Budget measures and stock market reaction

When the Chancellor rose to speak at 12.30pm today (16.03.16) the main UK stock market, FTSE 100, was broadly flat, having given up earlier small gains. Despite a few gyrations by individual shares – Tate & Lyle dropped 4.5% initially on the announcement of the sugar levy on the soft drinks industry, although it has since recovered somewhat – for most of the speech the market moved very little. Much of the economic forecasting and measures had been well trailed. However, towards the end of an hour long speech, on the announcement of an increase to the annual ISA allowance and the creation of a new lifetime ISA for the under 40s, the market did show some enthusiasm and rose about 0.5%, just before Osborne sat down.  

Sectoral leaders   
Financial institutions, life insurers and banks, appear to have been at the forefront of the charge, reacting positively to the ISA changes, of which more below, and possibly relief at there being no changes to the existing pension regime. The oil & gas sector, together with companies servicing this industry, were also gainers, with changes to taxation which included the effective abolition of petroleum revenue tax.

In terms of enterprise initiatives these were mainly aimed at small businesses; multi-nationals were under the cosh, as the Chancellor made it more difficult to divert taxable profit to low tax havens. Overall, the rate of Corporation tax was brought down further and is now due to fall to 17% by April 2020 (instead of the planned 18%) from the April 2016 level of 20%. On average this should increase the earnings of UK plc by 3.75% compared to the April 2016 tax year, ignoring the negative effect on tax planning by larger companies.

Economic impact?
The chancellor’s speech did not change our knowledge of the state of the world economy very much; he repeated his ‘cocktail of risks’ point. Essentially, financial markets were turbulent; monetary policy was not normalising and emerging market growth was slow. Productivity remained an issue in developed markets, and particularly so in the UK. Nothing new here. Despite all these difficulties, the UK and the US still seem to be creating jobs at a reasonable rate, however.

Main personal finance measures   
We summarise below the main measures effecting personal finance:

  • No changes to pension taxation – either in terms of the tax free lump sum amount or tax relief on pension contributions.
  • The annual ISA limit to be raised to £20,000 from April 2017 from £15,240 currently
  • A new Lifetime ISA for the under 40s from April 2017; up to £4,000 can be contributed, with the government topping it up by an additional 25%. The idea is that this can be used for building up a deposit for a house and/or saving for retirement. There will be no tax on withdrawal and the cash can be accessed at any time.
  • The headline rate of Capital Gains Tax is reduced from 28% to 20% (from 18% to 10% for basic rate tax payers), although neither reduction applies to gains on residential sales.
  • From 2018 Class 2 national insurance contributions are abolished for the self-employed.
  • Finally, in terms of income tax, the personal allowance will rise to £11,500 in April 2017 (from £11,000 in April 2016) and the amount at which the higher rate of tax is paid from £42,385 to £45,000.

David Liddell