What will be in the 2020 Budget? Virus outbreak overshadows Sunak’s debut

An increasingly serious coronavirus outbreak and a surprise change of Chancellor have upended early predictions of what might be in the Budget next Wednesday.

As the health threat mounts and overshadows many more mundane concerns, Rishi Sunak might be forced to tailor his speech around a crisis prevention strategy rather than post-election winning giveaways or major reforms.

The unknowable implications of a global pandemic will knock the usual economic growth estimates and borrowing projections out of whack.

It may also cause some cherished policies to be put on hold until we understand more about how the emergency could unfold. 

Apart from some swipes at the EU trade negotiating agenda, there might even be little mention of Brexit.

That doesn’t mean any of the big challenges facing the Government will go away – there will be howls of protest if it swerves announcements on housing or social care.

Extra support for businesses is also likely, and the Government can probably be expected to keep big election promises like raising the National Insurance threshold.

We look at some of the key issues affecting Britons’ personal finances that could come up when rookie Chancellor Sunak delivers the Budget on March 11.

National Insurance

Employees currently pay 12 per cent of their earnings in National Insurance contributions once they earn between £8,632 and £50,000 a year, and the lower threshold is due to rise to £8,788 on 6 April.

The Conservatives pledged in their election manifesto to raise this threshold to £9,500 in their first Budget, and expressed an ambition to eventually raise it to £12,500, the same point at which people begin to pay income tax.

The initial increase would cost £2billion and take 430,000 people out of paying National Insurance altogether, while those still paying it would be putting in £85 per year less, says the Institute for Fiscal Studies.

It estimates 16million households would gain £120 a year on average, since many have more than one earner.

The biggest average gains would go to middle and upper-middle income families, with only 8 per cent of the giveaway going to the poorest 20 per cent of households, according to the IFS.

Stamp duty

There has been some speculation that the Chancellor could tweak Stamp Duty to help give the housing market a boost.

Currently, anyone buying a property that costs more that £125,000 and who isn’t a first-time buyer has to pay Stamp Duty.

Previously it was believed that the Conservatives could radically reform the controversial tax by raising this threshold to as much as £500,000. However, these plans were dropped from the Tory’s manifesto last year.

The Government may use the budget as an opportunity to make good on a manifesto commitment to introduce a 3 per cent Stamp Duty surcharge on UK homes bought by foreign buyers.

Mansion tax

There have also been rumours that a Mansion Tax – an annual levy paid on homes worth more than £1million – could be unveiled next week.

However, it’s unlikely the Chancellor will include this new tax in the Budget after the  Prime Minister vetoed the idea following a backlash from grassroots Conservatives, according to reports.

Help for first-time buyers

The Government may use the Budget to provide updates on a manifesto promise of a new scheme to offer local buyers a 30 per cent discount on their first homes. 

This comes as the Help to Buy scheme, which has helped thousands onto the housing ladder since 2013 by lending them up to 20 per cent of the purchase price interest-free for five years, is due to be phased out.

The new ‘First Homes’ scheme would hand councils new powers to prioritise key workers such as police, nurses and teachers in their area by knocking a third off house prices for first-time buyers.

The scheme is under consultation until April.

Pensions

A £10billion raid on pension tax breaks for higher earners, which would see Government top-ups into retirement savings pots slashed to basic rate for everyone, was floated a few weeks ago, but is thought to have been dropped following stiff opposition.

With such a big pot of money potentially up for grabs, the Government might announce a consultation into reforms of pension saving incentives instead.

The Chancellor still needs to tackle pension tax penalties that mean doctors turn down shifts for fear of shock bills, an issue that has become even more urgent following the coronavirus outbreak. 

The Treasury is rumoured to be planning a tweak to thresholds rather than abolishing the controversial rule causing the problem, which critics warn won’t be enough to solve a staffing crisis.

The Tories also promised in their manifesto to review a separate pension tax problem affecting low paid people. This sees workers, mostly women, earning between £10,000 and £12,500 lose pension top-ups automatically paid to the better off. 

Social care

A social care plan has been repeatedly delayed since 2017, but the Conservatives came forward with a ‘guarantee’ in the last election that no one needing care will have to sell their home to pay for it. 

They pledged to make an urgent attempt to build a cross-party consensus on funding, and while a deal is being sorted out they will earmark an extra £1billion of funding every year for more social care staff, better infrastructure, technology and facilities.

There has been silence ever since, although fears have been raised elsewhere that the social care system could collapse by 2029 unless the Government intervenes to prevent a funding crisis for both individuals and local councils, and a shortage of beds.  

Inheritance tax

Cuts to Britain’s most hated tax would go down well, and look more likely following two reports issued by Government tax gurus.

Long and complicated forms should be overhauled and confusing rules on giveaways to loved ones should be scrapped in favour of a single ‘personal gift allowance’, according to the Office of Tax Simplification.

A group of MPs also issued a report calling for inheritance tax at 40 per cent to be ditched and replaced with a 10 per cent tax on annual gifts of £30,000-plus and a new death allowance.

Meanwhile, the tax treatment of inherited pensions is relatively benign, and the Chancellor might look to tighten up the rules. 

There is a credible argument that pensions are meant to provide an income for old age, not be an inheritance tax planning device allowing wealthy savers to pass on unused pots.

Savings

Savers hoping for the Government to throw them a bone after a year of falling returns, or to reverse Treasury-backed National Savings & Investments’ cuts to Premium Bonds and savings rates may be left disappointed. 

Anna Bowes, the co-founder of website Savings Champion, said she thought the NS&I ‘ship has sailed’, while industry expert James Blower said he believed it wouldn’t reconsider the cuts.

Both were of the opinion that the best thing savers could expect from the Budget would be minor increases to the Personal Savings Allowance – which allows basic rate taxpayers to earn £1,000 in interest tax-free – or the Isa allowance, which currently sits at £20,000. The latter is considered more likely.

Blower said the only thing which could be a cause for optimism for savers is the recent record of Conservative Chancellors pulling surprises out of the bag on Budget day.

He suggested Sunak might try to make his mark by introducing something similar to the Help to Save scheme, which offers those on low incomes a 50p top-up for every £1 they’ve saved. 

Investment

As tackling the climate crisis moves higher on the agenda, and demand for ESG (environmental, social and governance) focused funds grows, HM Treasury could enter the green bond market.

This would enable more investors to buy UK government debt, as some ethical funds target specifically green bonds.

They do not invest in UK gilts because these do not pass ethical screening tests (what with spending on activities such as defence) but they could buy green gilts if the proceeds of the bonds were ring-fenced.

IR35 – contractors’ tax arrangements

Contractors, freelancers and the self-employed have been given a bit of breathing space on controversial new IR35 tax rules ahead of the Budget, but it looks as if they won’t be delayed.

The rules shift responsibility from contractors and freelancers to employers in deciding whether they really are contractors or should be on PAYE tax.

IR35 is being used to crackdown on disguised employment income, with the government arguing that long-term contractors working for just one company should be paying full income tax and national insurance, rather than cutting their tax bills as limited companies.

A cottage industry sprung up around facilitating this some years ago, which at its most extreme end led to some agencies taking pay and giving contractors income as interest-free loans. This in turn led to the controversial loan charge crackdown that has seen HMRC accused of heavy-handed tactics and issuing unrealistic big tax demands.

Employers stand accused of pushing workers down the contracting path in order to cut their own national insurance bills, as well as the costs of sick pay, holiday pay, pensions and other employment rights.

IR35 rules meaning the employer not the employee is responsible for tax status are already in place for the public sector, with a crackdown seen in the NHS, councils and social services.

The same system is due to come in for the private sector in April but there are claims that firms and workers aren’t ready and that an overreaction by companies will harm genuine contractors’ prospects.

Entrepreneur’s relief

The tax break that allows business owners to pay less capital gains tax when they sell up has been attacked for benefiting wealthier entrepreneurs and failing to achieve its initial goal of encouraging investment in enterprise.

Tying into the IR35 rules, there are also concerns that the spirit of entrepreneur’s relief is being undermined by contractors. 

The concern is people working as limited companies, paying corporation rather than income tax, and paying themselves in dividends and only minimal salaries. They then roll up their earnings within the company, before winding it down and taking the money out at the low 10 per cent entrepreneur’s relief tax rate.

Rumours have circulated that the Chancellor is going to scrap the relief altogether, rather than just cut it as his predecessor Sajid Javid was expected to do.

This could be detrimental for smaller companies, where the sums involved are often not in the millions of pounds and are compensation for a lifetime of taking business risk.

Support for small business

We might get greater detail on proposals to support investment in local areas and economies.

Small business networks are keen to see more initiatives to help boost the performance of local firms, and find better ways of measuring funds channelled into such support programmes.

There are also calls for a commitment to tax breaks for training staff as well as a more simplified tax system that encourages business investment and growth.

Boosting diversity

At the last Budget, there was a focus on providing more support and opportunities for female founders and entrepreneurs from minority and disadvantaged backgrounds so we could get an update on this.

There have been calls from small business networks to launch a government challenge, in partnership with the private sector, for solutions on how generations of entrepreneurs can be connected for mutual gain.

Emma Jones of Enterprise Nation said: ‘Young people benefit from the wisdom and connections of those who have been in the workforce and those just starting out after a lifetime of employment benefit from the digital skills of Generation Y.’

Affordable childcare

Childcare costs for working parents featured in all major parties’ manifestos at last year’s election.   

Experts warn that inflation-busting fees are not sustainable, in spite of benefits such as 30 hours’ free childcare and Child Tax Credit.

The Conservatives pledged to create a £1billion fund and said it would be dedicated to creating affordable, high quality childcare which included care for children before and after school and during the holidays.

Not much was said beyond that and many believe that the Chancellor will use this Budget to explain how the money for the fund will be sourced and spent. 

Cladding after Grenfell

Many homeowners who live in flats are struggling to sell their homes because they can’t confirm the safety of their building’s cladding after regulations changed post-Grenfell.

The Government is paying £600million to remove Grenfell-style cladding from 333 blocks, but it is not funding the replacement of other types of potentially dangerous material.

Campaigners have called on the Chancellor to set up a fund to help up to half a million people living in these unsafe buildings. 

Student finance

In their election manifesto, the Tories said they would consider the recommendations of Philip Augar’s review into higher education, and in particular look at interest rates on loan repayments with a view to reducing students’ debt burden.

Augar’s proposals, revealed last spring, would cut tuition fees to £7,500 from £9,250, reduce the level at which students start paying back their loans to £23,000, down from £25,725 currently, and increase the time before the debt is written off to 40 years from 30 years.

The interest charged on student loans would also be cut while students are studying, from the Retail Prices Index of inflation plus 3 per cent to just the rate of RPI.

Given the manifesto’s specific reference to looking at the interest rates charged on student loan debt, this is one change which could be announced on 11 March.

Compiled by Tanya Jefferies, Will Kirkman, George Nixon, Jayna Rana and Angelique Ruzicka.