On Wednesday 3 March, Rishi Sunak delivered his second Budget as chancellor. The Budget outlines the state of the economy and the government’s spending plans.
The World Health Organization declared Covid-19 a pandemic on 11 March 2020, the same date as the 2020 Budget. Since then, the pandemic has led to lockdowns, restrictions, and an enormous rise in government spending.
The Office for Budget Responsibility (OBR) estimates borrowing for the current tax year will be £394 billion, the highest figure seen outside of wartime. So, it’s no surprise that Covid-19 continues to influence Sunak’s decisions.
The chancellor noted the economy has been damaged, with GDP shrinking by 10% in 2020, and that the road to recovery would be a long one. However, he added: “We will continue doing whatever it takes to support the British people and businesses through this moment of crisis.”
As usual, the Budget began with an overview of the economy.
The OBR expects the economy to grow faster than previously forecast. The economy is now forecast to grow by 4% in the coming fiscal year, and then by 7.3% in 2022.
However, Sunak noted that the pandemic is still inflicting profound damage on the economy. The OBR predicts that, in five years, the economy will still be 3% smaller than it would have been otherwise.
The improved outlook also means peak unemployment is expected to fall. It’s now expected to reach 6.5%, compared to the initial forecast of 11%.
As expected, Covid-19 support has been extended to cover the spring and summer months.
The Coronavirus Job Retention Scheme, often known as the “furlough scheme”, will now run until the end of September. It will continue to provide 80% of wages (up to £2,500 per month) to workers unable to work due to the pandemic. From July, employers will need to pay a proportion of their wages.
Self-employment grants will also continue, with two further instalments over the coming months. The scheme has been extended to include the newly self-employed who missed out on previous grants and have now filed a tax return.
The chancellor said total Covid-19 support measures are now worth more than £400 billion.
The Personal Allowance – the threshold before you need to pay Income Tax – will increase from £12,500 to £12,570 as planned in the 2021/22 tax year. The threshold for higher-rate taxpayers will also rise from £50,000 to £50,270 in 2021/22.
However, both these thresholds will then be frozen until 2026. So, while you may not face an immediate tax rise, the freeze will affect income in real terms over the next few years.
The chancellor also announced that several other allowances will freeze, rather than rising in line with inflation:
Again, these freezes could affect personal finances in the long term.
The headline announcement for businesses is the rise in Corporation Tax.
From April 2023, Corporation Tax, paid on company profits, will rise from 19% to 25%. However, small businesses with profits of less than £50,000 will continue to pay the current 19% rate and there will be a taper.
Only businesses with profits of more than £250,000, around 10% of firms, will pay Corporation Tax at 25%.
However, a new “Super Deduction” will allow companies to reduce their tax bill when they invest.
From 1 April 2021 until 31 March 2023, businesses can reduce their tax bill by 130% of the cost of investment in a bid to encourage firms to invest for growth. It’s a move that hasn’t been tried before, but the OBR predicts it could boost investment by 10%.
Other important announcements include:
Businesses can also take advantage of the government’s drive to encourage apprenticeships and traineeships. Incentive payments for firms hiring apprentices will double to £3,000. Sunak also revealed he is launching a programme to help firms develop digital skills.
The chancellor announced two key measures for the property sector.
First, the Stamp Duty holiday will be extended by six months. Until the end of June, homebuyers purchasing a property worth up to £500,000 will not have to pay Stamp Duty. The threshold will then fall to £250,000 until the end of September. From October, the threshold will be £125,000.
Second, the government will provide mortgage guarantees to lenders offering 95% mortgages. The move aims to support first-time buyers with small deposits. These mortgage products will be available from April.
Cultural venues have been significantly affected by Covid-19. The Budget revealed a new £300 million “Culture Recovery Fund” to support arts, culture, and heritage industries.
In addition to this, a £150 million fund has been set up to help communities take ownership of pubs, theatres, and sports clubs that are at risk of closure.
Despite plans to increase fuel and alcohol duty, both have been frozen. The freeze means fuel duty will not rise for the 11th year in a row, while alcohol duty has not increased for two.
A new “Infrastructure Bank” will launch this spring, with around £12 billion in initial funding and will be located in Leeds. It will invest in both public and private sector green projects across the UK.
It’s expected the bank will support at least £40 billion of total investment in infrastructure.
Please get in touch if you have any questions about what the Budget means for you or your financial plans.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.