UK Budget Round-Up
31 July, 2020
The UK Chancellor, Rishi Sunak, delivered his first Budget in the House of Commons on 11 March 2020. This was the first budget since October 2018 and was presented against the backdrop of the global outbreak of COVID-19. Consequently, the Budget was dominated by measures to support UK public services, individuals and businesses that may be affected by COVID-19. This included a £30BN package to support the UK economy.
Whilst Budget 2020 did make some changes affecting UK pension members who are still contributing to their UK pensions (in the form of changes to the current pension thresholds for the annual allowance), for our expatriate clients, Budget 2020 resulted in very little change. Key highlights to note though were:
- UK’s Lifetime Allowance – the lifetime allowance for pensions (being the maximum amount you can accrue in a UK pension in a tax-efficient manner) increases in line with CPI for 2020-21 from £1,050,000 to £1,073,100.
- UK State Pension – The State Pension increased by 3.9% from 6 April 2020. Under the triple-lock formula, the State Pension must rise by price inflation, average earnings growth or 2.5% – whichever is higher. In this case, the State Pension is matching the 3.9% average earnings increase seen by UK workers in July 2019.
On 8 July 2020 the Chancellor presented a further “mini budget” in response to COVID-19. It signalled a move from the first phase “rescue” seen in the March Budget to the second “recovery” phase focussed on jobs.
There had been significant speculation in the financial services industry that the Chancellor would look to scrap or change the State Pension triple-lock. Inflation in the UK hit a four year low in May being a mere 0.5% (rising to 0.6% for June). Inflation remains significantly below the Bank of England’s target of 2%.
Despite low levels of inflation, the State Pension is likely to be increased by a minimum of 2.5% or earnings growth. Applying the current triple lock formula could have unintended distortions. As a result of the UK’s furlough scheme there could be a sharp decline in average earnings in 2020 followed by a quick recovery causing significant increases in 2022. Pensioners could see a sizeable increase in their State Pension at a time when the UK government is facing mounting debt.
Commentators had expected that the Chancellor may announce a modified triple lock with a lower increase. Despite the Conservative’s manifesto commitment to the triple-lock policy, a change could be justified by the unforeseen nature of the current COVID crisis.
Whilst no change has been made yet, the triple-lock may be revisited in the UK’s Autumn Budget which is expected in October 2020.