack of certainty and stability in the pensions taxation regime can damage people’s engagement in retirement planning."

Alex Davies, the chief executive of Wealth Club, says the LTA freeze is the latest blow to more wealthy pension savers and means people “need to look beyond pensions to build a large retirement pot”. He says this will push more sophisticated investors towards Venture Capital Trusts and Enterprise Investment Schemes, where tax breaks have not been affected by the latest Budget changes.

The Capital Gains Tax allowance was forecast to be cut as part of a wider “wealth tax” on investors – but like the other allowances, it’s simply been put in the deep freezer at £12,300 until April 2026. Isa allowances are also frozen, at £20,000 for adults Isas and £9,000 for Junior Isas.

Inheritance Tax and Stamp Duty 

Another bugbear of wealthier families is that the Inheritance Tax allowance has not kept pace with either inflation or house price rises. This too will remain frozen at £325,000 until April 2026. The housing market was a key theme of this year’s Budget as the Chancellor pledged to turn “Generation Rent” into “Generation Buy”.

As well as giving the green light for UK high street banks to start offering 95% mortgages (last seen before the financial crisis) to allow first-time buyers will small deposits to get on the housing ladder.

Stamp duty on house purchases was cut on homes worth up to £500,000 to shore up the housing market during the Covid-19 crisis. As expected, this has now been extended until the end of June 2021. But there was an extra element to the Government’s generosity: stamp duty cut will remain on purchases up to £250,000 until the end of September. This unexpected twist helped boost the share price of a range of listed housebuilders – companies like Persimmon (PSN) and Taylor Wimpey (TW) saw gains of 5% today.

Green Bonds and UK Stocks

A retail savings product backed by National Savings and Investment (NS&I) was also announced by the Chancellor. This will be closely linked to the first “Green Gilt”, which will be launched this summer.

The savings bond will “give all UK savers the opportunity to take part in the collective effort to tackle climate change,” the Treasury says. The Government expects to issue a minimum of £15 billion in green bonds this financial year, with further details to be published in June.

Investors will be keen to know what interest rate the bond will pay – currently you will get 0.78% if you buy a 10-year Gilt and 1.35% if you go for the 30-year option.

Also on a sustainable theme, a new UK Infrastructure Bank will be set up this year (the word "infrastructure" is mentioned no less than 41 times in the Budget report) and this is a central part of plans to "Build Back Better". Those with a longer memory will remember the UK Green Investment Bank, launched to great fanfare by former Chancellor George Osborne in 2012, and subsequently sold to Australian investment giant Macqaurie.

Rishi Sunak also mentioned a review on UK share listings that will have an impact on retail investors. Known as the Hill Review, the changes are designed “to make the UK the best place for high-growth, innovative businesses to publicly list”. The review, which could make changes to how many shares in a company are available to the public and lead to smaller companies listing, is ongoing and the regulator is currently consulting on them. Daniel Pinto, chief executive of Stanhope Capital, says current listing rules are stuck in the past and leave the City on the back foot against other financial centres: “The City should no longer be synonymous with big banks and FTSE 100 companies. It should become the financial centre of choice for SMEs and fast growing businesses”

 

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard  is content editor for Morningstar.co.uk