Budget Commentary

Thanks principally to higher than expected tax receipts, the Chancellor has been able to announce something of a giveaway budget, spending all of the additional income and delaying moves to eliminate the budget deficit further into the future, if ever. Nonetheless, the deficit has been reduced substantially during the course of this decade, this being the result of austerity together with modest economic growth. What has not shrunk, of course, is the total government debt which continues to steadily increase but for the moment, low interest rates keep the annual cost of this burden at a relatively controllable level.

Among areas to benefit from additional spending are, in particular, the NHS while there is extra money for defence and a number of other areas while for some, austerity will continue. What is also clear is that in the event of a ‘no deal Brexit’, the budget will almost certainly have to be heavily revised next Spring and to this extent, therefore, the 2018 budget is the first ‘conditional’ one that we can recall.

On specifics, and subject to the no deal Brexit caveat, aspects of the budget that may be of interest to you are as follows:

Individual Savings Accounts

Unsurprisingly, the annual allowance of £20,000 for both Cash and Stocks and Shares ISAs remains unchanged. The annual subscription limit for Junior ISAs and indeed for Child Trust Funds for 2019/20 will be increased in line with CPI to £4,368.


The VAT rate is set to remain unchanged at 20% for the next fiscal year.

The VAT threshold for small business, currently £85,000, will remain unchanged for a further two years. There had been speculation that this was set to be reduced to a figure more in line with international averages but for the moment that is off the agenda.

Income Tax

A significant part of the ‘giveaway’ element of the budget relates to income tax. While there is no change in the tax rates, the personal allowance will increase to £12,500 on 6th April 2019, earlier than originally planned. The allowance will then remain the same for the following tax year and thereafter it will increase in line with the Consumer Price Index.

The threshold above which higher earners start paying 40% tax is being increased to £50,000 in 2019/20, a year earlier than planned. That higher threshold will remain the same for 2020/21. An increase in National Insurance will however have the effect of reducing the overall tax saving in respect of this particular band of income from 20% to 10%, so the giveaway is not as great as at first sight appears to be the case.

The Dividend and Personal Savings allowances remain unchanged: the case for holding savings within ISAs, free of all income tax and indeed gains tax, clearly remains in place.

Inheritance Tax

The nil rate band disappointingly remains at £325,000, a figure that has not been increased for many years. As forecast however, the residence nil rate band rises to £150,000 from April 2019 which is helpful to owners of relatively valuable houses planning to leave legacies to direct descendants.

Capital Gains Tax

The annual exemption increases from £11,700 to £12,000 (£6,000 for Trusts) from next April, the lifetime limit for entrepreneur’s relief remains at £10 million while the rates at which CGT are charged (basic rate 10%, higher rate 20%) remain unchanged, with figures of 18% and 28% respectively where such gains result from the sale of buy to let properties.

Premium Bonds

The maximum individual investment remains at £50,000 and the current rate used to calculate the prize fund is 1.4%. On the NSI website it states that the odds of each £1 unit winning a prize are 24,500 to 1 each month at present.


The annual allowance continues to be capped at £40,000 (or less if one’s income is below that figure) while the taper remains in place for high earners. Given that the chancellor has previously stated that pension tax relief is ‘eye wateringly expensive’ we are frankly surprised that this figure remains unchanged: wherever possible, we recommend using the annual allowance to its full extent.

Those with low earnings can continue to contribute £2,880 per annum which is then topped up within the pension fund by the addition of basic rate income tax relief.

From next April, the Lifetime Allowance increases in line with inflation, as promised, to £1.055 million.

Business Taxes

Corporation tax remains at 19% during 2019/20.

A number of detailed changes were made to the regime for companies ranging from an increase in the Investment Allowance to measures to ease the burden of rates on small retailers.


The Budget contains surprises, including the changes to personal allowances and the lack of any curtailment on pension contributions. Beneficial treatment for the NHS in particular was flagged well in advance by the Prime Minister and is most fortunately financed for the moment by higher than anticipated revenues. In our view, however the real question hanging over the budget is whether it will survive the Brexit process: frankly, only time will tell.

Brief Observations on the Investment Outlook

Up until the beginning of October, global equity markets had edged this year, led in particular by the USA with performance being dragged back by emerging markets. The UK market had made a little headway, buoyed by generally increasing dividend payments.

The month of October was, however, difficult as problems facing the global economy came to the forefront of investor’s minds. Consequently, many equity markets are now either little changed or down on the year as a whole. The fixed interest sector has moved a little lower as the trend towards higher interest rates, led by the USA, has slowly gained ground, making it header for fixed interest managers to add value.

We are encouraged to note that as October drew to a close, equity markets showed signs of stabilising. In our view, at current lower levels better value is emerging across many areas of the market, for investors with appetite for high risk, emerging markets present long term opportunity while for medium risk investors more developed markets elsewhere now look much cheaper given that in many cases company earnings remain encouraging. Worries clearly include a range of geo political tensions, not helped by a deteriorating relationship, in trading terms at least, between the USA and China, leading to slowing growth in the emerging world. This clearly remains a concern but since our Summer Newsletter, the sometimes hostile language between the two appears to have eased somewhat.

At home, Brexit continues to dominate the political and economic agenda. With just a few months to go, we cannot say with any certainty whether or not any form of withdrawal of agreement will be secured while untangling the UK’s deeply complex trading agreements with the EU will take years to complete, as will trading agreements with the rest of the world. Perhaps at the time of our next Newsletter, Winter 2019, when we seek to assess the outlook for the year ahead, Brexit related matters will be a little clearer!

We do hope that readers find our occasional newsletters to be helpful: feedback, perhaps including suggestions relating to investment areas that investors find to be of particular interest, is always welcome.