Philip Hammond hasn’t got it easy. Putting a Budget together is difficult at the best of times, but with Brexit looming large over the UK, producing a financial plan for our economy is now a hell of a lot harder.
In such an uncertain time, how can Hammond hope to offer the stability the UK needs?
Steven Cameron, pensions director at Aegon UK, reckons the chancellor might feel pressured to come up with some radical ideas to re-energise both the government and the economy.
There are lots of things that people want to see in today’s Budget, but what are the changes that are most likely?
After taking a backseat throughout the election campaign, housing policy now looks to be at the top of the agenda, pushed into the fore as intergenerational inequality takes centre stage.
The lack of affordable housing has reached a crisis point, with many first-time buyers priced out of home ownership, particularly in London where average first homes now cost £428,526.
While it doesn’t solve the root of the problem, which is lack of supply, the chancellor could make the buy-to-let market even less attractive by introducing another stamp duty hike for people with second homes.
Ultimately this could put more properties back on the market for younger people to buy.
We could also see a cut or even a complete removal of stamp duty for first-time buyers, says Simon Heawood, chief executive of proptech startup Bricklane.com, particularly given the government’s pledge to help the younger generations.
While this would be good news for people looking to get on the property ladder, OneSavings Bank’s John Eastgate, says it is important that the bill for these should not fall at the feet of landlords.
“Around 20 per cent of UK households are in the private rented sector, so the social and economic importance of a healthy and balanced rental market cannot be understated,” he says. “The market needs to be nurtured, not neutralised.” Housing policy certainly seems to be a delicate balancing act.
A cut to the tax-free dividend allowance would be an easy target for the government, says Hargreaves Lansdown’s Danny Cox.
The existing £5,000 allowance, which catches out investors as well as small business owners, is already due to be cut to £2,000 from April 2018. “Increasing the rates of dividend tax or cutting the tax-free allowance further would be a quick win for the chancellor,” says Cox.
Over recent years, we have seen generous increases in the Isa allowance and the introduction of new Isa brands, making this type of product far more attractive to savers. But following the big jump in the Isa allowance to £20,000 last year, don’t get your hopes up for another threshold boost.
However, the increased focus on intergenerational fairness means it’s possible we might see an extension of the Lifetime Isa, says Liz Bottomley, managing director of Private Banking at Arbuthnot Latham.
A cut to the 30 per cent tax relief offered through venture capital trusts has also been mooted as an easy target for the chancellor, particularly bearing in mind the government shelled out £171m of tax relief last year. The Hargreaves financial planner says a reduction in the rate of relief to 20 per cent is not out of the question.
Financial service professionals have been expecting a change to pension tax relief for donkeys years now, and while the same old expectation has cropped up again this time round, many experts think it’s unlikely.
“Never say never, but the current system of pension tax relief appears safe from radical reform for the time being,” says Aegon’s pensions director. “Hammond will want to avoid rocking the boat when the government is so wary of upsetting its base.”
But where we could see change is in the annual allowance.
Les Cameron, head of technical at Prudential, says the chancellor might decide to shrink the annual allowance from the current £40,000, or he might choose to bring more people into scope of the tapered annual allowance, which would be relatively straightforward to do.
Pru’s technical boss also says it’s possible the lifetime allowance increase – which was set to rise in line with the consumer price index from next year – could be deferred or cancelled completely.
There are mounting concerns that the chancellor could hike the insurance premium tax (IPT) to 20 per cent, a cost which would serve as a blow to drivers in particular, who already pay over the odds for insurance.
IPT has already doubled to 12 per cent from six per cent in the past 18 months, and Freddy Macnamara, chief executive of pay-as-you-go insurer Cuvva, points out that car insurance premiums have risen five times faster than inflation in the last year alone.
“These rising costs are making driving completely unaffordable for many people, and it is undoubtedly contributing to plummeting car sales.”
But Macnamara says a dangerous consequence is a rise in the number of uninsured drivers on the road. “In the past year, we’ve seen the number of incidents involving uninsured drivers rise for the first time in a decade, and it’s no coincidence that this follows huge increases to annual premiums.
“A further hike to IPT also puts a serious financial strain on anyone with low to medium salaries, especially those living in London, where premiums are higher than they are anywhere else in the UK.”
What action should you take in light of any changes?
Given that tax rate changes are usually made with immediate effect (or at midnight on the day of the Budget), there is often little you can do to cushion the blow.
However, it’s more likely that the big changes will be introduced from April next year, giving you a window of time to plan accordingly.
If you have a financial adviser, this gives you even less reason to panic, says Scott Gallacher, chartered financial planner at Rowley Turton. “Good advisers will proactively contact those clients affected by any changes, and discuss whether their financial plan needs to be amended.”
Claire Walsh, financial planner from Aspect 8, thinks the Conservatives will want to create some good news to distract from Brexit. And the chaos currently rattling the government means the chancellor might be wary of stirring the pot too much.
Hammond’s embarrassing U-turn on national insurance tax after his first Budget means he could be inclined to opt for the safe route second time around.
Perhaps a boring Budget is what our economy needs.