Big budget bonanza

As budget headlines vie for limited headline pixels, we’re shining a light on the more interesting nuggets for investors.

UK banks will be breathing a sigh of relief today, after they were hit with a less-than-expected temporary increase to the Bank Corporation Tax surcharge, up from 3% to 6%, rather than the leaked 8%.

Lloyds, NatWest, Barclays, and HSBC rose on the news, although savers should keep an eye on the interest rate they’re earning on any cash.

A slew of ISA changes are likely to dominate headlines over the next few weeks. Mooted cuts to the Cash ISA limit were reversed, meaning people will still be able to fund the full £20,000 a year allowance into cash savings from April 2027.

Lifetime ISA withdrawal penalties have been cancelled, but the LISA itself will be replaced by a new First Time Buyer ISA (FTB ISA). The FTB ISA will pay a 25% bonus up to a maximum of £20,000 at the point of a home purchase, unlike the LISA where a bonus is applied to contributions. 

Additionally, the 25% bonus will be paid on the total account value, not just the contribution amount. So if you grow your ISA pot, you grow your government contribution too.

Finally, a new ‘Starter ISA’ was announced to help get people investing. The details are thin at the moment, but we’ll be engaging the Government to help build this into a solid ISA to help people start their investment journey. 

Sometimes what wasn’t announced can be just as big as what was! Capital gains tax stays at 18% and 24%. The 25% tax-free pension lump sum is untouched, as are income tax, National Insurance, and VAT rates. Good news for SIPP and workplace pension savers.

So, no need to sell or raid your pension early. But CGT was spared, not scrapped, and the annual allowance is just £3,000, so keep using your ISA and pension allowances.

All in all, perhaps not a budget for the ages, but still one that will be remembered by policy wonks and nerds (like me!). So, what’s next? Will Burnham go for an early election, and how will the US midterms play out?

Gilt market reaction

So, that’s the Budget. What has the gilt market reaction been?

Well, yields have moved marginally lower in response to the content of the Chancellor’s red briefcase. At the time of writing, 10-year gilt yields are hovering around 5.31%, while 30-year yields stand at 5.70%. 

‍

It seems the Chancellor has neither upset the applecart nor wowed the crowd. Yields may have crept lower but they still sit near multi-decade highs, with 30-year yields having spiked north of 6% in October. 

Gilts are a means of government borrowing, and fluctuating yields are a real-time market response to economic policy and conditions. 

If, for example, investors start worrying about government finances, they are more likely to sell their gilts. This means prices fall, yields rise, and government borrowing becomes more expensive. It also means anyone already holding gilts sees their value drop.

If confidence improves, the reverse happens. Gilts aren’t just a Whitehall litmus test. They can also be a handy weapon in an investor’s arsenal. Gilts, exempt from capital gains tax, offer low credit risk, and regular coupon payments are protected from income tax if held in an ISA or SIPP. 

And if you hold to maturity, you know what you’re in line to receive as a return. That might appeal to cautious cats, or those who want to offset risk in their portfolio.
‍

‍