Richard Stone, Chief Executive of The Share Centre, one of the UK’s leading independent retail stockbrokers, on the Summer Budget 2015:
"The Share Centre welcomes the Chancellor’s observation that “Britain isn’t saving enough”. The Share Centre is committed to supporting personal investors as they seek to achieve their savings and investment goals and aspirations. We welcome the measures the Chancellor has set out to support personal investors.
Personal investors need to have the certainty that the tax system is not going to suddenly change, simplicity so they can understand the tax system and confidence in the underlying economic conditions. We believe the measures set out by the Chancellor meet all of those points.
Simplifying the dividend tax credit system by replacing it with a tax-free Dividend Allowance is welcome for investors with more modest portfolios as is the openness the Chancellor signalled to considering significant pension reforms. We believe the ISA should be the long term savings vehicle of choice for personal investors. Changes to the lifetime allowance and tax reliefs for higher-rate taxpayers’ pension contributions as well as increased pension flexibilities are already making pensions and ISAs more closely aligned. To continue to signal to personal investors that the Government believes the ISA should be the savings vehicle of choice will help give personal investors the clarity, simplicity and confidence they require.
In seeking to encourage personal investors to save more, the return to real wage growth is welcome and the stable economic outlook should help build investor confidence further. The Government’s stated aim to sell three quarters of its stake in RBS and the remaining stakes in Lloyds Banking Group and Royal Mail are to be welcomed and we would urge the Government to ensure the retail investor can participate, not just in Lloyds, but in all three processes.
Personal investors play a vital role in the UK economy and through their investments provide the capital on which UK business can thrive and grow. Although the tax increase on dividend income is unwelcome, in general we believe the budget is positive for personal investors, particularly those with modest portfolios, and we welcome the moves set out by the Chancellor and his support for personal investors. The acknowledgement of the need to save more is important, and we encourage the Government to continue doing all it can to provide investors with the clarity, simplicity and confidence which will enable them to do so."
Below we have set out our brief response to each of the key points that impact personal investors:
Dividend tax credit
The changes to the dividend tax credit system are to be welcomed for those with more modest portfolios. For basic rate taxpaying investors with modest portfolios this will make no difference to the tax they pay, it will simplify the system and in some cases – for example for higher-rate taxpayers with modest investment portfolios – personal investors will pay less tax. By way of example, with a FTSE 100 tracker fund currently yielding c.3.4% this would enable an investor to invest £147,000 and then receive the dividend income on that investment tax free.
However, for higher-rate tax payers, or those with more substantial portfolios this will be a potentially painful tax increase. The increase in the effective tax rate on dividends above the £5,000 allowance of 7.5% for each tax rate band will penalise investors with larger portfolios who are driving income from their savings. The government expects this measure to raise £6.8bn over the next 5 years which is a tax on those investors.
The Government had previously announced significant changes to pensions with increased freedoms introduced in April 2015. The Share Centre welcomed those reforms and believe that investors continue to be sensible in their use of those freedoms, seeking to use the monies they have saved to deliver a retirement income.
These changes have to be viewed alongside the significant increase in the ISA allowance (now £15,240), the introduction of workplace pensions, reductions to higher rate tax relief on pension contributions and changes to the state pension. In that context, we believe the Government was signalling a shift in policy towards the ISA environment being the savings environment of choice for individuals wishing to save additional sums for their and their family’s future.
We therefore welcome the proposed Green Paper consultation on pension tax relief and the explicit recognition that it may be desirable to move to a system like the ISA where contributions are made from taxed income but withdrawals are tax exempt. The ability to save £15,240 per annum from taxed income already makes the ISA a higher net worth product given the average annual salary in the UK of c.£26,000 per annum. A clear and simple to understand system where a single tax environment is identified as the suitable savings vehicle to encourage personal investors to save for their and their family’s future financial security would be welcomed.
We note the changes to the higher rate tax reliefs and limits on pension contributions. This puts further pressure on the desirability of saving into a pension product as compared to an ISA. We also note the Government’s comments regarding the transfer of pension accounts from one provider to another. As a net recipient of personal investors’ accounts, and with a flat rate charging structure which becomes increasingly compelling as the value of an account increases, we welcome any moves to make the process of transferring from one provider to another easier.
We note that the Summer Budget 2015 included relatively little in respect of ISAs. The Government reaffirmed its commitment to the Help to Buy ISA. We continue to argue that the ISA flexibilities announced in the April 2015 budget should be extended in full to Stocks & Shares ISAs and welcome the announcement that these flexibilities will apply to “cash held in Stocks & Shares ISAs” and look forward to further detail on how this will operate. (These flexibilities will allow investors to withdraw and replace monies within the same tax year within their ISA)
Buy-to-let interest payment tax relief
The restrictions on the tax relief that can be claimed as a result of mortgage interest payments on buy-to-let properties is welcomed. This relief has made buy-to-let a particularly attractive investment proposition. As such it has helped fuel the property market but also serves to make the return on other investment options look less attractive. This change should help level the playing field and encourage more investors to look to self-select stockmarket investment as an alternative.
The Bank levy was imposed to get the banks to contribute to the costs the state had incurred in supporting the sector following the financial crisis of 2008. It has though reached a level where it is causing pain and encouraging banks such as HSBC to consider relocating. Where the tax system ends up creating disincentives to business to be based in the UK or acts a as a push to drive them to other jurisdictions this is bad news for the UK economy both in terms of tax revenues and job creation. The Chancellor is right to address this now and the changes announced should further help support this sector return to more normal conditions. A strong and profitable banking sector lending to UK business and consumers is vital for the health and growth of the UK economy.
We welcome the statements in the Summer Budget 2015 Report (1.97 to 1.100) regarding the sale of the Government’s stakes in RBS, Lloyds Banking Group and Royal Mail. With regard to RBS we would encourage the Government to consider ways in which personal investors can be engaged to enable them to acquire a stake in the bank as it is returned to private ownership. We welcome the clear commitment to launching a sale of its Lloyds’ shares within the next 12 months open to retail investors, and we stand ready to play our part in enabling retail investors to participate in that offer. We would encourage the Government to adopt a similar approach for the sale of its remaining stake in Royal Mail following the significant retail investor interest that was shown in the original initial public offering (IPO).
In addition to gaining sales proceeds which contribute towards the reduction of the national debt, these sales processes help return these businesses into private ownership with retail investors able to play a significant role and benefit from the future growth and prosperity of those businesses.
We welcome the further reductions announced in corporation tax. This will help support business growth and investment returns to the benefit of the UK economy and investors in those businesses.
National Living Wage
The introduction of the National Living Wage is a welcome move – and the reduction in corporation tax and changes to National Insurance help offset the costs for business. For individuals on more modest incomes, savings and investment should be no less important. We encourage the Government to continue to support moves to improve financial education such that those with more modest resources still see the importance of saving and have an understanding of how to do so. Saving and investment should be an activity engaging everyone not just seen as the preserve of high net worth individuals.
The Office for Budget Responsibility’s forecasts for economic growth and the path of the deficit are pleasing with the UK forecast to maintain steady growth and return public finances to a surplus in 2019-20, just ahead of the next general election. This demonstrates the UK economy is returning to a sound footing and will enable the continued growth in real wages and living standards.
This growth in real wages will allow individuals to save more as their disposable income rises. In addition a sound economic backdrop allows businesses to invest and grow, creating jobs and delivering returns for investors.
The Chancellor clearly signalled a continuation of Government spending on major infrastructure projects – including through the creation of a new Roads Fund and announcements in the Summer Budget Report regarding plans to get the rail investment programme back onto a sustainable footing and a desire to drive improvements in Network Rail (Summer Budget Report 1.254). These measures should provide further support to those companies operating within the infrastructure sector.