What the budget means for personal finance

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The budget was expected.  The emergency meeting of the Monetary Policy Committee of the Bank of England, by definition, was not.  Both had meaningful implications for personal finance.

Interest rates were cut from 0.75% to 0.25% (and have since been cut again to 0.1%)

The initial cut sent interest rates back to where they were in 2016 before the BoE started trying to push them back upwards again.  According to the BoI, the initial decision was taken to “help to support business and consumer confidence at a difficult time, to bolster the cash flows of businesses and households, and to reduce the cost, and to improve the availability of finance”.  It subsequently doubled-down on its policy and cut interest rates again.

This means that anyone with a product (savings or loan) which tracks the base rate should see their finance charges going down per their bank’s standard schedule.  People looking to take out new products, especially fixed-rate products, such as some mortgages, should keep an eye on the market and be prepared to act quickly if they see lower-rate products become available.

Inflation is forecast to be 1.4% in 2020-2021 and 1.8% in 2021-2022

The inflation forecast is relatively benign, however, the word “forecast” is essentially an alternative term for “guess”, possibly an educated one, but a guess nevertheless.  With interest rates so low, Sterling could potentially weaken against other currencies, thus making imports more expensive.

Traditionally, this fact would be counterbalanced by the fact that exports would become more affordable and that inbound tourism would benefit as would domestic investment markets which benefit from international capital, for example, property.  At this point, however, it’s very unclear whether that would continue to hold true.  This means that higher inflation could be a reality (or interest rates will have to go back up to slow it down).  In short, therefore, most people should probably be taking a “watch-this-space” approach to inflation.

The National Insurance threshold goes up and the IR35 rule extends to the private sector

The threshold for paying National Insurance will go up from £8,632 per annum to £9,500 per annum.  This will take an estimated £500,000 people out of the National Insurance system.  While this has been billed as a move to help those on lower incomes, it may be a double-edged sword since National Insurance contributions may be a factor in determining eligibility for certain benefits including the state pension.

At the same time, the infamous IR35 rule will be extended from the public sector to the private sector.  In short, the IR35 rule is a way to determine whether or not a contractor is “genuine” or a “disguised employee” and hence how they should be taxed.  If a contractor is determined to be a disguised employee, they will effectively have to pay tax as though they were on PAYE but they will not receive the corresponding benefits.

For completeness, this was announced long before the budget, in fact, it has been in the pipeline for some time, but it comes into effect in April along with the NI change.

Changes to pensions and taxation

Both the old and new state pensions are going up by 3.9% and at the other end of the scale, there will be changes to the way high-earners are taxed so that pension relief only begins to be reduced when a person earns £200,000.  That means that it will only impact people earning at least £150,000 of actual salary as distinct from pensions contributions.

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