Why it’s important to stay calm after the Budget announcement
We may see volatility in the markets as a result of these announcements, given the breadth of change. Here are some useful insights to share with your clients on how markets have reacted in the past.
The Chancellor, Rachel Reeves, presented her Autumn Budget to Parliament on the 30 October 2024. Here are the key takeaways and considerations.
What are the headlines?
- The national minimum wage will rise in April 2025 from £11.44 to £12.21 per hour, moving towards a single national rate.
- Employers' National Insurance Contributions (NIC) will increase by 1.2% to 15% from April 2025 and the threshold at which NIC becomes payable will fall steeply from £9,100 to £5,000.
- Employment Allowance will increase to £10,100 from £5,000.
- Capital Gains Tax (CGT) will be increased, with the lower rate rising from 10% to 18% and the higher rate from 20% to 24%. CGT on residential property remains unchanged.
- The inheritance tax threshold will be frozen until 2030.
- From April 2027, inherited pensions will be included in inheritance tax calculations.
- Both business property relief and agricultural relief will remain, but with new limits.
- Existing 40% on business rates for the retail, hospitality and leisure industries will continue in 2025/6 up to a cap of £110,000 per business.
- The non-domicile regime will be abolished from April 2025 and will be replaced by a new residence scheme.
- The surcharge on Stamp Duty Land Tax for second homes will increase to 5% from 31 October 2024.
Stock market fluctuations caused by Budget announcements may be short-lived
We may see volatility in the markets as a result of these announcements, given the breadth of change. If your clients are concerned about the potential effects that Budget announcements could have on their investments, it might be useful to consider how markets have reacted in the past.
The mini-budget unveiled by Liz Truss and Kwasi Kwarteng on 23 September 2022 is a prime example of how markets normally recover, even after a significant period of volatility.
When the former Prime Minister set out her plans, she immediately drew criticism for including £45 billion worth of unfunded tax cuts.
Markets reacted swiftly – the pound fell to its lowest-ever level against the dollar and borrowing costs increased. If your clients were invested in UK markets, they may have seen the value of their portfolio fall.
Indeed, the FTSE 100 – an index of the 100 biggest companies on the London Stock Exchange – fell by 3.01% on 23 September 2022.
Investors would likely be concerned about this volatility in the days and weeks after the Budget announcement.
But by 4 November 2022, the FTSE 100 had recovered and continued growing. In fact, if your clients invested in the index between 1 September 2022 and 1 September 2024, they would’ve seen total growth of 17.18% despite the short-term fall. 1
While past performance doesn’t guarantee future returns, the historical data suggests that market volatility caused by Budget announcements is typically short-lived. Assuming your clients don’t take any action, the value of their portfolio could potentially bounce back as quickly as it dropped – although there are never any guarantees.
That’s why it’s so important for investors to take a long-term view of their investments and stick to their financial plan. As a financial adviser, you will be able to re-assure clients and discuss any changes to their financial plan if needed.
The value of advice
Some of the tax rises may cause your clients to worry about their ability to save for the future. They may also have concerns about what they can pass onto their loved ones.
It’s important for your clients to avoid any knee-jerk reactions in the short term. As their adviser, you will be able to work with your clients to find ways to potentially mitigate a larger tax bill. For example, they won’t pay CGT when buying and selling shares in an individual savings account (ISA), which may help to mitigate the effect of CGT increases. They also don’t pay income tax or dividend tax on interest or returns from ISA savings.
Investors can contribute up to £20,000 to their ISAs in 2024/25, and taking advantage of these tax-efficient savings and investments might help reduce their tax bill.
Such announcements demonstrate the invaluable role of financial advisers supporting their clients through short-term market volatility and ultimately about achieving their long-term goals.
1 11.09.2024 FTSE 100 London Stock Exchange (LSE)
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