Now the Conservative government has shaken off the restraints of the coalition, we can now expect them to follow through on their promises to cut spending, welfare and tax. Can they do this whilst claiming to be “The Workers’ Party”? I can give you my before and after thoughts as an intern at Grant Thornton to hopefully increase your understanding about what could be quite a large change to the country’s finances.
On Wednesday lunchtime, George Osborne will be announcing the first Conservative Budget in nearly 20 years since Ken Clarke in 1996. We can expect these to be the biggest and toughest changes, as this is the new Budget after the May election and furthest from the next. The party have promised a £12bn cut in welfare, however, with the previous parliament managing £8bn of cuts in two years, the easy savings may already have been found. I expect the main targets will be child tax credits for childcare, housing benefits, and employment and support allowance for those unable to work due to illness and disability.
Whilst these announcements and allowances never appear to impact me, I do feel a little shock when I see there are predictions of scrapping the Student Maintenance Grant; a non-repayable financial support for over half a million students in the UK studying for their degrees. With the fate of Greece yet to be decided, I suppose it gives a strong warning to governments in fear of uncontrolled borrowing.
George Osborne is expected to reject calls to cut the highest rate of income tax from 45% to 40%, although he is likely to raise the personal tax allowance (or amount income on which you do not have to pay tax) to £12,500. In addition, there are rumours of the Inheritance Allowance being raised to £1m dependent on property value and marriage status. Overall, I think the government are trying to hit those dependent on welfare hard in order to encourage people to find employment. Output per worker has levelled off since 2013, so it is difficult for the government to increase wages when the country as a whole is not producing more.
I’m sure the banking community will have their ears to the ground when it comes to changes in the Banking Levy, a tax on the debts of all UK banks. This was originally introduced in 2011 to discourage banks from the risky types of borrowing that led to the 2008 financial crisis. I doubt the levy will be scrapped altogether, but a change is likely given that the biggest payee of this tax, HSBC, is considering leaving the country. As with other corporations, the government needs to make compromises to keep the UK attractive as a place for business, but simultaneously maximise income from the financial sector. It might be easy to blame bankers for the country’s problems, but they are also essential to growing the economy once more.
Just over an hour later and George Osborne has delivered his “Budget for working people” to a sometimes rowdy House of Commons. Broadly he referred to strengthening the NHS, the education system and the country’s defence via a strong economy, encouraging growth in the “Northern Powerhouse” and learning from the example of Greece. The cynic in me noticed him talking about welfare reform as opposed to welfare cuts; perhaps to limit criticism of the controversial changes in the press. Writers in the Financial Times called the Budget “deliriously postmodern” and for some even the start of Osborne’s campaign to become prime minister.
It was ambitious of the Chancellor to aim for creation of 2m more jobs, whilst the Office for Budget Responsibility predicted only 1m in the next five years. This growth is hoped to brought about by a reduction in corporation tax from 20% to 19% in 2017 and 18% in 2020; a move which will no doubt infuriate neighbouring European countries. This bonus may be offset in smaller businesses, however, by the cost of the increase in the minimum wage. Those over the age of 25 can now expect a rise from £6.50 to £7.20 per hour as the National Living wage, a greater change than even Labour had planned. The tax-free personal allowance has risen to £12,500 as expected and the higher rate of income tax bracket was raised to £43,000 from next year.
With a pledge to make Britain a “higher-wage, lower-tax, lower-welfare economy” , the Chancellor announced a further £12bn of savings to be made in the welfare system, using changes that make it more attractive to work than rely on state-paid benefits.
Disability benefits will continue to be not taxed or means-tested, however, those who are deemed able to perform some working tasks will see a reduction in their Employment and Support Allowance, as expected. A new Youth Obligation for 18-21 year olds was introduced, stating that they must “either learn or earn”. Housing benefits for this age group were also removed, I suppose with the view that they would just remain living in their family home. Working parents will receive free childcare for up to 30 hours a week from 2017, however families with more than two children will not be gifted any additional benefit support for this child.
One point that stood out for me was the reduction in the benefits cap from £26,000 to £23,000 in London, and down to £20,000 in the rest of the country. As someone currently paying for rent in London during my study, I can vouch that over £9,000 of that allowance will quite easily be eaten up by accommodation costs before people have started paying for anything else.
Student maintenance grants have indeed been scrapped, however, the Student maintenance loan you are now permitted will be raised to just over £8,000 per year in 2016/17. I suppose in the short term this will help students who can’t afford the immediate costs of accommodation and supporting themselves for the first time. In the long term, however, can the government afford to pay all these loans when thousands of pounds of debt are written off in fifty years’ time? Especially now that the Chancellor has removed the cap on the number of students that can go to university.
What changes will affect the work that Grant Thornton does? As part of the Financial Services Tax team, we will obviously be looking at the Corporate Tax rate drop and changes in Capital Gains Tax rates that affect Investment Management. Capital Gains Tax is the tax the government imposes on any profit made when you sell assets (shares for example) that have increased in value over time. For individuals, the permanent non-domiciled status is being removed from those who have been UK residents for 15 of the last 20 years. The tax free inheritance has risen to £1m through changes in the value of the property left and landlords are set to see changes in the Buy to Let interest relief and a raise in the Rent A Room tax relief to £7,500. In terms of the Banking Levy, it is set to be reduced over a six year period and an 8% surcharge on Bank profits introduced. This sends out mixed messages to the financial sector and we’ll have to wait to see if HSBC do indeed choose to move their headquarters from the UK. The charge of 8% may be considered more acceptable than the levy, as it is directly profit related.
Hopefully, I have managed to give you a bit of insight from an intern’s point of view. If you would like any more information, check out http://www.grant-thornton.co.uk/en/Budget-2015/ and @GrantThorntonUK on Twitter. Also look out for the Grant Thornton specific #GTBudget and the general #budget2015 across all your social media platforms.