Guidance

Budget 2021: a GAD technical bulletin

Published 5 March 2021

Introduction

The Chancellor of the Exchequer presented his Budget 2021 to Parliament on 3 March, centred around 3 key themes:

1. protecting the jobs and livelihoods of the British people
2. strengthening the public finances
3. an investment-led recovery

This bulletin focuses on areas in which GAD advises, including reforms relating to investment, insurance and pensions.

Building back better

Whereas Budget 2020 (see GAD Technical Bulletin) was dominated by the government’s initial response to the COVID-19 pandemic, this year’s Budget places a greater emphasis on the UK’s recovery from the crisis.

Published alongside the Budget, ‘Build Back Better: our plan for growth’ sets out the government’s plans to support economic growth through significant investment in infrastructure, skills and innovation. The government wants to support access to finance to help unleash innovation, including reforms to address disincentives for pension funds to invest in high-growth companies.

UK Infrastructure Bank - To facilitate private sector investment in infrastructure, a new UK Infrastructure Bank will be established in spring 2021. The bank will provide financing and advisory support to local authority and private sector infrastructure projects to help meet government objectives on climate change and regional economic growth. It will be able to deploy £12 billion of equity and debt capital and able to issue up to £10 billion of guarantees.

Local economic growth - The UK government has also launched 3 new investment programmes, creating a more decentralised approach to supporting local economic growth. The Levelling Up Fund (£4.8 billion), UK Community Renewal Fund (£220 million) and the Community Ownership Fund (£150 million) are intended to create well-paid jobs, revitalise places, and develop hubs of innovation in every part of the UK.

Environmental objectives - The Monetary Policy Committee (MPC) of the Bank of England has operational independence to set monetary policy, subject to a remit set annually by the Chancellor. Budget 2021 updates the MPC’s remit to reflect the government’s economic strategy for achieving strong, sustainable and balanced growth that is also environmentally sustainable and consistent with the transition to a net zero economy. The MPC’s inflation target remains unchanged: 2% as measured by the 12-month increase in the Consumer Prices Index (CPI).

Further ‘green’ measures were announced in relation to both government borrowing and retail savings:

Green gilts - The government will issue its inaugural ‘green gilt’ this summer, with a further issuance to follow later in 2021. Government borrowing raised in this way will be spent to help meet the government’s green objectives. A framework will be published in June, providing further details. The government has also committed to reporting how this spending contributes towards social benefits. With a minimum of £15 billion of green gilts to be issued in 2021 to 2022, the UK is looking to build out a ‘green curve’. This is a yield curve, specifically for green bonds, showing the yield of the bond against its maturity.

Retail savings - Also launching this summer, National Savings & Investment will offer a green retail savings product for consumers. This product will be closely linked to the green gilt framework and its associated reporting standards. It will give all UK savers the opportunity to take part in the collective effort to tackle climate change.

COVID-19 recovery schemes

A number of COVID-19 recovery schemes were expanded or extended, with confirmation that the Coronavirus Job Retention Scheme will continue until September 2021.

• A Mortgage Guarantee Scheme will be introduced for new mortgage applications from April 2021 to December 2022. The scheme is designed to increase the appetite of mortgage lenders for high loan-to-value lending to creditworthy customers. Lenders will be able to purchase a government guarantee that compensates them for a portion of their losses in the event of foreclosure.

• The government is also launching the new Recovery Loan Scheme for UK businesses. The scheme launches on 6 April and will be open until 31 December 2021, subject to review. This will provide lenders with a guarantee of 80% on eligible loans between £25,000 and £10 million.

GAD has supported government departments’ response to the pandemic. We helped to develop the Trade Credit Reinsurance scheme, which has maintained insurance coverage throughout the pandemic. At Budget 2021, the government committed to assess whether there is a case for further interventions beyond the current scheduled end date of 30 June 2021. GAD also advised on the Film and TV Production Restart Scheme. The Chancellor announced that this scheme will be extended for six months, running to 31 December 2021.

Tax allowances and thresholds

Decisions on tax allowances and thresholds are underpinned by the need to take a fair approach to rebuilding the public finances:

To help repair the public finances, corporation tax will increase to 25% from April 2023 on profits over £250,000. The rate for small profits under £50,000 will remain at 19%, with a taper operating in between. The government will review the 8% bank surcharge to ensure the UK banking sector remains competitive internationally.

The Chancellor announced that personal allowance and higher rate threshold for income tax will be uprated in line with CPI as planned in April 2021. They will then be maintained at that level until April 2026.

The Upper Earnings Limit and Upper Profits Limit for National Insurance Contributions (NICs) will also remain fixed for 5 years after the April 2021 increase. All other NICs thresholds will be considered and set at future fiscal events.

The Lifetime Allowance (LTA) is the maximum amount that someone can accrue in a registered pension scheme in a tax-efficient manner over their lifetime. Budget 2021 announced that the LTA will now be maintained at its existing level (£1,073,100) until April 2026.

A number of other savings tax thresholds remain unchanged for 2021 to 2022. The band of savings that is subject to the 0% starting tax rate remains at £5,000. The Individual Savings Account (ISA) annual subscription limit remains at £20,000.

Automatic enrolment charge cap

Finally, Budget 2021 announced a consultation will be issued shortly on the charge cap. The charge cap is the highest fee that can be levied on the default arrangement of certain employer pension schemes, principally those used for automatic enrolment.

In January 2021, the Department for Work and Pensions published the government’s response to a review of the default fund charge cap, deciding to leave the cap unchanged at 0.75%. The new consultation will consider whether certain costs within the charge cap affect pension schemes’ ability to invest in a broader range of assets. The government is keen to ensure pension schemes are not discouraged from such investments and are able to offer the highest possible returns for savers.

Next steps

If you would like to discuss any of the topics covered in this bulletin or to learn more about the potential impact of other Budget 2021 announcements, then please get in touch with your usual GAD contact.