Transcript: UK Budget — what it means for your money

This is an audio transcript of the Money Clinic podcast episode: ‘UK Budget — what it means for your money’

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Claer Barrett
Ten billion pounds worth of personal tax cuts. But will it be enough to win an election? Even people who aren’t normally interested in Budgets were interested in this one. And with the latest measures favouring investors, parents and people of working age, there might well be something in it for you. 

Jeremy Hunt voice clip
The way we treat child benefit in the tax system is confusing and unfair. (Crowd cheering) Today I set out plans to end that unfairness. I also want to create opportunities for a new generation of retail investors to engage with public markets. I will reform the Isa system to encourage more people to invest in UK assets . . . We today put this country back on the path to lower taxes. (Crowd cheering) Growth up! Jobs up! Taxes down! 

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Claer Barrett
Welcome to a special Budget edition of Money Clinic, the weekly podcast from the Financial Times about personal finance and investing. I’m Claer Barrett, the FT’s consumer editor.

In this episode, we’ll be discussing some of the key measures the chancellor outlined in that clip — tax cuts, child benefit changes, and the great or not-so-great idea of a British Isa with our panel of expert guests. Joining me in the studio today are: Carl Emmerson, deputy director of the Institute for Fiscal Studies.

Carl Emmerson
Hello. 

Claer Barrett
Miranda Green, the FT’s deputy opinion editor. 

Miranda Green
Hello, Claer. 

Claer Barrett
And FT politics reporter Rafe Uddin. 

Rafe Uddin
Hi, Claer. 

Claer Barrett
Now let’s kick off by describing the Budget in a word. Miranda, what would you choose? 

Miranda Green
I think cautious, because Jeremy Hunt, you know, he’s got that strong school prefect energy, hasn’t he? And clearly, after the chaos of the last few years, the Johnson-Truss-era Budgets, I mean, there were so many Chancellors of the Exchequer that, actually several of them didn’t get to even deliver a Budget of their own. We’ve arrived at Jeremy Hunt who, for all the faults which I’m sure we will pick over, of this Budget, which might be the last before a general election, it was a sort of steady as she goes, and he was clearly trying to right some wrongs, which I’m sure we’ll discuss as well. 

Claer Barrett
Carl, what’s your Budget in a word? 

Carl Emmerson
I’ll go for unsurprising, for two reasons. Firstly, because actually quite a few of those measures — the national insurance cut, the non-doms change — we’d read about in the press before the Budget. And for the second reason that actually, if you look back at history, pre-election Budgets often contain modest tax cuts, and this was no exception to that rule. I guess the big question is what happens in the Budgets after the next general election where historically we’ve often seen tax rises. 

Claer Barrett
Mmm. And Rafe?

Rafe Uddin
I think a bit of a stalemate, both for the chancellor and also for the shadow chancellor. So we’ve got the chancellor who has very narrow headroom going into the Budget, the second lowest since 2010, so very modest changes. But what that also means is that after the election we’ll also have a potentially new chancellor who’s going to have to find ways of potentially cutting taxes or increasing spending, while also carrying a very, very narrow range of headroom into the coming years. 

Claer Barrett
OK, well, thanks all. Carl, let’s start by examining those tax cuts. Now, will that additional two-percentage-point cut to national insurance really mean most people will be better off? 

Carl Emmerson
It’s not that small a tax cut on its own — 2p off NICs when you put on top of the 2p we had in January means about £1,500 a year for those earning £50,000 a year or above. But it’s important to remember that the chancellor has been freezing pretty much every threshold in the personal tax system that you can think of. And when we get to April, what we think is that the bottom 40 per cent of earners, those earning below about 26,000 a year, they’ll be either no better off or worse off from the changes as a whole. When you take the middle 50 per cent of earners, those earning between about 26,000 and 60,000, yes, they will be better off from these changes. And the top 10 per cent? They’ll be no better off or worse off. Now, of course, that’s working-age earners. There are other groups who pay income tax who lose from the threshold freezes who don’t gain from the national insurance cut. And pensioners who are not in paid work are clearly one of those groups. 

Claer Barrett
Now, Miranda and Rafe, who would you say are the winners and losers from this Budget? 

Rafe Uddin
You know, I think the chancellor really wanted the Budget to end with headlines getting workers winning here. And to a certain extent, that’s sort of true. The national insurance cuts really do benefit those who are in work. But I think the quite significant change or positive change that come out of this budget is for working parents. And changing the child benefit thresholds, the change in the bandings around that, which we’ll discuss later, really deal with a bit of productivity rut for those individuals who are actually disincentivised to work beyond a certain point. 

Claer Barrett
Yeah. So that was one of the few surprises in the Budget. Miranda, but what do you think about it? The winners and losers? 

Miranda Green
Yeah. Well, absolute to pick up on this idea of pensioners not benefiting from the national insurance cut.

Claer Barrett
Quite radical for the conservatives.

Miranda Green
Yes. Absolutely so, which is very politically interesting. That group, particularly if they own their own home outright, have not really been hit by the higher interest rates, the mortgage crisis, the cost of living crisis in the same way. So, you know, in a sense, they haven’t suffered in terms of their budgeting in the way that perhaps working families have over the last few months. So it kind of makes sense in a fairness way, but I think it does draw attention again to the political electoral incoherence of the Tory party strategy to come up with a Budget which hits some of your own core voters. 

Claer Barrett
Well, all good points. Plus, if listeners want to hear more about this, then listen to last month’s episode, Tax cuts: will they or won’t they?, with Nigel Huddleston, the tax minister who made lots of comments about his desire to simplify the tax system, essentially get rid of more of these cliff edges. There is a link in today’s show notes.

One of the other things that surprised me about the Budget was the chancellor stating his desire to scrap national insurance completely in the future. Carl, can you explain to listeners why he might want to do this? 

Carl Emmerson
Well, I think the attraction of cutting national insurance is clear. It puts more money in the pockets of people in paid work. It can boost growth. It will lead to more people being in work more hours. The attraction is there. But even if Mr Hunt manages to get rid of employees’ national insurance, there’d be two questions there. Firstly, you’re going to have to find over £40bn a year to pay for that. That would be a huge tax cut. So what spending are you gonna cut to pay for it? And actually I don’t think they’re gonna manage to do that. But even if they did, secondly, well, what about employers’ national insurance, the other part of national insurance, which actually raises more money than employees’ national insurance. 

Claer Barrett
The tax on jobs. 

Carl Emmerson
So the chancellor didn’t speak about that. So I don’t think we’ll be seeing the abolition of national insurance any time soon, not even the abolition of employee national insurance. I think the public finances are just far too tight for that. 

Claer Barrett
I mean, I did wonder, was one of the reasons that he trailed the fact that national insurance was going to be cut, was that to give people a chance of understanding what national insurance really is and what it would mean to them? Because it is another form of income tax, essentially. But it’s not very well understood. 

Carl Emmerson
It’s not. There’s clearly a lot of people who still think that the amount of national insurance they pay will have some bearing on the benefits to which they might subsequently be entitled to. But that link is incredibly weak, and there’s no sense in which the National Insurance Fund is actually paying for the state pension and the NHS and other welfare benefits. All of tax revenues are just going into one big pot.

So in some sense, you know, it’s a tax on earnings. We don’t really need to have two taxes on earnings. We could merge income tax and national insurance. You could do that and still have a lower rate for pensioners if you wanted. it would be much more transparent. It would be a much better system. But of course, it would mean that those who are basic-rate income taxpayers in paid work will suddenly realise that their tax rate is not 20 per cent but is actually much higher. 

Claer Barrett
Yes, well, that’s a bit of smoke and mirrors for the chancellor to figure out.

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Well, Miranda, our FT colleague Henry Mance wrote a sketch of the political circus last week, describing Jeremy Hunt hilariously as the fiscal drag queen who came dressed as the shadow chancellor Rachel Reeves. Now he’s, of course, referring to this shameless appropriation of Labour’s tax-raising policies. Now tell us why this is significant. How is it gonna make life more difficult for Labour? 

Miranda Green
Well, it’s interesting actually, because he did, of course, raid some of the most well-rehearsed Labour revenue-raising plans. And it does clearly give Rachel Reeves a bit of a problem, because he’s now got to look around with her team and find some other ways to raise revenue. I mean, as Carl said, it is usual after general elections to see Budgets where taxes go up a bit. And she has been, over the weekend after the Budget, promising that there will be an instant injection of funding into the public services, which polling shows the public would like. So she’s got to find that money from somewhere. So it gives her a headache in that sense. And, you know, as Henry was writing, it was a kind of quite shameless raid on some Labour policy because he also extended the windfall tax on North Sea oil and gas.

The only promised revenue-raising measure that I think Rachel Reeves has got left is adding VAT to private school fees, which is, of course, something the Tory party would never touch with a barge pole. There are about 10 things, it’s rumoured, that the Labour party are looking at to potentially raise a bit more revenue. And it does give her a bit of a problem. But on the other hand, if the Tory party has already said that the non-dom regime is not fair, then actually there’s less political danger in Labour arguing to go even further with it, potentially, also on North Sea oil and gas, and also on things like helping working people more.

In a sense, if the Tory party adopts that sort of rhetoric around helping the middle earner, it makes it a bit easier for the Labour party to clobber the wealthy. There’s a sort of interesting ju-jitsu move that I think Rachel Reeves is trying over the weekend, which she pulled off pretty well. 

Claer Barrett
Now, we don’t know when the election will be. But do any of you have a hunch about what tax and personal finance policies Labour could potentially enshrine in its manifesto? 

Carl Emmerson
Well, as well as the VAT on private schools, we know Labour has been looking at the lifetime allowance on pensions, the amount of money you can accumulate in a pension, in a tax-advantaged way. They’re likely to bring that back. Jeremy Hunt got rid of it a year ago. And we also suspect they’re looking quite closely at how a small number of individuals in private equity firms are able to draw some of their income under what looks like potentially privileged tax terms. But these are all pretty modest tax rises. It’s gonna be hard for whoever’s chancellor after the general election. And I guess I would like to see the manifestos of those seeking office to be realistic about what’s affordable. 

Claer Barrett
Rafe, what’s your insight? 

Rafe Uddin
Well, I get the feeling that the manifesto is probably not going to make a sort of generous announcement around cutting taxes, and certainly not at the start of any term. I think Starmer, the leader of the Labour party, has said that the first two years are probably not going to involve actual tax cuts. So we might see a promise that after five years or after a term in office or two terms in office, we’ll have a goal of lowering taxes.

Rachel Reeves over the weekend made a number of, well, I guess what she was trying to do was get ahead of any claim that the party was going to put up taxes. But what she was also saying is that there are a number of difficult decisions that are coming her way. She’s going to have to manage issues around public spending and departmental spending in government and what we might see, it won’t be in the manifesto, but what we might see is a sort of national insurance increase, much like Rishi Sunak’s health and social care levy, and a sort of argument to increase taxes for a short period of time to boost investment in government departments or public services. But I don’t think that’s going to be in the manifesto. 

Miranda Green
I think it’s really significant that you’ve had two Budgets now, the Autumn and this one — Autumn Statement and this Budget — where the Labour party has accepted the conservative tax cuts. And clearly they do not want the electorate to think there’ll be a Labour tax bombshell, because of, that was the slogan that lost them the ’92 election, where they were also way out in front, in terms of opinion polling. So they don’t want any of that chat amongst people like us or about amongst the general public. And they, in Labour circles, are very worried about this idea of where do you get growth in the economy, because that’s where you really get some revenues coming in. They’ve been trying to talk about this sovereign wealth fund that they want to start. They also are very interested in trying to get the UK pension wealth invested into the UK economy. So I think you might get a lot more chat about that sort of policy. 

Claer Barrett
An area where both big parties are aligned.

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Let’s move on now to the chancellor’s stated aim that we heard at the top of the show of creating a new generation of investors, starting with plans for this new UK Isa. Rafe, fill us in. 

Rafe Uddin
So the chancellor has finally announced a flag-waving Isa for savers. Effectively, a consultation has been put out where they have floated a number of ideas. 

Claer Barrett
There’s no new product yet. It’s just an idea. 

Rafe Uddin
So what the UK Isa would involve is a £5,000 tax-free allowance to enable investment in UK equities. 

Claer Barrett
And that’s on top of the £20,000 you get currently. 

Rafe Uddin
And what we’ve not seen, however, is how the government is going to define a UK equity. And it’s actually quite a tricky part of making this work. It’s also one of the reasons providers were quite hostile to the idea. Lots of large FTSE 100 companies aren’t really operating in the UK. We’ve got Chilean mining companies that are listed on the FTSE 100. Does Antofagasta get included in the British Isa? Probably, because that’s the simplest way forward. But does it get things going in the UK economy? Probably not. Then you’ve got sort of investment trusts, let’s say Scottish mortgage trusts. Well, that screams UK-based, pre-independence in Scotland, but that’s also heavily invested in US equity. So do you exclude it? Probably not. But does it get things going in the UK economy? Again, probably not. 

Claer Barrett
Now Jeremy Hunt claimed that more than 200 city and corporate investors lobbied him for this change. Now it’s easy to see why they might want us to invest in their UK-based funds. But Rafe, it might take more than a tax break to make the UK equities market appeal to listeners at the moment. 

Rafe Uddin
There’s some good reasons or justifications for actually having a UK Isa. So I spoke to Baroness Altmann, who’s been spearheading the campaign, was the sort of leader of an open letter to government. 

Claer Barrett
Yeah, I mean, she’d quite like it if the entire Isa allowance was ringfenced towards UK companies, which is a bonkers idea. 

Rafe Uddin
Though I think her argument would be that it’s a tax-incentivised savings product. If the taxpayer is in some way subsidising or supporting these investments by providing relief, well, maybe it should be focused on UK equities. But one of the problems that the British Isa and lots of the enhancements in the chancellor’s budget won’t address is issues on the supply side, that there isn’t a lot of new growth stocks out there in the UK economy, and that can have an effect of discouraging investment in UK equities. If there aren’t the businesses there, then, well, where do you invest? Well, everyone tends to go for US equities instead. 

Claer Barrett
And they’ve shown much higher growth certainly over the past 10 years. And the past one year, absolutely blown the UK out of the water. I mean, Carl, have you got any thoughts about the idea of the UK Isa? 

Carl Emmerson
Well, I think I’m fairly sceptical that something like a British Isa is really going to make much of a difference here. I don’t think that’s the real thing that’s hugely constraining us, and I’m rather unconvinced that there’s a lot of people out there who have used up their 20,000 a year of Isa allowance and are really desperate to invest more in the UK economy, and this would really lead to them doing more investment than they would otherwise do. I think that’s very unlikely. 

Claer Barrett
Now let’s talk about NatWest briefly, Rafe. The chancellor also warmed up plans for a retail offer of part of the government’s remaining stake in the bank. That could happen this summer. What do listeners need to know about that? 

Rafe Uddin
So the government has a plan to dispose of a hefty chunk of its current holdings in NatWest, possibly by June this year. It’s already engaging with a number of brokerage platforms. It’s made them sign NDAs, which they’ve then apparently told people they’ve signed NDAs. So . . . 

Claer Barrett
(Laughter) So that’s a non-disclosure agreement for anyone who doesn’t know what it means. But how will this work? I mean, it has been likened to the Thatcher-era privatisations, such as British Gas. We’ve talked about the “Tell Sid” advertising campaign on the podcast before. But the feature of those kinds of privatisations where you couldn’t buy shares in those companies until that point — if you want to buy shares in NatWest now, put them in your Isa, you’re welcome — so you haven’t performed very well recently. And the other thing is the discounts. When they’ve done these big offers before, there’s been something in it for the little guy, the retail investor. But again, with the shares already trading on the London market, it’s hard to see how a discount wouldn’t devalue the shares that are out there right now. 

Rafe Uddin
It’s true. And I think the argument is that they’re going to have to list it at a discount. And given that these shares are already trading on the open market, what we might end up seeing is people aren’t going to hold on to these shares. They’re just going to quickly flip them for a small profit. And then it just enters the market. So it doesn’t really encourage investments in UK equities or even in NatWest. 

Claer Barrett
Well, both of those measures — NatWest and the UK ISAs — combined with plans to force pension funds to disclose what proportion of UK shares they hold, a rule designed to boost London’s flagging reputation as a financial centre, but briefly, do you think that this will have any effect? 

Carl Emmerson
I don’t see a lot of harm from asking pension funds to list what proportion of their investments are in UK shares, but I also don’t think there’ll be a huge amount of change as a result of it. So it’s just a transparent thing. I don’t think this is really gonna make too much difference. And the package of the whole here looks pretty marginal at best. 

Claer Barrett
Now finally, Rafe, the lifetime Isa. Lots of listeners were really disappointed that the property price cap remains frozen at £450,000, and that those withdrawal penalties remain. Given the struggles to get on the housing ladder, should the chancellor have listened? 

Rafe Uddin
So at the moment when you pull money from an Isa, you do suffer a small penalty. You lose some of the money you’ve put in yourself in order to withdraw. And because there are two quite narrow options for what you can do with cash invested in a lifetime Isa — you can either buy a home or hold it until you’re 60 for retirement — well, that means that some people will eventually need to withdraw funds and then they’ll lose a decent chunk alongside the government bonus that’s promised to them. And that can be quite discouraging. So there was an idea that he was going to deal with that penalty. He hasn’t dealt with that penalty. And so for lots of young savers, I think they might feel that they’ve been overlooked on this one. 

Claer Barrett
Also, not much in the Budget generally for first-time buyers, which are traditionally one of the voting blocks that politicians really want to appeal to, ahead of a general election. 

Miranda Green
I mean, the failure of the Conservative party over 14 years in office to enlarge the group of homeowners is one of their biggest political failures, as well as one of their social failures. I mean, I was talking to some Conservatives over the weekend who said, this is just an utter disaster. You know, you’ve driven down the group of voters you can automatically call. And also you’ve arguably put a whole generation off the very idea of capitalism and having a stake in the way that personal finances work over a lifetime. So I agree with you. I think that the absence of a coherent housing policy and then offers for people who are trying to get on the housing ladder, is a huge political problem for the Tory party right now. 

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Claer Barrett
Now, one of the few surprises on Budget day was that the chancellor will make it possible for around half a million mid-to-high earning families to claim child benefit. This was the only tax threshold he decided to thaw. Currently, parents earning £50,000-plus have their child benefit entitlement tapered away, and it vanishes completely by the point one of them earns £60,000. From April, not far away, the threshold will start at £60,000 and be tapered away more slowly, so families could still receive something if the highest-earning parent takes home up to £80,000.

Miranda, I’ve been contacted by lots of listeners over the weekend who are now thinking I probably could apply for child benefit, but when should I do it? And how? Miranda, you’ve got the lowdown from HMRC. 

Miranda Green
OK, so only one parent can apply for child benefit. And if one partner is not working, it should be that non-working parent, as they will then also receive national insurance credits towards their state pension. That’s really important. The fastest way to apply is use the HMRC app. But if you make a new claim or opt into payments before that date, before April 6th, there’s a risk you may attract a tax liability, so try to make sure you do it on April 6th or after. And you might need to complete a tax return in future to pay back any of this tapered benefit of the current rules. 

Claer Barrett
Between 60,000 and 80,000. 

Miranda Green
Exactly. So HMRC has promised to set up a system where full-time pay-as-you-earn workers could repay excess benefits via their tax code. But that is not coming yet. 

Claer Barrett
Carl, what are your views on child benefit? 

Carl Emmerson
Well, I think we do need to step back from this current, rather odd system we’re in and work out what we want from the system. Do we want to have a universal benefit typically paid to the mother? Do we want to just have a means-tested system, which can be more targeted at families who are poorer and go for one or the other? It would strike me, rather than this rather odd hybrid mix where we’ve got this universal benefit, apart from taking it away from households where it happens to be one adult earning over a certain amount. And the government has said in the Budget it’s going to try and do a better means test on child benefit and move towards having it based on joint family income.

But I suspect that will never happen. And the reason is I think firstly, administrative, I think it’s really hard for HMRC to work out the joint income of households. It needs to know the income of someone and their partner. Remember their partner might change during a year. It’s not that simple in some families’ cases. And secondly, politically, if you want to do this in a revenue-neutral way, well, yes, you might generate around half a million one-earner couples who will win and may thank you for it. But you’ll also generate about half a million two-earner couples who you suddenly start taking child benefit away from them that you don’t at the moment who will not thank you for it. So I suspect we won’t see this change that the chancellor talked about in the Budget. 

Claer Barrett
Now, this, along with the flagship reforms to funded childcare hours, have been criticised by campaigners for not making a meaningful difference to women who are on the lowest incomes, who are still priced out of childcare. 

Miranda Green
Yes. The combination of these two measures is quite interesting in terms of the impact that they might have over the coming year. And we’ll see quite quickly, I think, whether the childcare reforms are actually working, because a lot of it comes in April and some more in September. But I mean Carl’s right. The child benefit change is welcome because that cliff edge meant a lot of women on a kind of middle income were losing out on the child benefit. Very tough on single mothers, for example. 

Claer Barrett
And tough on families where one parent stays at home, looks after the children, one parent goes out to work. 

Miranda Green
Yeah, absolutely. So and of course, to your point on the childcare reforms, it’s very interesting this in terms of who benefits. All of the childcare reforms are aimed at families where the parents are in work, and it’s essentially a kind of supposed to be a productivity measure. Let’s face it, it’s, we will help you put your children with somebody else while you go out to work. It’s not really aimed at the children who arguably need early-years education and socialising and all of those things that are causing kids to turn up at reception classes age five without being able to cope with primary school. Because unless you’re in work, you don’t get help with the childcare.

So there’s a really strong argument, I think, that the opposition parties are working up that childcare is important, but it has to be high-quality early-years education, not warehousing kids so their mothers can go out to work. And I think that’s where the political argument will move to. And we’ll see also whether the package from the government actually delivers as it’s supposed to. I’m told that there are, for example, geographical pockets, places like the north-east where there just aren’t the places. 

Claer Barrett
Well said. But if you’re one of the half a million parents who could potentially benefit from this, it’s worth the faff of claiming, as child benefit rates will increase on April 6th. So for a family with two children who can claim the whole amount it could be worth over £2,200 a year.

Well, Carl, Miranda and Rafe. It’s been an absolute pleasure having you in the FT studio today. Thank you very much for sharing your Budget insights with Money Clinic listeners. 

Rafe Uddin
Thanks, Claer.

Miranda Green
Thank you,

Carl Emmerson
Thank you. 

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Claer Barrett
That’s it for Money Clinic with me, Claer Barrett this week. And we hope you like what you’ve heard. If you did, spread the word and leave us a review. We’re always looking to chat with people about their money issues for the show. So if you’re interested in being part of a future episode, then email us. Our address: money@ft.com. You could also take a peek at our website FT.com/money, grab a copy of the FT Weekend newspaper or follow me on Instagram. I’m @ClaerB

Money Clinic was produced in London by Tamara Kormornick and Persis Love. The sound design is by Breen Turner and our editor is Manuela Saragosa. You heard original tunes this week by Metaphor Music, and Cheryl Brumley is the FT’s global head of audio.

And finally, our usual disclaimer. The Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s all the small print for now. See you back here next week. Goodbye.