Given the way things have been going lately I assume you’re already seen the leaked copy of the bulletin this week [ED – it was an innocent mistake that could be made by anyone working in an organisation where keeping state information safe is paramount!]
But after what seems to have been (it might even technically have been) the longest run up to a budget, we finally received Chancellor Rachel Reeves’ second budget. Time will tell if she gets to deliver a third, but it was a robust performance. I’m not here to talk about the politics of the decisions she has made but will say it definitely feels as though we’ve been softened up a little over the last few months so that we could all heave a sigh of relief about what wasn’t introduced.
It might be worthwhile just looking at the Budget in the context of what we knew and Tom Stevenson at Fidelity international describes things well:
The Budget we got was shaped in large part by the government’s pre-Budget choices:
- Perhaps most importantly, the government chose to limit its flexibility before last year’s election by ruling out rises in income tax, VAT and national insurance.
- A couple of weeks ago, it chose to stick to that manifesto promise. This despite sounding out the market on a broad-based hike in income tax – and finding it supportive.
- A year ago, the Chancellor chose to focus her tax-raising measures on business, making the economic growth the government needs harder to achieve.
- She then doubled down by choosing to create a wafer-thin fiscal buffer to ride out the growth downgrade that the Office for Budget Responsibility duly delivered today.
- Throughout, the government has made an important philosophical choice – to favour tax rises over spending cuts.
Other choices have been foisted on the government in the run-up to this Budget. These, too, have limited its room for manoeuvre.
- Backbench MPs chose to block the Chancellor’s tentative attempts to manage down the country’s growing welfare bill, to force it to keep winter fuel payments in place and now to end the two-child benefit cap too.
- Investors have chosen to demand a high yield when lending to the government, relative to other countries, constraining its ability to borrow. Taxpayers spend £100bn a year simply servicing the government’s debt.
Without the productivity and economic growth that might have freed us from this fiscal and economic bind, the choices the government and others have made ultimately left the Chancellor with few real choices.
They made today’s smorgasbord of tax-raising measures unavoidable. Whether you think these choices are the correct ones will depend upon your political views.
As you would expect I had a few points that I wanted to mention:
If anyone is going to be struggling with the proposed ‘mansion tax’ I noted that the values will/might/ who knows not be based upon council tax rates, but some other valuation mechanism. If you are thinking of getting out of your mansion beforehand, my tiny shoebox of a flat is perfectly valued and in the market at a mere £1.95m. Grab it now before they work out how they are going to value properties (good time to be an Estate Agent with a time-charged fee structure?)
International Adviser reports that HMRC has confirmed cash held in stocks & shares ISAs will be penalised under the new limits and that it is also planning to prevent transfers from stocks and shares ISAs into cash ISAs.
As confirmed by the Chancellor herself to Martin Lewis from Money Saving Expert, anyone only receiving the state pension after 2027, when it is expected that the state pension alone will be more than the personal allowance, will not only not have to complete a tax return but they will not have to pay tax either. Well, she said not for this parliament. After that who knows, or whether it will even be her call. Unfortunately, I’m not sure yet whether everything above the personal allowance will then become taxable if in receipt of even £1 of private pension. And reported in Citywire, Sir Steve Webb, a partner at LCP and a former pensions minister, said there are many questions around these plans, including why those working but on the same income level will have to pay tax!
I think JB Wealth needs to up its game! How come Hargreaves Lansdowne had a mention by Rachel Reeves in the budget (without the obligatory “other firms are available”) but maybe it will be us next year.
So, I don’t propose to go through all the points raised in the budget and am going to hand the hard yards over to our JB Wealth Budget Report, attached. Please feel free to send it out to anyone else that you might know who’s affected by the announcements (hint: that’s everybody!) And if you would prefer it in a different format please let me know as I’ve received 47 48 49 budget updates from various sources so far…..
Market News
I’m cheating a little, because this section starts with a market update from Lothar Mentel, Tatton’s Chief Investment Officer, discusses the impact of the Budget on markets, and the prospects for the UK’s current and future economic growth. Moving to global markets Lothar goes on to explain the impact of the US government shutdown on market liquidity and finally provides an outlook as retail and professional investor sentiment travels along different paths.
And he offers us his wider market thoughts in the lates Tatton Weekly under the following sections. I should warn you there is some early use of the phrase Santa Rally bubbling up [Ed – you have to be joking, I cannot be a year ago you were talking about that – arrggghh!]
- Markets give thanks to central banks – Markets see easier monetary and fiscal policy plus an abundance of capital investment ahead. Retail investors seem more nervous, while institutional investors feel bullish – a reversal of previous sentiment. Capital rotation has often followed.
- Don’t bet against the budget – The long budget build up is over – and at least markets didn’t mind the delivery. The rally in UK bonds and equities suggest international investors see this as an appropriate balance between growth and fiscal discipline.
- US earnings: supportive or overexcited? – The US earnings season has been pretty good. We wondered whether the lack of previous downgrades would prevent a positive ‘surprise’, but companies delivered one anyway. Can that carry on?
Sideways Look at Things
There have been hundreds of thousands of words written over the last few days about the outlook for the UK economy according to 7IM. And many people will naturally jump to thinking about the UK market – particularly the FTSE 100.
A little reassurance for anyone who’s worried about any portfolio impacts:
- 2025 has felt troubling for the UK on both the economic and political front. But the FTSE 100 has returned 20% this year, including dividends …
- … because the market is not the economy. If you look at where the 100 businesses in the FTSE make their money, less than 25% comes from the UK. And if you dig into the current top ten companies, you can get a bit more of a flavour. A few highlights:
- British American Tobacco makes almost no money in … Britain (probably a good thing for the NHS!).
- HSBC cares a lot more about Asia than the UK high street … 4.8 billion people vs. ~70 million. In fact, for almost all of the companies, China and India are growing fast as sources of revenue.
- Even the National Grid makes more money from the US than it does the UK. It’s (weirdly) responsible for powering quite a lot of New York State.
Source: FactSet/7IM
Last Thoughts
As we all know the freeze on income tax thresholds until 2031 will hit those with bigger pockets more. As reported in MoneyWeek, someone with a yearly income of £15,000 today faces an extra tax bill of £259 over the three years between 2028 and 2031, with the personal allowance frozen at £12,570.
Someone on £45,000 a year will take a hit of £683 over the same three years, while someone with an annual income of £47,000 now will have to fork out an extra £1,292.
Someone on £47,000 is likely to become a higher rate taxpayer between now and 2028 due to rising wages, according to AJ Bell, meaning they’ll be dragged into paying 40% tax on a portion of their income. In England, Wales and Northern Ireland, you pay the higher rate of income tax on taxable income between £50,271 and £125,140. The 45% additional rate applies on income over £125,140.
Over 8.3 million people have now paid higher or additional rate tax since 2021, when income tax thresholds were first frozen, with more set to be dragged into this net between 2028 and 2031. The extension announced in the Budget will rake in £12 billion in extra revenue, according to the Office for Budget Responsibility (OBR).
If there had been no freeze since 2021, the OBR estimates the personal allowance would have been £17,470 by 2031, and the higher rate threshold £70,370 – more than £20,000 higher.
Laura Suter at AJ Bell added: “Nothing can make up for the lost years where income tax bands have seen no inflationary uplift. “The cumulative cost is staggering: the OBR estimates it will cost taxpayers £56 billion a year by 2029-30, around £1,330 per taxpayer on average.”
| Yearly income | Extra income tax burden between 2028 and 2031 |
| £15,000 | £259 |
| £45,000 | £683 |
| £47,000 | £1,292 |
Source: AJ Bell
How to protect yourself from frozen income tax thresholds
There are steps you can take to mitigate the effects of frozen thresholds eroding your hard-earned cash.
James Norton, head of retirement and investment at Vanguard Europe, suggested optimising your ISA and pension allowances, like the annual allowance, which shelter your investments from income, dividend and capital gains tax. “For those in retirement, consider the best way to draw your income. Most people will be best served by taking money out of cash savings and general investment accounts first. This means you can leave money to grow tax free for longer within ISAs and pensions,” said Norton.
Andrew Prosser, head of investments at investment platform InvestEngine, said increasing pension contributions can reduce your tax bill and means you’ll benefit from pension tax relief. “For higher-rate taxpayers, a £20,000 contribution can effectively cost just £12,000 once government and personal tax relief are applied, making careful planning more important than ever.”
Miscellaneous
The Premium Bonds prize fund rate could potentially be in line for a boost after the National Savings and Investments (NS&I) fundraising target was hiked in the Budget says MoneyWeek. The government-backed savings provider now has a net financing target of £13 billion for the 2025/26 financial year, within a plus or minus range of £4 billion. Its previous target for the same financial year was £12 billion.
It means NS&I could raise as much as £17 billion from savings products without breaking its financial target. NS&I has raised just £3.9 billion in the first half of this financial year, meaning it’s more than £9 billion away from hitting the target.
This could potentially prompt it to increase its Premium Bonds prize fund rate to attract more customers. The prize fund rate is currently 3.6%, after being lowered from 3.8% in August.
Summary
From a financial planning aspect, I think the changes highlight the need to have a multi-faceted approach to where your money is held and how you take it when you need it. This means additional held from financial advisers so if you are concerned about any of the issues raised in the budget then please speak to your usual JB Wealth Adviser.
We will continue to digest the details and pull together what solutions might emerge once the dust settles and will bring them to you in future bulletins.
I’m off on dad duty now rearranging my eldest’s university room. I’ve had all my jabs so should be OK whatever we might find but I hope to catch up with you next time!