What the Summer Budget means for your savings and investments

Chancellor of the Exchequer George Osborne’s Summer Budget is a boon for political commentators, economists and historians alike, as all will have plenty to debate, given his emphasis on hard work, low tax, the Northern Powerhouse and One Nation Toryism. But more practically, there is a lot for savers and investors to digest too after the release of the first purely Conservative Budget since November 1996.

Your ISA, pension and investments

Chancellor Osborne unveiled a series of new policies and initiatives, with the promise of further changes to come, notably in the area of pensions, where further reforms may be afoot.

• Pensions. Five features of the Chancellor’s statement are particularly worthy of note when it comes to pensions.

1. As per the Conservative Party manifesto, tax relief on personal pension contributions will be restricted for those earning over £150,000 per year. From April 2016 for every £2 earned above that limit, you lose £1 in annual allowance. Anyone earning over £210,000 a year will therefore be able to contribute £10,000 a year into a pension with tax relief, rather than the current maximum of £40,000.

2. The Summer Budget confirmed a policy first launched in the 2014 Autumn Statement regarding the taxation of pensions upon death. As announced last December, the Government will reduce the 45% tax rate that applies on lump sums paid from the pension of someone who dies aged 75 and over to the marginal rate of the recipient from 2016-17.

3. A reduction in the Lifetime Allowance (LTA) for pension contributions was also confirmed. The government will reduce the Lifetime Allowance for pension contributions from £1.25 million to £1 million from 6 April 2016. Transitional protection for pension rights already over £1 million will be introduced alongside this reduction to ensure the change is not retrospective. The Lifetime Allowance will be indexed annually in line with inflation (according to the consumer price index) from 6 April 2018. ​

How the Lifetime Allowance has changed since A-day in 2006

Source: HMRC, AJ Bell

4. Following consultation, the Government has decided to delay giving pension holders a chance to sell their annuities for cash until 2017. Further details will become available this autumn, as the Government wishes to ensure there is a robust package to support consumers in making their decision.

5. On a related theme, the Government is extending access to the Pension Wise service to those aged 50 and above, and launching a new comprehensive nationwide marketing campaign. The aim is to make sure more people can access high-quality, impartial guidance before they decide how to use the new pension freedoms.

However, the biggest changes may be yet to come. Mr Osborne also announced the publication of a green paper and a consultation on wider pensions reform, with a plan to promote greater savings. In his speech, the Chancellor suggested pensions could be treated like ISAs, whereby taxed money goes in and there is no tax on the way out. The consultation will end on 30 September and if you are feeling particularly keen, you can read the paper here:

• ISAs. While pensions may draw most of the attention, the Government stuck to its commitment to making ISAs more flexible. The March Budget 2015 announced changes to the ISA rules will allow you to withdraw and replace money from your cash ISA intra-year without this replacement counting towards you annual ISA subscription limit. This policy will also cover cash held in stocks and shares ISAs. These changes will come into force from 6 April 2016.
• Investments. Portfolio builders who are seeking income need to be aware of one particular change announced by the Summer Budget. The Government will abolish the Dividend Tax Credit from April 2016 and introduce a new Dividend Tax Allowance of £5,000 a year. The new rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

The markets

There can be little doubt that Chancellor Osborne wanted to portray his package of Summer Budget as pro-business, with the cut in corporation tax from 20% now to 19% in 2017 and 18% by 2020 the key headline here. Those changes will mean the UK has one of the lowest corporate tax rates in the world, some way below the EU average of 22.2% and the global average of 23.7% (according to KPMG). Only Switzerland, Singapore and Ireland come in lower among developed nations, at 17.9%, 17% and 12.5% respectively.

UK corporate tax rate will fall further below current EU and global averages by 2020

Source: KPMG Research

However, some of the immediate financial benefits of lower tax will be offset by a planned 25% increase in the minimum wage (seemingly rechristened the ‘Living Wage’) by 2020 to £9 an hour.

Overall, the FTSE 100 ended the Chancellor's 69-minute speech 1% higher on the day, roughly where it was when Mr Osborne stood up to speak. The index followed up with further gains on the Thursday, helped by hopes for a Greek debt deal and a stabilisation in China's stock market slump.

On a company-by-company basis, a number of new Budget initiatives saw the market select a clear number of potential winners and losers. After some dramatic share price shifts, investors now need to decide whether any good news is priced in and they can still chase the rises on Budget day, and whether some sharp share price falls reflect all the bad news, creating potential buying opportunities.

Potential beneficiaries and share price gainers on the day included:

• Global banks. Mr Osborne’s move to cut the bank levy from a 0.21% charge on risky assets over the next six years should cut the tax bill of the UK’s five largest quoted banks. From 1 January 2016 a new 8% profits surcharge will apply instead of the levy relating to worldwide assets, a shift which may be designed to head off any threats to move banking headquarters overseas. HSBC, for example, is expected to receive a $1.6 billion tax bill related to its global assets in 2015 so may well be better off.

Major banks reacted positively to tapering of the bank levy

Source: Thomson Reuters Datastream

• Supermarkets. Plans to enable councils to loosen Sunday trading hours gave a rare lift to the major grocers. Shares in Tesco, Morrisons and Sainsbury’s all rose, as analysts took the view that allowing bigger shops to open longer hours on Sunday could potentially damage independents but help the better-resourced, more heavily-staffed supermarkets.

Analysts suggest major supermarkets may benefit from longer Sunday trading

Source: Thomson Reuters Datastream

• Roads. Infrastructure was another key element of the budget. Reforms in the Vehicle Excise Duty regime are due to come into force from 2017 onwards and the cash will be allocated to a dedicated Roads Fund from 2020. In theory this ring-fenced resource of around £15 billion over 10 years could create a greater level of visibility for civil contractors operating in the road-building and maintenance space, although the share prices of firms such as Kier, crash barrier maker Hill and Smith and Breedon Aggregates proved indifferent on the day.
• Defence stocks. A pledge to meet NATO's target of spending at least 2% of GDP on defence was welcomed by defence stocks. Chancellor Osborne said military spending would rise by 0.5% above inflation for each year until 2020-21. BAE Systems welcomed this news with a sharp rise, although the response at support services plays like Babcock and other equipment providers like Meggitt and Chemring was more muted.

BAE Systems welcomed the Chancellor’s defence spending pledge

Source: Thomson Reuters Datastream

Not everyone will be happy with the Summer Budget, as there were some dramatic downside share price moves on the day.

• House builders, estate agents and domestic banks. Smaller lenders OneSavings, Virgin Money and Aldermore all tumbled, owing to both the bank profit surcharge and also moves to cool the buy-to-let property market. Mr Osborne tapered mortgage interest rate tax relief for buy-to-let landlords who are in the higher or additional tax bracket, citing a heated property market as a ‘risk to financial stability’. Estate agents, such as Foxtons, Countrywide, Martinco and Belvoir Lettings all slid on the news, as did house builders such as Berkeley, Barratt and Taylor Wimpey.

House builders wobbled after the Budget ....

Source: Thomson Reuters Datastream

.... as did domestic banks with heavy exposure to mortgage lending ....

Source: Thomson Reuters Datastream

.... and estate agents

Source: Thomson Reuters Datastream

• Renewables. The heaviest single faller on the day, share price-wise, was Drax. The Yorkshire firm's stated that the removal of the Climate Change Levy Exemption from renewable electricity would cost up to £30 million this year and £60 million next, against £229 million in comparable earnings in 2014. The shares fell 25% on the day, to reflect the potential earnings forecasts downgrades of 13% and 26% for this year and next.

Drax was a big share price loser on Summer Budget day

Source: Thomson Reuters Datastream

Russ Mould

AJ Bell Investment Director.