The UK Chancellor of the Exchequer, Philip Hammond, delivered the latest UK Budget on 8 March 2017. It was billed as “the final Spring Budget” because budgets are set to be delivered in the Autumn going forward. On the face of it, there was not much ground-breaking policy in this budget, certainly not much directly aimed at the financial services industry.
I examine some key points from the budget that will probably be of interest to financial services firms – especially banks, large corporates and the people that work for them.
1 – The Macro Picture: UK open for business as the second fastest growing G7 economy
There was an upbeat yet cautious outline of the UK economy in the budget. On the one hand, the UK’s GDP growth forecast was upgraded from 1.4% to 2% for 2017 and the Chancellor said that the UK had grown faster than every other G7 economy apart from Germany in 2016. However, the road ahead (basically the Brexit uncertainty) meant that GDP growth was forecast lower at 1.6%, 1.7%, 1.9% in subsequent years, returning back to 2% in 2021-22.
As an incentive for businesses in the UK, the Chancellor said that the UK corporation tax rate would, as planned, be cut to 19% from April 2017 and to 17% from April 2020. He pointed out that the UK’s corporation tax rate is the lowest in the G20. Clearly, businesses considering moving because of Brexit would need to take this tax competitiveness into account.
2 – National Insurance increase for the self-employed: Will employers who use them be next?
National Insurance Contributions (NICs) for the self-employed will go up from 9% to 10% in April 2018 and then to 11% in 2019 on earnings between £8,060 and £43,000. Earnings above £43,000 will continue to be taxed at 2% while those below £8,060 will not be taxed. Employees currently mostly pay 12% NICs.
The Chancellor sees this as a fairer balancing in the labour market given that self-employed people make up a larger proportion of the workforce than ever before and are now entitled to certain benefits like the state pension. Self-employed people could of course argue that compared to employees, they get fewer benefits (e.g. no sick pay or holidays) and so paying a lower level of NICs was fair.
The NICs rise is a clear breach of the spirit if not also the wording of Conservative Party Manifesto pledge of raising no new taxes in this Parliament. It may also signal a direction of travel: if the Chancellor is prepared to raise higher NICs from the self-employed in the name of fairness, will there be a future tax raid on the companies that use such self-employed labour? The likes of Uber, Deliveroo and other “gig economy” players may seem the most obvious future targets but plenty of banks and other corporates use self-employed contractors too – everywhere from IT to legal.
3 – Tax-free dividend allowance reduced: Crackdown on investors and service companies?
From April 2018, the total amount of dividends that individual company shareholders can receive tax-free from their company will fall from £5,000 to £2,000 per year.
According to the Chancellor, half of the people who have benefited most from this tax break are company directors with a shareholding in their business (they can effectively pay themselves £5,000 above any salary they may also get from their company) and the other half are investors who hold £50,000-plus of investments outside their usual ISA allowance (set to rise to £20,000 from April 2017).
Again, this cut was meant to address unfairness in the economy. Generally, there seemed to be signals that using a service company only to get a tax break (UK corporation tax can be much lower than income tax) is something that may soon be the subject of further tax reform.
4 – Shares in Lloyds Banking Group and RBS & UK Debt Markets
The budget gives an update on the sale by the UK government of shares it acquired during the crisis. In relation to Lloyds, it is following a divestment plan laid out in October 2016, is on track to sell all its shares by 2017-18 and fully recover the £20.3 billion taxpayer funds used. In relation to RBS, there were “legacy issues”, which have so far prevented any opportunities for disposal. The budget also provided an update in relation to UK Asset Resolution Limited (UKAR) – the company set up to hold the mortgage assets of Bradford & Bingley and Northern Rock – whose balance sheet had reduced from £115.8 billion in 2010 to £36.9 billion in 2016.
To help the UK debt markets, there will be withholding tax exemptions in relation to the interest of debt traded on a Multilateral Trading Facility (MTF). A consultation in Spring 2017 will be launched about how this policy should be implemented.
5 – Brexit
Brexit was conspicuous by its absence from the substance of the budget. The Chancellor is clearly keeping his powder dry for the next budget (in Autumn 2017) when the UK will probably have invoked Article 50 of the Lisbon Treaty and talks about exiting the EU will have been underway for some time. The Chancellor did joke however that the UK’s public sector net borrowing was predicted to fall to 2.6% of GDP this year, meeting the EU target of 3% for the first time in 10 years – but that he was not holding his breath for a congratulatory letter from (EC President) Jean-Claude Juncker.