George Osborne sparked fury during the referendum campaign when he claimed a vote for Brexit would result in an emergency budget full of tax rises and spending cuts – and the fact the Chancellor hasn’t followed through on this threat has been seized upon by his critics. However, it’s too early to breathe a sigh of relief: Osborne has postponed a budget response to Brexit, rather than cancelling it altogether.
In fact, the Chancellor – or his successor in the job once a new Prime Minister appoints their own team – will now turn the Autumn Statement, traditionally an update on Government economic policy, into something more akin to a fully fledged budget. It could include all sorts of announcements that will have an immediate effect on people’s personal finances.
For now, it’s very difficult to predict exactly what those announcements might be. However, if the consensus forecasts from economists about the impact of Brexit are proved right, with the UK tipping into a recession, an autumn budget will need to reflect a previously unexpected deterioration in the public finances, as tax revenues slip and the cost of benefits increases. In which case, the Government will either have to borrow more, cut spending or raise taxes – or employ some combination of the three.
How bad might it get? Well, Osborne’s emergency budget warning was based on his claim that Brexit would lead to a £30bn black hole in the public finances. And while the Leave campaign rejected such numbers as “project fear” hyperbole, there is now likely to be a sizeable shortfall on previous projections; even if you’re someone who believes Brexit will be good for Britain economically over the longer term, it’s impossible to deny there will be a short-term impact from uncertainty and anxiety.
In which case, it’s worth reflecting on what it might take to plug a shortfall in the public finances, particularly if there’s action you can take ahead of time to protect yourself from the Chancellor’s decisions.
Osborne himself has suggested tax increases might include a 2p rise in the basic rate of income tax and a 3p addition to the higher rate. These would be difficult to avoid, but such hikes would also be politically difficult and the Government may seek to raise similar sums through different routes.
One obvious target is the £20bn a year currently being spent on tax relief for private pension contributions, which the Chancellor looked at raiding in March’s budget. “The government top up to our retirement savings could be an early casualty – the possibility of further curbs to pension tax relief has now increased,” warns Tom McPhail, head of pensions research at financial adviser Hargreaves Lansdown.
For this reason, if you’re in a position to increase your pension contributions now – particularly if you’re a higher-rate taxpayer, since they get the most generous tax relief and are therefore the most obvious targets – this is worth considering. “Investors would be well-advised to make the most of the available tax relief while they still can,” says McPhail.
More broadly, think about taking advantage of other tax reliefs ahead of time, where it is possible to do so. Savers and investors shouldn’t take financial decisions simply to net a tax saving, but if you’re considering putting money into schemes such as individual savings accounts, venture capital trusts or the enterprise investment scheme, don’t assume these will still be as generous in a few months’ time.
Another area where the Chancellor has hinted at action is inheritance tax – rates could rise by as much as 5p in the pound, Osborne suggested prior to the referendum. That makes it even more important to plan ahead for the potential cost of this tax. By arranging your family finances in the right way, you can perfectly legitimately reduce your heirs’ potential inheritance tax bill, so take advice on the best way to proceed sooner rather than later.
It’s also worth considering other elements of your household finances in order to mitigate potential setbacks elsewhere. In particular, mortgage experts suggest it might be wise to fix the cost of your mortgage in the coming weeks. This makes sense for two reasons: first, fixed-rate mortgages, already at bargain basement levels, are set to get cheaper as the money markets react to an increasing expectation that the Bank of England will cut interest rates to help the economy through the shock of Brexit; second, once interest rates do finally begin to rise, you’ll be protected from the increasing cost of borrowing.
All that said, don’t make decisions overnight and seek advice if you’re not sure about what to do. It’s important not to be panicked into hasty action – and there is now a breathing space before the budget is unveiled – so take your time and consider your current circumstances carefully.
