UK Budget: When voters and taxes collide

Please note: The article does not constitute advice or any form of recommendation. Barclays Private Bank does not offer tax advice, and professional advice should always be sought.

How do you woo voters and stimulate an economy in recession? The UK government attempted to answer both questions in its latest Spring Budget.

At the crux of the fiscal decision-making was an effort to ease the tax burden, without restoking the inflation fire or straining the public purse.

Despite the challenging backdrop, the Chancellor Jeremy Hunt was at pains to point out that UK growth had risen faster than Germany, France or Italy since 2010. He also highlighted that UK national debt was the lowest in the G7.

In the following article, we take a look at some of the bigger decisions made by the Chancellor, and their potential implications for wealth holders.

Income and tax 

The prospect of income tax cuts was widely debated in the run-up to the 6 March.

Unfortunately for Jeremy Hunt, the current macroeconomic backdrop doesn’t lend itself particularly well to a tax-cutting strategy. News that the UK has slipped into recession won’t help government coffers (and limits the scope for tax cuts), and the ongoing inflation challenge tempers just how much money the Chancellor can put back into workers’ pockets (also limiting the scope for cuts).

In the end it was National Insurance, rather than income tax, that was trimmed. The government announced a further 2p cut to employee contributions, echoing an identical decision made in the Autumn Statement. It is effective from the 6 April 2024. The Chancellor also pledged to keep cutting National Insurance contributions if conditions allow.

In parallel, Jeremy Hunt left personal tax thresholds frozen. It’s a less obvious way of boosting tax revenue than something like income tax rises, because it sees more people falling into higher tax brackets as their wages rise. 

Property  

Residential property remains a hot topic for many voters. It was therefore no surprise to see property pledges in the Spring Budget. That said, some of the decisions were a surprise.

In an attempt to boost sales and transaction volumes, the higher rate of capital gains tax paid on profits from selling property, is to be cut from 28% to 24%.

For holiday home owners, there was the news that the furnished holiday lettings regime would be abolished. The goal is to make it easier to let holiday rentals over the longer term, in turn easing a housing shortage for locals in tourism hotspots.

The government also abolished the multiple dwellings relief from stamp duty land transaction tax, claiming it was widely abused and therefore not fit for purpose.

For more insights on the London prime property market, read our article: Cautious optimism returns to the UK property market.

Businesses, fuel, hospitality, vapes and more…

Small businesses, pub goers and drivers all had reason to cheer.

Fuel duty will be kept at its current rate for the next 12 months, and a temporary 5p cut will be extended. Before this announcement, it was due to expire at the end of March.

Likewise, in a boost to pubs and the wider hospitality sector, alcohol duty was frozen and extended to 2025.

Meanwhile, the VAT registration threshold was raised from £85,000 to £90,000, in a move which the Chancellor claimed would exempt thousands of small businesses.

Jeremy Hunt also announced the government’s intention to publish draft legislation on extending the “full leasing” regime that was revealed in November. It would see the scope for tax-breaks being widened to include leased assets, on the condition that the government could afford it.

One of the bigger winners in this Spring Budget was the arts sector. The government has opted to make permanent what was previously a temporary higher rate tax relief for orchestras, museums, galleries and theatres. Similarly, Jeremy Hunt confirmed the higher relief rates for touring orchestras and non-touring productions, at 45% and 40% respectively, would become permanent.

At the other end of the scale, a new levy was introduced on vaping, although the Chancellor acknowledged it had a role to play for some smokers trying to quit, thus holding him back from going further. And on the topic of hot air, the government increased the Air Passenger Duty for non-economy flights. In other words, passengers in Business Class and First Class will soon pay more.

Meanwhile, the UK’s windfall tax on the profits of oil and gas companies, will be extended until 2029.

Non-Dom conundrum 

In the lead up to the Budget, there were rumours that the Chancellor was willing to change tack on the non-domiciled tax region – something his party had previously vowed to protect.

And so it transpired, with the decision to abolish the current system and replace it with a residency-based system. From April 2025, new arrivals to the UK won’t be required to pay UK tax on foreign income and gains for first 4 years of their residency, and can bring them to the UK tax free: the only cost of this being a loss to their personal allowances. However, after 4 years of residency they will be subject to tax on their worldwide income and gains. With regards to inheritance tax, the intention is to consult but a suggestion of exposure to worldwide inheritance tax after ten years of UK residence has been made. 

In the interim, transitional arrangements will be implemented and include a 2-year period for current non-doms to bring wealth held overseas into the UK at a 12% rate of tax, as well as reducing their exposure to tax on foreign income by 50% in the tax year 2025/26.

It means that one of the more distinct lines in the sand between the government and the opposition, just got a little bit smudged as their differences narrowed.

Pensions and ISAs

This Spring Budget was also used to reveal the Government’s plans to consult on a new British ISA, which would offer investors an additional £5,000 tax-free allowance for investment in UK assets.

In a similarly patriotic spirit, the government decided to increase scrutiny of asset allocation within British pension funds. If after a period of monitoring it is decided that there is an inadequate exposure to UK assets, then “further action” could be taken. It is unclear what form that action might take, but the incentive to improve domestic investment was clear.

Capital gains tax and dividend allowances

Before the Budget, it was known that April 2024 brings with it further reductions in some of the allowances commonly used by investors.

As a reminder, the capital gains tax (CGT) exemption will halve from £6,000 to £3,000. Only two years ago, the exemption was £12,300, illustrating just how fast fiscal policy can change.

Likewise, the annual tax-free allowance on dividends paid out to equity investors, is dropping to £500.

The important thing to remember is that while the exemptions might be less generous, they haven’t been removed entirely. They remain an important consideration for financial planning.  

Final thoughts 

In addition to the topics covered above, there was of course a deeper set of fiscal policy unveiled in the Spring Budget. We have chosen to focus on some of the more significant ones for the purposes of this article.

The outlook for the UK economy is uncertain and it will be hard to ascertain the Budget’s full impact for a while yet. Ultimately, there is an important point to be made here: when it comes to financial planning, being proactive and using available allowances, makes sense. By doing neither, you risk creating unnecessary inefficiency in efforts to preserve and grow wealth.  

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