Understanding the Autumn Budget: the economic, market and policy implications

Well, good morning, everybody, and welcome to this Royal London post-budget webinar. I'm Steven Hill, Head of Policy and External Affairs at Royal London. I appreciate that everybody's incredibly busy, not least after the events of yesterday. So thank you for giving us your time this morning and joining us for this session. We've got a lot to get through. We've got a great line-up of speakers.

The way the session is going to work is that I will introduce each speaker individually. They'll speak for roughly five minutes, definitely no more than that, and then we'll get onto some questions from your good selves. So please do pop your questions in the chat as we go along.

I've got to mention the learning objectives for this session because this will count towards your CPD.

So by the end of the session, you will hopefully have a better understanding, of the impact of the budget, both for your clients and consumers and also the economy more broadly. So without further ado, I'm going to hand over to, Trevor Greetham from Royal London Asset Management, Trevor Greetham‚ Head of Multi-Asset. And he's going to kick off, talking about the impact on the market.

Trevor.

Great. Well, thanks very much. I mean, the first thing to say is the market reaction yesterday was relatively muted and slightly positive in terms of lower gilt yields and a bit of a rise in the pound. But so much had been trailed ahead of the actual speech, including the entire details of the budget, that it's not surprising the markets didn't move that much.

I mean, a quick sort of summary would be it's fiscal tightening, but it's back end loaded in terms of the pain. And I think what the government appears to be trying to do is delay some of that tax rise in the hope that something turns up in the meantime, and in particular in the hope that growth turns up in the meantime.

It's a tricky macro context for the UK because growth has been weak. You've got high levels of interest rates and you've got sticky levels of inflation, which means that we're not seeing interest rates being cut by the Bank of England as fast as maybe people would like to see. And if you think about why we're in this situation, debt levels are high in all the major economies in the world at the moment.

But we've had a series of crises in the UK that have been particularly difficult. So if you cast your mind back, I'm going to go back a bit of a way here. We had the global financial crisis in 2008, where the UK financial sector was very much in the crosshairs. We've had that shrinkage in credit and finance sectors since then.

We had the Covid pandemic where the UK had, a deeper than average level of lockdown twice, and that also left a lot of debt behind. And of course, we left the European Union. And that has slowed growth down. And there's a variety of different estimates of how much it slowed it down. Very eye catching this week was one from the American National Bureau of Economic Research that was saying that GDP was 6 to 8% below where it would have been.

And that translates into tax revenues of £65 to £90 billion. So you've got all of that sort of context for what we saw. And on top of that, since the bond market crash in 2022, you've got high interest rates. So the cost of borrowing is now positive in real terms. And as far as the government's concerned, for every £10 that they spend on government spending, they've got to spend £1 of that on interest costs.

And that also makes a big difference. So what can you do about the situation if you're if your debt on some measures is approaching 100% of GDP? Well, there are only really four main things governments can do. They can cut spending. They can raise taxes. They can try to grow or they can resort to inflation. So touching on those just very briefly before I hand over to Melanie.

They can cut spending. That's politically difficult to do, as you know, especially when you've got public services under pressure and an ageing population. They can raise taxes, but they've really got to try to do it in a way that doesn't hurt the economy. They can try to grow. You can talk about growth, but growth can be a bit elusive.

So you've got changes in planning, changes in trade policy that may bear some fruit. And then it's always the last resort really inflation. But when I say you can try and inflate your way out of debt. Since the Covid pandemic, the level of prices in the UK is up 28% in the last five years, should have been up 10%.

So inflation could end up being part of the mix as well. What did we see yesterday? We actually saw spending going up. So that's moving in the wrong direction. We saw tax rises pencilled but for quite late in the Parliament. And the Senate could say there's a hope that maybe they get delayed again and it's in the next parliament.

And then we're just waiting for growth. So it's a bit of a mixed budget really, a bit of a spinning of the plates, hoping that something shows up.

Thank you Trevor. Melanie, can I pass to you, please? Melanie is, Senior Economist at Royal London Asset Management. The clue is in the title, she's going to give us an overview from an economic perspective.

Thank you. So look, in some ways this was this was kind of the budget that was expected. So, you know, we knew that she'd have a bit of a so-called fiscal black hole to make up for. There were a lot of, leaks and hints that she was going to try and increase the amount of fiscal headroom that she had before hitting her fiscal rules.

And she did that. And the other aspect of course, was that she was expected to achieve both of those things by increasing taxes substantially. And indeed, that's pretty much what we've got. So if you think about the taxes, the overall amount of tax hiking isn't that far out of line with what many economists were actually expecting going in.

And of course, as Trevor is mentioning, a lot of the detail was leaked. The taxes that were announced weren't particularly surprising in that sense. The size of the actual fiscal black hole that you had to fill was actually smaller than expected in the end. So for example, the higher level of wages, and partly that the inflation commitment, the higher wage level is actually somewhat helpful, for the fiscal finances.

And then in terms of the expanded headroom she had before hitting her fiscal targets, there was a very welcome increase in the size of the increase in that headroom was bigger than anticipated. So that aspect, very welcome. The other thing I thought perhaps was the pattern of things was a lot different to how maybe many were expecting a little different at least.
So she did add quite a significant amount of additional spending. So a lot of that in the shape of, welfare benefits, some out of her control, some within her control. And that means if you look at the overall fiscal profile, you've actually got an element of net stimulus, if you like, over the very near term.

And those tax hikes come, as Trevor mentioned, very late in the profile, so then that you get the tightening largely from sort of 2028-29. So very kind of back in profile for tightening. So in terms of the economic implications, if you like, and especially focusing on the next couple of years rather than, you know, as this point out further along where lots of things can change if you look at the next couple of years at least, there's not really a big implication directly from this budget.

It looks like for GDP growth on inflation, though. There were some helpful things. So we've had some action on energy bills, and we had the previously announced, rail fares freeze, for example. And of course, we got that perennial freeze in fuel duty. We kind of always know that's going to happen. But of course that was announced.

And all those things together mean that the OBR think we'll have inflation lowered by about 4 tenths next year. So when we thinking about the implications for the Bank of England, that a bit in particular is actually relatively helpful. I do think it keeps a December rate cuts in play, and certainly a rate cut by February.

But overall the point I wanted to make is this just wasn't quite as reassuring a budget as perhaps it could have been from a general kind of fiscal and fiscal sustainability perspective. So, as is pictured, the number of times now there was that tightening is really very backloaded. And things can change before we get to that point.

It's dependent on a lot of moving parts. There were a lot of elements to this budget, a lot of policy change. And even after increasing the amount of headroom that she has before hitting her fiscal rules the OBR are estimating that there's only a 59% chance that she actually hits those rules. It doesn't take much of a downgrade, particularly in something like nominal GDP growth forecasts. Before you really start eroding that headroom. Before you really start eroding that headroom.
 
Thank you Melanie. I was distracted because there's already questions coming through, which is fantastic. And do keep them coming, I know the temptation is to wait until people have finished speaking but please do put them in the, and we'll get to those, shortly. So next week we come to, Craig. Craig Inches and he's got, a wonderful job title, Head of Rates and Cash.

And you're good to talk about the gilt market response, to the budget.

Yeah. Thanks. So the gilt market, I think some of the other speakers have mentioned, you know, a lot of the information in the budget had already been leaked or already been what we see is a sniff tested with the market over the over the preceding weeks. So a lot of the volatility that we've seen in the gilt market was very much one about or a couple of questions. How credible was the Chancellor's plan? And would she be able to achieve the fiscal headroom or replacing the fiscal headroom.

And then secondly it was about what the debt management office's response would be. Once we actually saw the Chancellor sit down in terms of the guilt remit and how that would play out for the rest of the financial year. And the question is, why is that important? Well, the gilt market these days has got a very different, mix of investors that it has had in previous decades.

Go back in history, a large proportion that gilt market was, funded by pension funds in the UK, who were effectively buyers of longer dated UK government debt and index linked assets and that sort of huge demand for actively kept gilts, well, bids and effectively kept yields low and kept gilt markets reasonably stable versus their global peers.

Really since 2022, since Liz Truss and the deleveraging of pension funds and the rise of interest rates. We've seen gilt markets perhaps less supported by pension funds and more relying on overseas buyers. And if you now look at government bond yields in the UK, they trade at a significantly higher yield than many of our global peers.

So therefore we are very dependent on that fiscal credibility and effectively the response to the debt management office. So once the Chancellor sat down, what was the key takeaway? Well, the first point was, as Melanie said, you know, that fiscal headroom had been restored and had been restored to a reasonably high level. So that was a tick effectively for the gilt market in the short term, to say we have a bit of headroom and therefore we can survive with where bond yields are at the moment.

The next question was about that credibility. You know, that sort of spending in the short term, as Trevor said, versus backloaded tax cuts that would have actually caused a bit of concern for the gilt market because they would say, well look, what if we can achieve the growth that's been predicted by the OBR? And what if we therefore spend too much and can't actually raise that tax until later in the Parliament?

That may mean that the Chancellor may have to come back to the market and ask for more government borrowing in the short term, which would put upward pressure on bond yields. So therefore, what the debt management office did was effectively almost bailed the Chancellor out to effect. When she sat down, we saw the review of the remit and the additional gilt borrowing was about £4.5 billion of additional gilt borrowing from now and to the end of the financial year.

Why was it so low? Well, the debt management office had got themselves really ahead of plan this year and were almost about £20 to £25 billion ahead of schedule. So therefore we didn't need to see a huge rise in government borrowing. The additional response to that was that they actually have the benefit of cancelling gilt auctions between now and the end of the financial year.

So we've seen five gilt auctions cancelled, we've seen one syndication cancelled. And in addition to that, the debt management office made a really shrewd move to say what we'll do is we'll cancel more long dated issuance, and more index linked issuance and move that towards medium dated issuance. Why medium dated issuance? Because a lot of the demand is from overseas buyers and hedge fund space, who typically focus on that ten-year part of the curve.

So it's giving them a lot more flexibility between now and the year end. So the gilt market reaction to that was really well received. As Trevor says, we saw bond yields lower, but the area we saw them lower most was at the long end. So we saw long dated yields fall somewhere in the region of about 0.15%.

If you go back a few weeks ago, long dated government bond yields were trading at 5.75%. They're now back down to just over 5.2%. Our view really is that you'll see gilt yields continue to fall, over the next few months. And you see the long end of yield curves and index linked bonds perform particularly well between now and the end of the financial year.

And we should, barring any sort of, economic mishaps in terms of the data or more, political uncertainty, we should see gilts actually outperform the global peers as well.

Excellent. Thanks, Craig. So, we've had the market and sort of economic, overview and the speakers happily are keeping to time. So, that's excellent. We're now going to move more into the sort of policy and political space and hear from Jeremy Jenkins, Director of Policy at Royal London, who's going to talk about some of the key policy announcements that the Chancellor made yesterday that impact on our sector.

Thank you very much, Steven. Let me pick up on a couple of themes. But maybe just start with something, that was very apparent to all of us. So we had weeks and weeks of speculation, from some of it kind of well founded, you know, from think tank suggesting the chancellor should do this, that or other.

Some of it evidently in a briefed, or leaked from government and some of it just pure speculation, from journalists. And it was really hard to tell which was which in recent weeks. So that was really interesting. I mean, speculation is nothing new ahead of a budget. But the time we had speculate it was longer than normal.

And I think that was probably more sort of government backed rumours, if I call it that, than we've seen, in the past. And I think it was quite notable. I mean, even I think if the OBR hadn't inadvertently released the entire contents of the budget prior to the Chancellor standing up, it was quite evident the Deputy Speaker was planning to chastise the government for, some of that activity.

And I think it's important just to, to bring that into perspective. I mean, every government has been guilty of this. Every Chancellor has been guilty of this in recent years. But it did feel like that maybe there's a line being drawn in the sand there whereby, you know, hopefully we can get back to a place where essentially budgets are more about being shared with Parliament first and then, you know, debated accordingly rather than sort of shared with the public, piecemeal, ahead of every budget, which, of course, has led to a lot of people, getting worried about their own financial position and decisions that they should make.

And, you know, advisers will have seen, and been at the front end of a lot of that of course. So with a bit of luck, we do get some course correction for future budgets from that, and punctuated, of course, by the fact that the entire contents, as I say, about at least early, quite odd to watch, people on television, minutes before the Chancellor stands up, trying to furiously read through, all the detail.

Yesterday, I mean, a couple of themes to pick out from what was announced that I'm not going to exhaustively go through, all of what was announced. And there was a lot in it, but things that are most relevant to most people, pensions and ISAs. Let me just take the sort of themes around those that, that I would say we should kind of walk away with.

So on pensions, there is a basic premise by which we can automatically enrol everybody, that's stood for, you know, over ten years and it centres around, let's say it's the pensions are treated as deferred pay. They are treated with deferred taxation to income tax relief at your marginal rate upfront. And you pay that again. And retirement, whatever your marginal rate is then you get 25% tax free.

That didn't change despite the, the speculation. And for people in a workplace pension, of course, they get an employer contribution. That remains a very attractive proposition. What did change was the saving of National Insurance or what will change rather so, salary sacrifice, of course, will change from 2029. And I won't get into too much detail.

I know you maybe just mentioned that as well, Clare. It is important, though, just to hang on to that principle that National Insurance was never deferred. It was avoided, if you like, through salary sacrifice, because pensions don't pay National insurance. So it didn't quite fit within the deferred taxation equation, if you like. So the basic kind of premise of workplace pensions are right for everyone still stands.

Therefore, auto enrolment remains intact. And of course, there is a big agenda from government attached to pensions, which is about how do we get more investment, from people's pensions into helping areas of the economy grow. And that will continue. And it's quite a safeguard against, you know, major change that would cause us problems on us. Briefly.

Briefly, on ISA and it is linked, actually. So again, just to cover the changes, but more just think about ISAs in general. There is a move to, remove now, cancel or abolish as someone described the lifetime ISA. Which is interesting, there is a link there ten years or so ago that was introduced by a previous chancellor, who I'm pretty sure, did so on the basis that it's essentially a Trojan horse to displace all the upfront costs of tax relief on pensions and perhaps a lifetime ISA was away in doing that.

That didn't come to pass for various reasons. And now we're seeing, potentially a lifetime to disappear altogether, in favour of something else. But the move to restrict what goes into a cash is essentially geared not so much as a tax take, but as, a shift of the money into stocks and shares.

And within that, again, money into hopefully UK stocks and shares to help growth in the UK economy. So, the theme that we see here, on ISA is essentially not that different from the theme the government had already started on pensions.

Excellent. Thank you Jeremy. So last and certainly not least, we come to Clare Moffat. Clare is Head of Technical. And Clare, you're just going to unpack what some of this might mean for our advisers watching and indeed their clients as well.

That's right. So Jamie mentioned some of the things that haven't changed. And I think that's where I want to start, what hasn't changed. And we know that a lot of clients were asking about tax free cash. So that hasn't changed. Also gifting rules. So since we heard to the pensions were going to be part of inheritance tax, there's been a lot more interest and giving money now.

So not passing on that wealth on death and so there was different kind of chat before the budget maybe. You know, there'd be one kind of annual exemption, maybe there'd be a lifetime exemption. Things would be kind of tidied up a bit. That's not happened. So giving away money is still a good idea. We've certainly seen a lot more interest in things like normal expenditure out of income.

I think Jamie mentioned the Lifetime ISA and I'm not going to talk about that apart from see it's one if you've got clients who are gifting for grandchildren which is always popular paying until last time I so has been quite a good idea. So you know, that's one to kind of keep an eye on.

But as Jamie says, you know, there's there'll be a consultation. We'll see what happens next on that front. So sticking with the kind of inheritance tax idea, there was a paragraph in the budget document yesterday which was talking about, IHT and pensions and, you might have been aware the last kind of few weeks, we had a House of Lords select committee looking at, inheritance tax on pensions and asking a lot of questions.

And a lot of people from the industry were involved, financial services, but also the legal industry talking about some of the issues. Now, one of these things was about this fact that you could almost have a lot of money under the estate or not very much money under estate going to one person and the pensions going to someone else.

And actually the pension provider could just pay that money out and the person could almost choose not to pay inheritance tax, and it would be the responsibility of the personal representative. So that has changed. The personal representative is going to be able to ask the pension provider to hold 50% of the taxable benefits for up to 15 months.

So that hopefully kind of deals with some of those concerns. Once the personal representative has received clearance from HMRC, the personal representative will be released from liability on inheritance tax if any further pensions are identified. So, you know, this happens to quite a lot of people. It happens with assets under estates currently that something it's found years afterwards.

So again that was a bit of a concern from personal representatives and certainly and lawyers acting on behalf of them. We are going to get more draft legislation in the finance bill. We're still going to see a lot of draft regulations to come. But that was the sort of main changes and IHT but moving on, salary sacrifice, and this has been covered a little bit.

But what does this mean for clients. Well, from an employee point of view, you might have clients who will notice, you know, less going into their pension because they are above that £2,000 cap. But many people actually choose instead of getting more money into their pension to have more take home pay. So you might also have people who will notice after 2029 a difference in their take home pay.

I think if you've got hired or additional rate tax payers, and the employer says actually we're not going to run the salary sacrifice arrangement anymore and we don't know what will happen, we'll need to see how this plays out because salary sacrifice is still going to be available. It's just that cap on the first £2,000. But if it is taken away, what we'll see is higher in additional rate taxpayers will have to start claiming and they're hired an additional rate tax relief back if they are in a scheme that operates relief at source.

So that's a change because currently under salary exchange, it's a real benefit for your clients that they don't have to worry about claiming it back. Also, that money doesn't go into their pension. It's a reduction in their tax bill.

So that's kind of one of the things to think about. But income tax relief is still available. And I think we’ve seen in the press that there's been a lot of talk about salary sacrifice. I'm really keen still to, when I'm talking about this to consumers, to see you know, as we mentioned, like pensions still are really good.

And income tax relief is a real benefit for everyone, especially if you are, you know, getting it taxed up. Whether that's the high income child benefit tax charge, whether that's the 100,000 and the start of the personal loans tax tab, or if you have children and are over £100,000, that, you know, kind of a knife edge where you start losing childcare, and childcare hours.

So, you know, pensions are so good, so good for saving for retirement. From an employer point of view. Well, it's going to be a bit more of an admin pain. And I think it's good that we've got until 2029 to think about this. You're going to also have to be explaining how this is going to work to your employees.

From a financial point of view, some employers pass on all of the benefit of National Insurance to their employees. So maybe pass on 50% of this evening. So, they might not notice as much of a difference, but some employers actually use that National Insurance saving to pay for other employee benefits, so that that might feel a bit more of a hit for them.

So there's certainly different issues for employees and employers. If you're a business owner and an employer, you're going to be thinking about all of this. But there are also some other things I think was really useful to think about that happened yesterday. So we're going to see dividends increase by 2%. So if you remunerate yourself by taking a lot of dividends out of your company, that's going to be an increase tax bill that's happening from April 2026.

So that's something to be aware of. Again, it kind of makes pensions seem attractive because actually taking pensions out if you're a limited company they escape all of those tax walls. So that's a real benefit. One of the other things is called the mansion tax. I think it's high value council property tax charge, something like that, it's got lots of letters.

Now you might have clients who have very expensive properties over £2 million. This is coming in in 2028 - 2029. So from a kind of property point of view, you might have clients in general, who might be thinking about, well actually do I want to downsize? And certainly as people get older sometimes that that comes up as well.

The other thing that is more specific to, business owners is there's going to be this property income tax charge. It's going to be 22%, 42% and 47%. Many business owners I've spoken to over the years, will talk about, put a lot to put into my pension, but really, I like my money to be in bricks and water.

I know it mainly advisers have conversations with clients who would see the same, especially self-employed people as well. They would often think, well, I'll become a landlord, I'll have a bit of a property portfolio. So there is going to be this tax I am again, if you are a business owner, then that could mean that your tax bill is going to be higher.

So it might be worth thinking about. But what do I actually want? Does my business have a value on my going to sell on my business? Am I going to pass on my business? So it's thinking that about all of these different tax changes when they happen and what is going to be the best remuneration structure and whether a carrying on, for example, as well as having your main kind of business, also having some rental properties, for example, whether that is going to be a good idea or not.

So those sorts of main things that I was going to talk about from a client point of view.

Excellent. Thank you, Claire. And there's lots of questions coming through a number on salary sacrifice, actually. So we will, come to those. With apologies to my speakers, this is now the more interesting part of the session where we get to hear from you, and talk about the questions that have been coming in.

And I wish I got on my reading glasses. So apologies if I'm pulling some unflattering faces as I look at my laptop in front of me here, reading the questions. We're going to come back to Trevor and Melanie because we've had a question, around taxation and you mentioned, of course, that the tax rises have been back ended.

So they are going to come towards the end of this, Parliament. And so the question is, in view of the amount of money the government is planning, to take out of people's pockets, essentially. Do you agree with the OBR (the Office for Budget Responsibility), that the growth forecasts will fall flatter? And is there the potential that markets will become concerned when the lower growth becomes more evident?

Who wants to take that? I will.

I mean, so certainly I mean the profile of UK growth has been, you know, somewhat disappointing. For a little while. But I think the, the bigger thing for me, rather than the tax income threshold, is this reassessment of productivity feeding into that particular element of future disappointment. You know, they've downgraded the productivity growth forecasts by on average like three, 3/10.

So they have been expecting productivity growth of 1.1% a year on average, which is already not you know, especially strong and have now downgraded that that assessment further. I think that's one of the key concerns that a lot of economists have thinking about the sort of future growth potential of the UK. I think, you know, especially when you then add on top of that disappointing productivity growth picture, this sort of ageing, the ageing profile of the of the population too, is similar to many European economies.
And that just general question of, of where is the growth going to come from.

So just to add to that, this reminds me of the 1990s in a way, because remember, Robert Gordon, the US economist, used to say, you see computers everywhere, but not in the productivity statistics at the moment. It's AI, isn't it? So we keep hearing about how AI is going to be this productivity revolution. Maybe it's a very slow start and a slow burn, but the OBR’s downgrading productivity is rear-view mirror.

Yeah. And you know, the government, as I say, is maybe stronger than hoping they're expecting things will get better. Yeah, I guess I was just going to say from a markets perspective. So markets you know ultimately, you know that's where fixed income markets would potentially benefit from that. Ultimately in a lower growth environment, as unemployment rate ticks up, you'd expect to see interest rates decline.

And ultimately, yes, that could impact the return that you could receive on cash. But for longer dated fixed income instruments, as yields fall, you get that capital benefit. So particularly, you know, government bonds, corporate bonds could actually be a benefactor of, of a, declining interest rate environment.

We've got a question here, which I fear may have been asked more in hope than expectation. Does this budget mean no more tax rises in this Parliament, or will she (the Chancellor) come back again in March 2026? And how will markets take this? Now, I think there might be but I'm going to check this with Trevor.

There might be some positive news in terms of coming back in March 2026, because I think the Chancellor said yesterday there would only be one major fiscal step.

So I’ll pass to Melanie on the on the details of that, but I’ll come back afterwards.

Yeah. So what they have what they're going to legislate for is for the OBR to only assess the government's, you know, with the government going to meet their fiscal targets once a year. And the expectation built into that is that the government won't make policy changes unless there's a very significant, you know, economic circumstance change.

So yes, we should be in a situation where if we're going to get more tax rises, at least it will be the Autumn 2026, not Spring 2026. But come back to the point I was making, you know even the OBR are assessing that there's only a 59% probability that they're going to hit the fiscal, which means there's a pretty good chance that they are going to need to come back.
Maybe it's not next year, maybe the year after and ask us, come on.
We were doing the maths last night. We're trying to figure out, you know, when does the next election have to happen and when do these tax rises hit. And the way things look at the moment, the tax rises would hit just as you're running into the next general election campaign, which doesn't seem very logical. So either, you know, they may want to call things early if growth hasn't showed up, or they may want to do some kind of tweak or adjustment and make all the pain in the next parliament, which is what governments tend to do when they're doing fiscal adjustments late in an electoral cycle.

They push it over the boundary into the next parliament, so we could see more of this plate spinning. And I was doing the same as you. I was making use of that AI Trevor, and I was looking I was I was looking forward to say that on average wage growth, you know, how many, how many people, how many working people will be pulled into higher rate tax by the end of the forecast period?

It's about 27%. Yeah. And a decade ago that was only 8%. So you know, really big rise in terms of the tax take of working people as the as they move through that forecast period.

And just and just staying with, the economy before we move on, as I say, to, salary sacrifice. This one's for you, Craig. Somebody asked if you could comment on the Bank of England or whether the Bank of England, I think the question is will scale back it's QT quantitative tightening program. And what's the view of the gilt markets on this?

Yeah. So in terms of quantitative tightening they've already stepped back a bit. So we saw an announcement, you know, a month or so ago where they cancelled some long dated quantitative tightening. That's the operation where, they're selling back the bonds that they bought through, the low interest rate environment under quantitative easing, they sell them back to the market on a, on an active basis, i.e. reducing the amount of gilts that they own on their balance sheet.

You know, as, as we move forward, over the next few years, we'd expect to see that quantitative tightening become somewhat passive. So what they'll do is they'll effectively just let the bonds that are maturing just roll off their balance sheet. They won't be actively selling bonds back to the market. And one of the reasons for that is just that point I made.

Is that gilt yields are the highest within that G7 space at the moment. And to put further pressure on higher yields when there's Trevor says, you know, one tenth of your expenditure is on debt servicing costs, you don't really want to push yields up any higher. So the combination of reducing QT to a passive status and the debt management office in the UK saying, let's cut the amount of long dated issuance that we sell to the market, should in effect, help to keep yields more contained.

The only risk that you run, though, by shortening the maturity of your overall debt is you have what's called refinancing risk. So every so often you will actually have to refinance more of that short, dated debt. And what that actually does is actually it actually helps to keep the government in check, because ultimately you have to come back to the market much more frequently for a much higher proportion of your overall debt to refinance.
And therefore, it keeps you on the straight and narrow and makes sure that you are actually meeting these fiscal rules.

Great. Thank you. Well, as I, flagged, we're going to move on to, salary sacrifice now because we've had a number of questions on this and apologies because I think, Clare, you've answered this, but as it's quite a complex area, we'll just revisit this anyway for the benefit of everybody listening. So, salary sacrifice cap, will there be a two-tier system where higher rate taxpayers needed to do a tax return and contributions in excess of the £2,000 cap, or will it still be treated as a gross contribution without the 2% NI that they would have benefited from?

So there was mention in the budget documents about the fact that higher rate in additional rate tax measures might, make sort of changes ahead of salary sacrifice coming in. If they think they are going to have to claim it back. I think it depends how the employer operates it. So they might see we're still going to have salary sacrifice.

We will, working with our providers, we will make sure that the kind of cap has applied. Anyone over the cap is still able to salary sacrifice and for hiring additional rate taxpayers. That does give that benefit of not having to claim that back. If the employer says we're just not doing salary sacrifice anymore and they are, then no relief at source scheme.

So I think that, you know, that's really key. If it's a net pay scheme, you don't have to worry about it. It's relief at source schemes where you would have to claim back any, the extra 20 or 25% back. Different rates apply in Scotland. Then, you know, they might be it's a slightly different position. So, I think it's a bit of a wait and see what happens.

And we do have this time to see how it will all be implemented.

Thanks, Clare, and staying with you for a second, and I'll now come to Jamie because there's a question that's kind of more around the broader politics of this. But somebody asked, Will taxable pay be reduced by the pension contribution for people in, child benefit or £100,000 personal allowance tax drop, but just lose out on the and NI above 2000?
Or can they only sacrifice £2000 off their taxable pay.

So it's only National Insurance we're talking about here. When we think about things like the personal loans tax tap, child benefit tax, chap, these are all linked to what's called adjusted net income. Now your adjusted net income is essentially taxable income you get to take off pension contributions. You get to take off gift aid as well.

So if you are still if you're salary, if you're still sacrificing, say you're sacrificing £20,000 of your £100,000 salary or your £105,000 to get out of that, then you'll only get National Insurance relief on £2,000, but your taxable pay is still going to be less. So you will still see the benefit and that that £20,000 will take you out of that trap because your taxable income will be £85,000.

So, it's the difference between National Insurance relief and essentially income tax relief. But adjusted net income is the kind of the key term when we're thinking about that.

Okay. Thank you. And then Jamie, we've had a comment from somebody followed by a question. And so I'll give you the context. The change in salary sacrifice is effectively widened the gap in tax relief and reduced the relief for basic rate taxpayers by 8%. While the move reduces the tax relief available for higher earners by only 2%, does the government understand this?
Given that labour muted tax in those who can afford it? More so it's a question about fairness, I guess.

Yeah, there are many questions come out of it. Let me come back to that point in a in a second there. Just want to tail off and to completely agree with what you were saying, there is a really important distinction here, because the government is not proposing to restrict salary sacrifice to £2000. It’s the National Insurance saving on that salary sacrifice.

So a whole host of other things that you can do with salary sacrifice still remain on the basis of what's proposed. But detail obviously to follow. Yes, there are some distinctions. I mean, you know, National Insurance for the basic rate of 6%. I mean, it wasn't that long ago, it was, you know, four points higher than that under the previous government.

And there was a couple of, a couple of reductions, so, sorry, 8%, isn't it? It was down from 12 to 8 under the previous government. And, we weren't quite sure if this government was going to reduce it further in favour of increasing income tax. Of course, that didn't come to pass. It was interesting really, because I think when that rumour was circulating that the government was going to put income tax up and bring down National insurance, there was a sense, well, is that directionally the removal of National Insurance or the merging of National Insurance into the income tax system, which would be commensurate with what the previous government evidently started by reducing it. So, that does not come to pass. And instead you have this disparity and it's true. So there is a different level of saving for basic and higher rate taxpayers. The government seems to have accepted that. I mean, the bigger prize and salary sacrifice is, of course, the 15% national Insurance saving that employers make on it.

And the great disparity there, which I think will be quite widely exposed through this, is that first of all, not all employers offer salary sacrifice. So many employees do not have access to that ability to do that and make that National Insurance saving of themselves, never mind the employer. Then, of those employers who do offer salary sacrifice, not all of them give back all the savings.

And that's quite an important point. So some employers share it all and put it back into the pension scheme. And the employer makes nothing from that 15% saving. Som are at the opposite extreme where they're using all of that 15% saving to do something else. Now it could be the provision of flexible benefits or something else that would be beneficial to employees, or it could simply be on the bottom line.

It does make me think that the bigger story that emerges from this is not so much about, slightly lower amounts going into pensions, but actually another area of increased costs for employers because the saving they previously made is no longer available to them. And I think that's an interesting one. As to how this like any budget, you know, on the day, it's all the facts of what's been announced the next day, there's the sort of morning after reflections.

It then takes days and weeks before people weave through what the real kind of narratives are that that emerge. And I think the employer costs from the salary sacrifice change might be one of those.

I'm not sure whether you said morning after there or mourning after this may be a Scottish lilt, and we’ll get you to clarify. Right. We'll give you a break. Thank you. And come back to the economics. Now, somebody is very keen, Melanie, for you to get your crystal ball out. I've been asked about whether they're going to be more tax rises.

This is this is your audition for Chancellor. I think they've said if the economic credentials improve, there's a lot of weight on the word. If there I think what could a future budget with growth at its core look like? And how likely is this in a parliament? I guess what's the way to growth Melanie?That's an easy question.

It is. Yeah. So in terms of the things that typically a fiscal policy can do that have the highest so-called growth multipliers, the biggest things are more investment. So public investment can be actually quite helpful. Investment in infrastructure, of one type or another. So that's the, that's the sort of classic kind of place you go.

I think the other thing, coming back to something that was mentioned by Jamie, is, is that could you fund tax reform and tax simplification, for example? I mean, there was discussion, as you know, in, in the press wasn't in the build up to this budget about a kind of wholesale reform or looking more deeply at the housing structure of housing taxation in the UK.

As we said something around the National Insurance income tax balance, you could make that, you could soften any impact of that, but get real benefits in terms of simplification, red tape for businesses, I think, and generally for the economy by simplifying the system.

And thank you for that, Melanie. That was a very good audition. I don't know whether you wanted to hear that or not, but you mentioned housing market. We’ve had another question. Will the introduction of additional property taxes stall the housing market?

It depends where it hits, right? I mean, in this case, the big announcement was at the very, very high end. So for the bulk of purchases, that's not, I think going to be an issue. What tends to create sword moves, and sudden spikes in movement, are things changes around stamp duty is a point closer to the kind of average median house price.

So it does it depends where.

It's sort of statistically, 88% of that £400 million is going to be raised from London.

Right.

Yeah. It is. If I may just come in on that. I mean, it's a it's a good example of where, the government has some choices. Do you structurally review the way that these things work to incentivise or create or, you know, in gender fluidity in the market or first time buyers or whatever it may be, or do you just simply do something tactical, which is kind of more where we are or where we find ourselves landing in terms of these additional charges?
Because most people would say, if you if you want to look at the more structural issues in the housing market, then you get into, you know, the rule of stamp duty and you know, whether it's inhibiting or, or otherwise, the movement. So yeah, we did we didn't choose, you know, yesterday to bite that one off, but it feels like, you know, just looking at council tax and the fact that, you know, a lot of it is based on valuations that are 30 years old feels like something.

We need to make that point from earlier on. I mean, the other the other thing that that could happen in the next few years is more reductions of trade barriers with Europe. So you think geopolitically we're having to rearm to face the threat from Putin. That means industrial cooperation with Europe. And, you know, you don't have a lot of defenders at the moment saying we should be increasing trade barriers with Europe.

A lot of people who thought that Brexit was going to be beneficial were talking about a fantastic US trade deal. And it turns out the US trade deal we've got is higher tariffs. So there's there are things on that side which could help growth as well. But politically difficult.

Thank you. And we'll give Melania a break from the crystal ball for a second to come back to Claire and Jamie with a question about ISA. So somebody has asked about the changes to the ISA allowance, and said, will there be any change to transfer mechanisms? If not, then individuals could simply contribute £20,000 into a stocks and shares ISA and transfer that amount to their cash ISA/. Those getting around the reduced cash ISA allowance is that a possibility?

Shall I start on on that one? I don't I don't think they've necessarily worked through the policing of all that yet because you've also got, you know, people putting money in a bank account. You've got the tax free interest allowances, which remained intact yesterday despite the changes in the and the rate of tax. You've got, you know, essentially kind of managed cash or money market funds and stocks and shares ISAs and so on and so forth.

There's a, there's a bunch of things which don't necessarily sit comfortably within the spirit of how do we get more people investing in the markets rather than holding money in cash that exists within the current system. And of course, over 65’s exempted. And I think that's quite a big chunk of those who do invest and can invest their full allowance.

So, it feels like if you were simply saying we must move all the cash into stocks and shares, there's a lot of leakage in that policy currently. So I guess the question is, as we work through those changes, do they seek to tighten up on the policing and the rules around that, or do they instead, and perhaps much more favourably, think about what are the incentives for people to actually invest in, not just stocks and shares, but the UK economy?
Rather than telling people.

I totally agree, I don't think reducing the tax free allowance of cash ISAs is going to result in an extra pound going into the UK stock market. I think it's a different investment decision.

And I think that's, it's always interesting when you look at kind of consumer behaviour. And when we did some ISA research, it was really interesting that, you know, people think that what doesn't encourage them to invest into stocks and shares ISAs, is they think they don't have enough money because they think you need some kind of lump sum to invest in them.

And also, it's because they think they don't understand enough. And so we've got this education need and for, for people who have advisers, that's brilliant. But if we want people who are younger to start investing in stocks and shares ISAs, or if we want people who are at older to not just be thinking about cash ISAs, then we need to be helping out with that.

I think to Jamie's point earlier, I thought it was really significant that the lifetime ISA is being quietly downplayed. Because, as you say, ten years ago, there was this suspicion that it was a way of actually removing tax relief at source and bringing ISAs up to be the new retirement saving vehicle, which obviously has a big, attraction to governments because the taxes will pay, you know, later, effectively.

And that seems to have been downplayed. And what was interesting also, there was some talk about not just not entirely abolishing the lifetime ISA, but sort of rebranding it as a first time buyer ISA, which, you know, could be a way of getting younger people to start investing in an ISA, we're thinking of that first big savings.
 
The other issue we've had with the lifetime ISA, especially for London and the South East, is the he amount the cap to make on how much you can pay into it. So, you know, I think that hopefully would be looked at in this consultation about what this new help to buy ISA or whatever we're going to call it, first time buyers, would allow.

It's one of these things isn't it. We're I mean again that place this point around, you know, we have choices about to make long term structural changes to simplify things and make life easier for consumers. Or do we just keep incrementally adding more complexity into the system and new products? And you know, which creates barriers to people actually doing the things the government wants to do.

But you're trying to please this first time buyers. I said, are you really trying to buy a house or not? Yeah. I mean, it sounds complicated, isn't it?
Yeah. The lifetime I, I never really knew what it was. I mean, there will be fans out there, but it was, it had some, some quite, divergent purposes. And I think that was always going to be difficult.

Thank you. We've got about ten minutes left and a few questions still to get through. We might have to take a bit of a quickfire approach, but staying with the theme of stock market investment, we've had a question asking for the panel's views on the brake, on stamp duty for shares, and whether it will make a difference to the UK stock market.

Who wants to take that one?

This was quite specific, wasn't it? It was the stamp duty transfer tax on startups for the first and on the final on the detail of that. But it would sound like it was more about trying to encourage new companies to list.

Yeah, I'm not across the detail of it either. It is. But it is in the genre of the whole kind of scale up capital agenda from government. And how do we get, you know, more of the newer companies? So, I mean, I guess the time will tell whether it actually serves as an incentive, but it was in the carrot rather than stick basket of options.

Still, to work through the detail on that and how it actually translates into financial products.

In the bigger decision area where the government is trying to sort of, encourage, if not, if not more strongly, move into the UK is in the in workplace pensions isn’t it. The various agreements so far, they don't include UK equities. There's a lot of rumblings about UK equities. And so far the focus has been on UK private assets.

And for a company like Royal London we diversify broadly. We've got a lot of UK private assets in commercial property in other areas already, so we have more in UK equities than the 4% weighting in the world index would suggest for lots of reasons. So I think we're kind of, you know, we're sort of in the right place on that.

But I think there'll be more coercion or encouragement for other people to move towards.

Yeah. And I think that's the big question.

That’s more significant than the stamp duty change. Yeah.
It's a big question. Is it. So you've got this whole agenda from government which is about okay, you know, we do accept as a government that the pensions are first and foremost for people's retirement. We do accept that. But secondly, they need to, you know, they need to play into the UK growth. And you can see there's some benefit to everyone if we all invest in our own economy and that stimulates growth.

Growth is good and we'll have slightly better lives. But it does, it does feel like there's a really strong desire to do that, but not backed up by any material incentive to differentiate. Investing in the UK over elsewhere. And some of the countries have gone down that route, and it does make a big difference.

Yeah.

I think I think from memory, Trevor's right. I think it was quite a specific, specifically targeted at businesses looking to list. That was the.
First time.
I can't imagine, it's.
It’s quite narrow.
To have a huge, insights on sentiment, towards investing in stocks and shares. This is an issue that you mentioned, earlier. What impact will the increase in dividend tax have on Small Business Start-Ups?

Well, so it depends if it's a limited company. So if it's set up as that, then, you know, if you take more money in dividends you're going to exceed your dividend allowance very quickly and you're going to be paying a higher rate of tax. So, I think always for businesses, it's about thinking about how they take out money from the business.

So you need to make sure you're taking some money out as a salary. You've got to, you know, to make sure you're getting your National Insurance contributions for your state pension entitlement. You need to, you know, do you need some cash, which will normally come in the form of dividends? And they need to be making sure that you're paying enough into pensions for that kind of future bank account.

And I think we have seen a bit of a difference. Most start up companies, especially, they might not have a value like, you know, a shop has a value. There's the kind of a bricks and mortar, feel to it. So, it is about thinking earlier about, you know, planning for retirement as well. So, but from, you know, if you the more you take out dividends, the more tax you're going to pay.

And it is about maybe trying to keep dividends within the basic rate band. That's going from 8.75 to 10.75, but then it leaps up, as soon as you hit the, the higher rate band. So, so it is about looking at that different structure.
You mean.

So you mean there are some companies that have apparently, on the face of it, enormous value and yet no real asset sort of plans or profits coming through? That's a strange concept, isn't it? One thinks about certain markets at the moment.

Indeed. Well, we've got time, I think, for just for for one more question I'd like to revisit. It's something it's aimed at Craig and Jamie because obviously you both touched on this in your opening remarks. But, you know, at at risk of grossly over simplifying, the Chancellor was really trying to appease two audiences yesterday. On the one hand, the markets, and on the other hand, her own party.

I'd just like to hear, you know, a minute from each of you on whether you think she achieved that. Craig, to you first.

Yeah, we you know, we were being slightly cynical on the, on the desk yesterday. A lot of their comments was the, you know, she repeated the phrase, these are my choices, these are my choices. And I think that was almost like a, you know, her trying to state her credibility, almost sort of say publicly, I've not been forced into this by the backbenchers or I've not been forced into this by the market.

But ultimately she had, you know, I think really, you know, if you look at some of the statements that she made in previous, comments, you know, about child benefit cap, about extension of tax threshold freezes, she wasn't in favour. So ultimately, you know, she has effectively had to backtrack on some of these. I think my view on the credibility side of things will probably come in, you know, some of the, some of the elections that we see next year, it will basically be on how the gilt market performs over the next few months.

And equally, as Melanie points out, what the data is like, I think, you know, and how we actually see that, transpire as to whether she's achieved the face of the markets in terms of whether she's achieved the face of her party. I'll probably hand that one to Jamie.

Yeah. I mean, it's one of the it's one of those things where time will tell, won't it, I mean, there was a lot of people predicting that yesterday could have been the meltdown, either politically or financially, of the nation's confidence. And in the plan, that didn't happen, thankfully. And, you know, instead, we kind of move on and see what happens next.

There was certainly, fair play, some appeasement of various audiences, you know, many with different perspectives as you as you rightly say yesterday, backbenchers, I mean, 400 odd MPs. Why are those 400 people so important? They've got a huge majority. They should be able to do anything that's proven over the last year. They can't do everything they want to do.

And those people do really matter, because if they don't support what the government's doing, then it becomes problematic and we take them as a, you know, the representation of their constituents and the wider population that's, you know, that's important. That's how our politics work. So, the Chancellor and the prime minister, you know, relatively unscathed from yesterday.

And what, you know, walk away to fight another day. But, you know, the kind of credibility now hangs on whether those plans start giving rise to growth and whether interest rates and inflation does, you know, do come down and so on and so forth. But I mean, growth is the big one in all of this, isn't it?

It's the kind of anchor upon which everything seems to hang now. If we don't see it, then the danger is we feel like we get to budget number three. And if we're in the same position, that's when I think it becomes really precarious.

Yeah, I just chip in there that I think that the inflation is always a threat in the background, isn't it? Because if things become difficult, then people fudge things. Inflation's let run. We don't you know sitting here talking about the next five years. Nobody predicted the Covid pandemic. You know we could have a different government. We can have a different leader of the Labour Party, we could have other events going on.

It's a question of how we deal all of these at the moment. I think they were successful yesterday. But events.

Events, dear boy events. Well, we are out of time, sadly. But thank you to all of the speakers. Thank you, most importantly, again to all of you for joining. I'm really sorry we didn't have time to answer a number of questions that came through from one adviser asking how we persuaded Gary Barlow to host the session and how we felt about Robbie Williams leaving Take That.
About five questions.

And, but I have to I do have to remind you, about the learning objectives for this session. It will count towards your CPD, and hopefully you'll now all have a better understanding of the impacts of the budget, on, on your clients and the wider economy. Thank you again. And enjoy the rest of your day.