Investment experts are divided over whether the Budget will prove a little surprise for savers and investors, or the pending EU referendum would lead to drastic changes to the nation’s taxation system.
When George Osborne takes to the dispatch box this Wednesday for the next Budget announcement, experts say the Chancellor might need to deliver a “Goldilocks budget” and expect changes in income tax, higher Isa allowances as well as a final stake sale in the major domestic banks.
Rob Burgeman, divisional director of investment management at Brewin Dolphin says: “This is a very tricky budget for the Chancellor. The economic backdrop is worsening as a referendum stupor settles over the UK and many business decisions are put on the back burner until July.
“It really needs to be a bit of a Goldilocks budget; too harsh and an angry electorate may seek to punish the government in the referendum, too soft and the deficit targets will fade into the horizon.”
In March, the Office for National Statistics said the UK’s good trades deficit with the EU widened to £8.1bn in January, from £7.4bn a month earlier reaching a record increase.
Meanwhile Tilney Bestinvest director of financial planning David Smith believes Osborne might slightly increase the capital gains tax to further benefit investors.
He says: “Providing a healthy tax receipt of almost £5.5bn in 2013/14, capital gains tax is still considered one of the most beneficial tax rates for investors. Just a 2 per cent increase in tax rates from 18 per cent for basic rate taxpayers and 28 per cent for higher and additional rate taxpayers to 20 per cent and 30 per cent respectively, could pocket the Exchequer approximately £100m a year.”
Smith says this move could be “extremely lucrative” for the Government, especially as many buy-to-let homeowners are looking to sell up in advance of the looming stamp duty hike, which is set to rise to 3 per cent.
Isas – a popular policy
Axa Wealth head of investing Adrian Lowcock says the Chancellor could increase the personal allowance further as “it has proved to be a popular policy”.
The income tax is already set to rise to £11,000 in April from £10,600.
Lowcock adds: “Cutting the highest rate of income tax from 50 per cent to 45 per cent actually boosted tax receipts for the Treasury, although much of this has been attributed to deferred bonus payments.
“We could see the level at which higher rate tax is charged is raised taking more people out of the 40 per cent tax band. The intention of this Government is that people with incomes below £50,000 should not pay higher rate income tax.”
Isa allowances may also rise as it still represents an attractive option for long-term savings, Lowcock says, but he expects no drastic changes to the system.
From 6 April, the personal Isa allowance will stand at £15,240, Help to Buy Isas were introduced in December and the Innovative Finance Isa is also due to come in next month.
Lowcock says: “We might see an improvement on the rules of the inherited Isa where a surviving spouse inherits the Isa allowance but the process of doing so is unnecessarily complex.
“Over the last few years we have seen a number of changes to Isas and pensions. This tinkering is having a big effect as Isas have become much more complex while constant changes to pensions is putting people off. My wish would be to put a hold on making more adjustments and let the recent changes bed in so investors can become comfortable with the recent changes.”
Comforting investors over banks’ health
On the banking side, Russ Mould, investment director at AJ Bell, hopes the Chancellor will comfort investors on the health of UK domestic banks by selling the remaining stake in both Lloyds and RBS.
He says: “There is a chance Osborne may revisit plans to sell the final 9 per cent stake in Lloyds having backed away from a planned disposal in February, just as the stock market was at its wobbliest and the banks were about to unveil another big round of charges against PPI mis-selling claims. At 70p the shares trade near to the Government’s break-even price of 73.6p.”
However, he says that RBS is “more problematic”.
Mould says at 226p, RBS shares are “miles below” the Government’s purchase price of around 500p, and “Osborne copped a lot of flak when he sold a £2.1bn stake at 330p last August.”
The Autumn Statement document clearly states that the Chancellor’s Budget calculations assume the sale of £25bn in shares over this Parliament and another £5.8bn in 2020-21.
Mould says: “It looks unlikely that any sale is likely in the near term, after RBS’ dismal 2015 results, so it really would be a bonus for the Chancellor, the country’s finances and potentially its economy if RBS can get its operational and share price performance going in the right direction and permit Osborne to raise some much needed cash.”