Budget response

Rosie Bullard, Partner and Portfolio Manager at James Hambro & Partners

Philip Hammond cracked some good jokes at the expense of his Labour counterparts but millions of self-employed and small business owners were probably not much in the mood for laughing afterwards.

This was not the first time a Chancellor has announced the last ever Spring Budget (Hammond reminded us that Norman Lamont once made a similar boast), and given its diminished status it was no surprise that much of it was spent rehashing old news, adding a little detail to previous announcements.

Perhaps the most surprising element was the news that self-employed workers would see their Class 4 National Insurance Contributions (NICs) rise by 1% to 10% in April 2018 with more rises planned thereafter.

Baroness Ros Altmann commented seconds afterwards – “Did we not pass a bill (that I took through the House of Lords) that promised no rise in tax and NI rates?”. This measure may meet some opposition from within once Conservative MPs absorb the consequences.

There are 5.5 million private sector businesses in the UK of which 99.3% are small businesses. Three-quarters of UK businesses do not employ anyone aside from the owner. A reform of National Insurance might seem fair to the Chancellor, but it’s likely to be viewed differently by rather a lot of others.

Similarly, the reduction in the tax-free dividend allowance from £5k to £2k in April 2018 represents a further attack on the practice of business owners paying themselves the bulk of their income through dividends to avoid having to pay NICs. Again, it might sound fair, but those many entrepreneurs who find themselves paying corporation tax, NICs for employees and income tax – traditional Conservative voters perhaps – may take a different view.

This may also affect those with dividend earning assets outside of tax wrappers like pensions and ISAs. It should be noted that the proposed increases to Personal Allowances (£11,500) and annual ISA limits (£20,000) will still go ahead in April and investors affected by the proposed dividend allowance reduction should take advice to make the most of their allowances ­– and those of any spouse.

Market response

From a market perspective, the pound hit a seven-week low against the USD just before the Budget, but rallied whilst Philip Hammond spoke. Perhaps the international community approves of some parts – particularly, I suspect, the comments on debt control. The plan is to reduce debt from the current 87% of GDP to sub-80% by 2022. Real wages will continue to rise, adding to inflationary pressures and leading to a rate rise sooner rather than expected perhaps, which is positive for sterling.  The FTSE All-Share also rallied in the immediate aftermath of the announcements, probably for similar reasons.

There was more confirmation on how the £23bn infrastructure budget will be spent, with some directed towards education and also to core infrastructure, including telecoms and roads. The latter is likely to have a direct beneficial impact on some of the companies we own.

As for the rest of the budget, the forecasts will bear closer scrutiny. Growth is expected to rise a little – to 2% this year – and then drop off. This is presumably an impact of Brexit (a word studiously avoided).

Returning to inflation – the figures might come as a shock to some people. Inflation is set to grow to 2.4% this year, exceeding the 2.2% NS&I bond holders will be able to receive soon on deposits of up to £3,000. The budget was a reminder of the need to protect client assets not just from volatile markets, but also the erosive effect of inflation.

Finally, what was not said – not a word was mentioned of fresh changes to how much investors can put into or hold in a pension. Hallelujah!

Rosie Bullard

Published 8 March 2017

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