We explore prime minister Boris Johnson's tax and spending plans and their likely impact on your wallet.
If painful experience has taught us to take politicians’ pre-election promises with a pinch of salt, what do we make of the pledges made by party leadership candidates, which aren’t even recorded for posterity in a manifesto we can scrutinise later on? Bear that thought in mind this autumn as you ponder what impact prime minister Boris Johnson might have on your finances.
On the campaign trail, Johnson certainly made various commitments. Before we get to those, however, there are at least two scenarios in which all bets are off.
First, the new prime minister’s parliamentary majority is wafer-thin – just one at the time of writing – and he may yet need to call a snap election. In which case, all previous promises will give way to the Conservative Party’s manifesto.
Second, there’s the dreaded B word. Johnson says he can negotiate a new deal with the European Union on the UK’s withdrawal, but is preparing for a no-deal Brexit too; this would put paid to most policy pledges. It’s also possible the Bank of England would choose to cut interest rates to support the economy – as it did following the Brexit vote in 2016 – which would have an immediate impact.
Still, let’s give the new prime minister the benefit of the doubt. Assuming there’s no election – and that Brexit negotiations go well – political analysts speculate there will be a budget from the new government early in October. That would be Johnson’s opportunity to deliver on what he said when standing for the Conservative Party leadership early in the summer. So what did he say?
Tax and national insurance
Johnson wants to raise the income threshold at which people start paying 40% tax, from £50,000 to £80,000. He also wants to raise the level at which national insurance contributions become payable to £12,500, from around £8,600 today.
This sounds like unmitigated good news – around 3.4 million people stand to gain from the income tax change while 2.4 million people would be better off thanks to the national insurance threshold increase. But will Sajid Javid, the new chancellor, have the cash to carry out Johnson’s wishes? The Institute for Fiscal Studies (IFS) puts the combined cost of the two measures at £20 billion. They’re certainly not going to be delivered overnight.
There’s also a catch. Johnson thinks one way of funding the changes, at least partially, would be higher national insurance contributions for the wealthy. Currently, you only pay national insurance at 2% above the “upper earnings limit” – around £50,000 – rather than the full 12%. The prime minister is talking about raising this upper earnings limit, probably to the new £80,000 higher-rate tax threshold. So with an income between £50,000 and £80,000 you’d then go from paying 42% in combined income tax and national insurance to 32%, rather than 22% as you might imagine.
“Most of the gain [from a higher income tax threshold] goes to those in the top 10% of the income distribution, who would gain an average of nearly £2,500 a year,” says the IFS’s Tom Waters. “The biggest gainers will actually be high-income pensioners, as they won’t be affected by the accompanying increase in the national insurance ceiling.”
We should beware the “continuing creep of the nanny state”, Johnson said on the campaign trail, singling out interventionist ‘sin taxes’ imposed by his predecessors on sugary foods to tackle UK’s obesity crisis.
If you’re a fan of fizzy drinks, don’t expect him to roll back the 8p extra cost of those with more than 5g of sugar per 100ml. But you might now escape the so-called “milkshake tax”, under which the government intended to impose similar rules on a wider range of soft drinks.
One other thought on spending. The decline in the value of the pound since Johnson’s victory means higher inflation as the cost of imported goods rises. That’s a hit on people’s disposable incomes – and not just holidaymakers.
Stamp duty and housing
As far as stamp duty goes, Johnson wants to abolish the tax on transactions worth less than £500,000 – well above today’s ceiling of £250,000 for most people. He has also talked about reforming the stamp duty system further up the housing ladder, with scope for further savings here if the rates, which hit 12% on transactions worth more than £1.5 million, are reduced.
Still, this is another one of those ideas that may prove unaffordable in the short term. The IFS says it would cost £3.8 billion just to move the threshold to £500,000. Moreover, Tom Selby of broker AJ Bell warns: “There is a big risk that stimulating demand in the market without growth in property supply will simply fuel house price inflation.”
NHS doctors struggling with the income thresholds and savings allowances on pension contributions have reason to be hopeful. Johnson expressed his sympathy for doctors during the campaign, promising to do something about a tax system that penalises some of them for taking on extra work with higher pension charges. The government now proposes to allow doctors to reduce their pension contributions to zero in certain circumstances, negating higher tax charges on pensions accruing as they earn more. He has also announced a review which could lead to further changes.
With unions blaming the system for exacerbating the shortage of doctors in the NHS, there is political cover for Johnson to be bold. He may take the opportunity to reconsider the complicated patchwork quilt of pension allowances, which are poorly understood and widely disliked. That could mean, for example, an end to the tapered annual allowance.
Simplification would be welcome, says Philippa Gee of Philippa Gee Wealth Management. “I would hope that the limits on how much can be held in pensions be addressed,” she says. But don’t expect change to benefit everyone. While Johnson will want to be seen to ease the pressures on doctors, he will also be conscious of the fiscal impact. Some analysts believe dumping higher-rate pension tax relief could be an easy fix for a government looking to raise finance for other areas – particularly if it can be sold as a simplification measure.
In the run up to the leadership ballot, Johnson expressed a desire to be the PM who finally tackles the UK’s care crisis. Detail is sorely lacking, but aides have signalled his support for the proposals made by Andrew Dilnot in a government review eight years ago. He argued for allowing people to keep more of their wealth – up to a cap of £100,000 while still getting state support for care – and for capping the cost of bills over a lifetime.
Brexit: by any means necessary?
In the short term, Boris Johnson’s overriding focus to deliver Brexit by any means necessary will loom over financial markets and investor sentiment.
“The market impact will see UK investors’ overseas holdings, particularly in global and US equity funds, flattered in sterling terms, and continued caution towards UK assets from overseas investors,” argues Jason Hollands, managing director of Tilney Investments. “We are likely to see relative outperformance by UK large caps with high overseas earnings compared to more domestically focused mid-cap stocks; the currency impact could also boost sterling-denominated dividend payouts from the FTSE 100.”
Should you change your portfolio accordingly? “Nervous investors might be tempted to shift further out of UK funds into global ones,” says Hollands. “Alternatively, investors might consider the case for taking some of the profits from holdings in US and global equity funds and topping up UK equities while sterling is weak and the UK market is at such a deep discount.”
- Principle and profit: Explore our new ethical portfolio