What Trump’s win may mean for the markets and economy
Based on his campaign pledges, here are some things we’ll be watching from President-elect Donald Trump and what they may mean for the economy and markets.
No change to tax relief on pension contributions or the tax treatment of employer pension contributions.
The CGT rate for higher-rate taxpayers was raised from 20% to 24%, and the basic rate increased to 18% from 10%.
The plans for a UK ISA will not be taken forward due to “mixed responses” in the last government’s consultation.
The first Budget of any new government is always a big deal, and Chancellor Rachel Reeves certainly didn’t disappoint.
Despite the fact that many of the key announcements had been trailed in advance, the numbers were striking: £30 billion a year more borrowing, £40 billion in tax rises, and an average of £70 billion a year in higher spending over the next five years.
With taxes set to reach their highest ever share of GDP in the UK, it might seem odd that many savers and investors’ first reactions to the Budget will have been a sense of relief. But thanks to widespread speculation before the Budget about changes to pensions taxation or the equalisation of Capital Gains Tax (CGT) with income tax rates, relief may well have been the primary reaction for many.
Nonetheless, the Budget did introduce some important changes which will likely lead to an uptick in queries by clients to their financial advisers.
Whenever a Chancellor needs to raise significant additional revenues, Treasury officials will point to the roughly £50 billion1 in net tax relief on pension contributions as an area with potential for reform. The run-up to this Budget was no different.
And speculation was fuelled by examination of Rachel Reeves’ 2018 pamphlet, The Everyday Economy, in which she argued that restricting tax relief on pension contributions for higher earners could help combat inequality while yielding £20 billion in additional revenues.
However, possibly recognising the complexity of reforms and the challenge of applying them uniformly across both the public and private sectors, the Chancellor opted for the status quo. As such, there is no change to:
Pre-Budget speculation was also rife about increases to CGT (reform of which also featured in the 2018 pamphlet) – but this time with more cause. For investments held outside a tax wrapper, the increase in the main rate may be one of the principal impacts of the Budget. While the last government progressively reduced the annual tax-free allowance to £3,000, this Chancellor chose to:
Combined with an increase in the rates for Business Asset Disposal Relief and Investors’ Relief to 14% from April 2025 and 18% from April 2026, the Treasury expects the CGT reforms to raise an additional £2.5 billion a year by 2030.
The last government sought to make changes to the ISA regime, including through the introduction of a new UK ISA – up to an additional £5,000 to invest in UK stocks and shares. However, in opposition, the Labour Party didn’t ever formally commit to backing the proposal and in the Budget, Rachel Reeves announced:
A degree of reform to Inheritance Tax was widely expected in the Budget. Speculation about changes to the seven-year gifting rule proved to be unfounded but there were nonetheless three important announcements for investors:
Given that currently, inherited Direct Contribution pensions usually fall outside someone’s estate for inheritance tax purposes, the forthcoming change in April 2027 will likely necessitate changes to legacy planning for some.
In addition to the individual tax measures, Rachel Reeves’ first Budget was also important because it revealed her preferences. Faced with spending pressures, she has chosen to tax and borrow more to fund them.
Yet despite the extra spending, the Office for Budget Responsibility reports that the impact on the UK’s future economic growth will be limited: a marginal increase to GDP growth this year and next year, but marginally lower growth towards the end of the decade. As such, annual growth is forecast to be 1.5% - 1.6%: not negligible, but certainly not remarkable.
Surprisingly, the Chancellor has left herself relatively little headroom against her new fiscal rules, with the OBR calculating the chances of the rules being met at just over 50%. The result is that if revenues turn out to be weaker than forecast, or if higher debt costs, external shocks or even statistical revisions to estimate of government debt erode the limited headroom, the Chancellor will be forced to take action to ensure her rules aren’t broken.
In this eventuality her preference, it seems, will be higher taxes rather than public sector belt tightening. Which means that the tax changes considered and then discarded for this Budget could well be put back on the table for future Budgets.
Based on his campaign pledges, here are some things we’ll be watching from President-elect Donald Trump and what they may mean for the economy and markets.
Neville Pike, Product Director in Invesco’s UK Equities team shares his thoughts on the potential impact of the changes announced by the Chancellor in the Budget on UK Equities.
Despite strong earnings reports, the markets are reflecting some uncertainty and concerns related to geopolitical risks and growing deficits.
1 HMRC, Private Pension Statistics, Table 6
The value of investments and any income will fluctuate. This may partly be the result of exchange rate fluctuations. Investors may not get back the full amount invested.
All information is provided as 30th Oct 2024, sourced from Invesco unless otherwise stated.
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