A Summary Of The Autumn Statement

: Published on Wednesday, 30 November 2011

The problem George Osborne has is the Pandora’s box he has created by setting up the office of Budget Responsibility as an independent body to produce economic forecasts and to judge the progress of the government fiscal targets. The idea behind the OBR was sound, the Labour administration had made a complete cods of the country’s finances but were masters of spin and hence were able to persuade the electorate that all was well. The OBR would mean that such manipulation of figures could not happen again.

Barely a year later the OBR is doing it’s job, unfortunately what it is telling us isn’t what George Osborne was hoping for!

So George is in a fix. He desperately needs some Keynesian spending to get the economy moving again but he hasn’t got any money to do this otherwise his borrowing reduction plans (which to date mean borrowing increasing plans) will look even more tenuous than they do now and we shall see the 7% bond yields which have brought down Italy, Spain and Greece.

So in a nutshell he has:

Reduced the rise in fuel duties (costing £975 million in 2012-13),
committed the government to an increase in infrastructure spending (£760 million),
Provided additional funding for the Youth Contract (£365 million),
Extra small business rate relief (£210 million)
Capped the inflation linked rail fares (£105 million).

The infrastructure boost rises to £2.145 billion by 2014-15 however come 2015-16 there will be further spending cuts

These new measures are to be paid for by:

capping child and working tax credit (raising £1.24 billion in 2012-13),
changing the tax treatment of asset-backed pension contributions (£450 million),
cutting overseas aid (£380 million) a
Raising the bank levy (£280 million).

Whilst it sounds churlish, I for one have long wondered why when we cannot afford aircraft carriers and space programs we send money to India who do have the money for these niceties so reducing our foreign aid and perhaps recognising our own dire state a bit more does seem to make sense.

The “rabbit out of the hat” trick is the use of pension fund money to pay for significant capital projects, Mr Osborne states the Government has negotiated an agreement with two groups of British pension funds to unlock £20bn of private investment. One wonders just what promises he had to make to achieve that.

On a personal financial planning front the statement has macro and specific affects on clients.

Seed Enterprise Investment Scheme (SEIS)

This sounds great in principle, 50% tax relief up to £100,000 and you can roll over CGT as well. The devil as ever will be in the detail.

VCT Changes

Again the scrapping of the £1 million investment limit on venture capital trusts will improve the sector however we have extensive experience of VCT, EIS, AIM and off exchange start ups. As a general rule the returns on these investments has usually been an inverse correlation to the tax relief given so a VCT for instance with 40% tax relief (as in the BES days) would invariably drop by 40% in capital value. Yes some have done very well but unless you are a particularly “gung Ho” investor I can think of better ways to lose your money.

State Pension Age

The state pension age is rising at an every increasing rate. It is now set for age 67 by 2026. Frankly from a purely economic perspective this is long overdue. When the state pension age was first muted the life expectancy of recipients was around 5 to 7 years (if we are still allowed to point out the truth that women live longer than men!) Now its more like 20 years and the state cannot afford it. Nor can the state afford the government final salary pension plans but that is perhaps another story!

Annual CGT Allowance

Despite having promised to increase this by inflation each year its been frozen at £10,600.

ISAS

These will increase by CPI to £11,280 annual allowance.

Tax Bands

The basic tax band goes up from 7,475 to 8,105 WEF 6^th April 2012 However the level of income above which you pay 40% tax remains the same at £35,000 so every higher rate tax payer will have to pay an additional 40% tax on £630 of earnings. What the tax man giveth with the one hand he certainly removes with the other!

Pension Carry Forward Tax Rules

We are doing a huge amount of work with clients presently over the changes to the Lifetime Allowance. This affects far more people that one would at first imagine and requires action by the end of March 2012. As a continued effort to make pensions investment unfathomable HMRC have changes the rules again with regard to the Carry forward relief. Its an obscure change which revolved around having a carry forward system which doesn’t carry forward but the changes will benefit some individuals who wish to maker a final contribution before they cease all pension input post March 2012.

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