It’s not my fault

I would normally have sent a missive about the budget at this time of year but our Chancellor has decided to put this back until the end of November. Presumably she has seen the numbers and was hoping some good news will emerge to save her bacon before then. Her unprecedented pre budget briefing this week seems to be designed to warn of us impending tax rises and to settle the horses that is the UK bond market which the Government relies on to cover the shortfalls in the tax take.

The last budget has led to a slowdown in the economy which is why tax rises are now on the horizon. To quote Winston Churchill “For a nation to try to tax itself into prosperity is like someone standing in a bucket and trying to lift themselves up by the handle”. A wise person also once said that the definition of insanity is “doing the same thing over and over again and expecting a different result”. We can hope our Chancellor has a cunning plan rather than more of the same. Personally, I think we are in for a cycle of further tax rises over the rest of this parliament. Cutting or even controlling the rate of increase in spending is clearly impossible for this Government.

The Government does have some more radical options such as removing the Bank of England’s independence to force through interest rate reductions, printing more money and reducing the quantitative tightening that partly led to Liz Truss’s downfall. Playing around with the economy in this way would likely spook markets and probably trigger some wild effects for the pound and international trade. It remains an option. 

One of the rumoured proposals is that they will switch 2p from the rate of National Insurance onto Income Tax, so individuals earning less than £120k will likely not see an increase in tax. However, for individuals with a private pension income, rental properties or investment income will see an increase in tax.

The UK has a significant problem in that many high earners have been fleeing the country since the new Government was elected which reduces the pool of taxpayers, leaving the rest of us having to pay more. The Government cannot simply introduce higher taxes for those higher earners or millionaires because many can simply choose to leave, earn less or live off capital. There was some talk of the UK having capital exit controls so UK and foreign individuals could not withdraw all of their capital if they chose to leave but I think that would be catastrophic for the UK.

I have had calls asking if I think the pension tax free lump sum might be reduced or withdrawn. Some young firebrands in the Treasury have been talking up the idea. I think this would be a spectacular own goal for the Government as sending out the message that it is not worth saving in a pension would lead to mass exits from most employer pension schemes. After all, why save anything for tomorrow when the Government (i.e. you the taxpayer) will later pick up the tab when they retire. I would be stunned if they make this choice. I also do not believe they would be able to do so without causing mass civil unrest. They would at least have to offer a period of grace of 3-5 years for people to prepare for such a change.

I would bet that an increase in state pension age has a 50% probability as this would allow the Government to fiddle the numbers to some extent. I would be surprised if this would affect anyone retiring before the next election in 2029.

I would also just note that I cannot give advice based on what might happen in the future and we need clear reasons in clients interest to make structural changes to their affairs. I will also not action advice which I believe is against client’s best interests. If you think you will need a large lump sum from pensions and you are concerned then please do speak with me as early as possible. All advice in this area must be in writing from me and usually takes a few weeks to organise.

I will of course report back following the budget to discuss any significant changes that might affect you and please do give me a call if you have any concerns.

Although on the personal tax side of things it seems we are in for higher rates of tax and a slowdown in the economy, this does not mean we need to be equally concerned about markets as the two are separate. The markets generally do not take much notice of short term political issues. As far as the UK stock market is concerned over 75% of the FTSE 100 companies make their money overseas, so the effect of day to day political dramas are fairly muted. Markets also do not generally care which colour of Government we have. Markets and the world economies have generally done very well this year. They will drop back at some point which is a perfectly normal part of the process and should not be a cause of concern. If there is anything significant you are planning for in the next 12 months which you are concerned about funding then do get in touch. 

While the UK domestic outlook may seem gloomy, it’s important to remember that economic cycles do eventually turn and new opportunities often emerge from periods of uncertainty. Staying informed and proactive can help you weather any storms ahead, and with careful planning, brighter days are sure to come. Please rest assured that I will continue to keep you updated and am always here to support you.