Investors fear a ‘Budget for the young’
Will embattled Chancellor Philip Hammond cut tax breaks for long-term investors to woo younger voters, asks Sam Meadows ‘There could be cuts in NI payments for those in their twenties and thirties’
With the clock ticking on Brexit, the Government is preparing to unveil its first autumn Budget, which will aim to repair some of the damage the Conservatives suffered in the election in June.
Much has been made of the party’s lack of popularity among young people – if you’re younger than 47 you are probably a Labour voter, according to YouGov – and the Budget will be seen as an opportunity to shift the balance.
The proposed reforms to care funding, dubbed the “dementia tax”, were ruinous for the Conservatives’ election campaign and Chancellor Philip Hammond is under pressure to avoid such a mistake on 22 November. A failure to deliver could ultimately cost him his job and heap yet more criticism on Prime Minister Theresa May.
Iain McCluskey, partner at PwC, the accountants, said: “It’s a really difficult Budget for the Chancellor. It’s the penultimate one before Brexit, which makes it very challenging. Things like welfare cuts are difficult with a small majority so he’s really hamstrung.
“We saw how badly the dementia tax went down with Conservative voters. He’ll find it hard to appeal to the young and old at the same time. Their needs are very, very different.”
Mr Hammond is considering tearing up green belt planning laws to give a boost to housebuilding, according to reports, as well as changes to pensions and help for students shackled to enormous loans.
Former chancellor George Osborne committed to raising the tax-free personal allowance to £12,500 by 2020. Mr Hammond has already come under fire in anticipation of an unveiling of tax breaks for the young at the expense of older people.
The policy, dubbed a “tax on age”, could mean cuts in National Insurance (NI) contributions for those in their twenties and thirties, possibly funded by a reduction in the tax relief for older pension savers.
Mr McCluskey said he was in favour of a rise in the starting point at which NI contributions begin to be taken. Currently you pay NI at 12pc if you earn more than £157 a week. “Raising the NI contributions threshold is a better idea and would have more impact than increasing the personal allowance, but ministers seem wedded to that policy,” he said.
He said another rise in the personal allowance, the amount you can earn tax-free, was likely. It is currently £11,500 a year but this could rise to £12,000 or more. He also suspects the 40pc tax rate could rise from £45,000 to £50,000.
According to calculations by PwC, a £500 rise in the tax-free personal allowance would save someone earning £25,000 around £100 a year. A rise to £12,500 would save them £200. If the higher-rate tax threshold rose to £50,000, someone earning that much would save £1,000 a year.
Tax relief makes pension saving an attractive investment option but because it is based on the income tax rate of the holder, it has been criticised for being more lucrative for wealthier savers and always appears at risk ahead of the Budget. If you are a basic-rate, 20pc, taxpayer, every 80p you put into your pension is turned into £1 by the Government. Higher-rate taxpayers receive 40pc tax relief, and so on.
“There’s been talk of restricting tax relief on contributions for some time but in the past the Chancellor has steered away from that big decision,” said Mr McCluskey.
It has been suggested Mr Hammond could limit tax relief to young savers, scrapping it entirely for those over the age of 40 or 50. According to AJ Bell, the fund shop, scrapping pension tax relief could cost some savers more than £100,000.
Assuming they retire at 65 and enjoy 4pc investment growth, cutting off tax relief for workers when they reach 50 would cost someone saving £500 a month £31,237 over their careers. Savers contributing £1,000 and £2,000 a month, would miss out on £62,474 and £124,947, respectively.
If the cut off was 40 it would have an even greater impact. Someone saving £500 a month would miss out on £64,968.
AJ Bell’s Tom Selby said abolishing tax relief, 60pc of which is paid on employer contributions, would be incredibly complicated and “take years to implement”.
The lifetime allowance and annual allowances, which determine the amount you can save into a pension, are a more likely target.
The lifetime limit has been reduced to £1m from £1.8m at its peak in 2010-11. Cutting further, to below £1m, would be hard to justify.
It would be easier to restrict the annual allowance. At the moment this allows £40,000 to be saved a year. Lowering this as part of a package aimed at the young could be popular.
investors choose to put their money into stocks instead of bonds,” said Mr Mould.
However, while the yield is attractive, dividend cover – which measures the ability of firms to pay dividends from profits alone – is historically low. Mr Mould said ideally investors want to see dividend cover of two or more, which provides some safety in the event of a sudden shock.
FTSE 100 dividend cover is estimated at 1.6 to 1.7 for 2018, and many of the highest-yielding firms have cover significantly lower. As has been seen recently with Pearson,
IT The Lifetime Isa, or “Lisa”, was launched in April to help under-40s save for a deposit as well as old age. Currently you can save up to £4,000 a year, which is then boosted by a 25pc go government bonus, taking it up to £ £5,000. Once opened, contributions can be made u until age 50. The money can o only be withdrawn at 60 or to buy a property without incurring a hefty penalty – 25pc of the entire pot including investment growth. Tens of
Provident Financial and Admiral, when this goes wrong and a dividend has to be cut, it can have severe ramifications for the share price.
Mr Bell said: “With all the data we have, we struggle to see where the UK is going. By comparison, we have strong conviction that Europe and the US have a positive outlook. The UK is mixed: low unemployment coupled with weak consumer confidence, for instance. That’s before you start contemplating the Brexit negotiations.”
He added that while a no-deal Brexit thousands of people have already opened accounts but experts say boosting the annual limit would be a vote winner.
Mr McCluskey said the age limit could be extended. “First-time buyers are getting older and extending the age limit to 50 would reflect that.”
Ditching the early-exit charge would also make the Lisa more attractive, he added.
Mr Selby said the Government could encourage more saving by combining all the different types of Isa into one: “Mr Hammond could announce a review of the rules with the aim of creating a single, simple Isa regime which savers find easier to engage with.”
Students are leaving university with an average debt of more than £50,000 and many will not pay this off within the 30-year time limit. The Prime Minister has called for a review of the tuition fees system, which could include changes to interest rates (some of which are 3 percentage points above inflation) and raising the point at which loans begin to be paid off.
Mr Hammond’s cabinet colleague David Davis has reportedly called for student debt to be wiped, a policy proposed by Jeremy Corbyn during the election campaign, saying it prevents graduates from contributing to the economy.
Changes to stamp duty on property purchases which, as this newspaper has repeatedly highlighted, is freezing the housing market, would also be popular.
Mr McCluskey said a “stamp duty holiday” is a possibility. This would give first-time buyers a window to pay little or no stamp duty on purchases.
Paul Smith, of Haart Estate Agents, said: “Stamp duty is holding back a whole generation of young people who are already struggling to save for a deposit, and it is time to bring this injustice to an end.’’
would be bad, it would not necessarily be bad for stock markets, as the pound would fall sharply again, boosting overseas earnings. The value of sterling will remain an ever-present factor affecting UK returns, as around 70pc of FTSE 100 earnings are from overseas.
The role of central banks remains important too. The money they have pumped into markets since 2008, and rock-bottom interest rates, continue to provide support to stock markets. The removal of such stimulus is likely to be handled very cautiously, but is uncharted territory.
Tough choices: Philip Hammond has the tricky task of appealing to young voters without alienating the Tories’ traditional base