After weeks of turmoil Jeremy Hunt has been appointed Chancellor to replace Kwasi Kwarteng.
Prime Minister Liz Truss has also this afternoon announced another U-turn on Kwarteng’s mini-Budget; this time scrapping plans to stop corporation tax from rising next April.
The pound has today fallen further against the American dollar as currency investors grow nervous over continued political uncertainty plaguing the UK.
Others are more optimistic: the FTSE 100, London’s benchmark index, has rallied as stock investors hope that the Government will backtrack on controversial economic policies announced just three weeks ago in the mini-Budget.
But are the changes in Westminster today good or bad for your wealth? Telegraph Money explains.
Investing
The Prime Minister will now go ahead with the previous Government’s plan to raise corporation tax from 19pc to 25pc in April. While the reintroduction would normally be harmful to businesses, experts have said it could improve how markets view British stocks, boosting DIY investors Isas and pensions.
Tom Sparke, of the wealth manager GDIM, said international investors had initially been concerned over the mini-Budget, reflected by a sudden fall in the value of the pound and chaos in the bond market. However, a reinstatement of the corporation tax rise would help shore up public finances and help Britain’s battle against inflation, he said.
It would show the Government is in tune with the Bank of England, which would improve investor sentiment, he added.
However, Mr Sparke warned there was a downside to consider. If the pound rose in value by a large margin, companies that earn money overseas would see revenue fall. It could hurt large businesses with a high degree of foreign sales. Such stocks saw their share prices rise after the pound fell in September so this could happen in reverse with a stronger currency, he said.
The yield on British government debt, also known as gilts, which rose sharply following the mini-Budget, could also stabilise, he said.
Emma Mogford, of the fund manager Premier Miton, added that a calmer bond market would push down the cost of borrowing for businesses. This could actually be beneficial for shareholders as they’ll have more cash to cover their dividends,” she said. “Investors in large companies should not expect a negative impact on their income now.
Personal Tax
The plan to cut the basic rate of income tax from 20pc to 19pc from next April is still in place.
In the Tory premiership race this summer, Jeremy Hunt told The Telegraph: I would love to see income tax cut, but it has to be done in a way that is sustainable. It can’t be an electoral bribe and it depends on growth. What you’d need is an income tax cut that is for life, not for Christmas. That means starting by saying we’re going to get the economy growing, then you get yourself in a position.
Mr Hunt also said he would keep former chancellor Rishi Sunak’s 1.25 percentage point National Insurance increase in place, saying that the NHS needs the money. The Prime Minister has already reversed that increase, and it comes into law next month.
However, Chris Etherington, of the accountancy firm RSM, said Mr Hunt could well backtrack as the priority for the new Chancellor would be to balance the books. An income tax cut and NI tax cut are the two most expensive cuts he could promise, he said. Instead, he might consider passing on savings to lower earners those who are suffering most from the cost of living crisis by increasing the personal allowance.
This has been frozen since the previous administration, which means that a lot of people have been sucked into higher tax bands and have paid more income tax. This would be less expensive than cutting income tax or NI, and would help those most in need.
Mortgages
The U-turn on corporation tax could help bring an end to the gilt market turmoil of the past two weeks, which may calm mortgage rate rises. But it will not be enough to prevent major house price falls, analysts warned.
Lucian Cook, of Savills estate agents, said: It will make it easier for the Office for Budget Responsibility, the fiscal watchdog, to balance the books, which will make the UK more secure. Gilt yields will fall back, the pound will strengthen and inflation forecasts will ease.
Mortgage rates, which rocketed at the fastest pace on record since the mini-Budget, should stabilise and could even fall, he added. But the U-turn will not be enough to stop house price falls. We will still be in an inflationary economy. There will still be interest rate rises from the Bank of England, he said. We are in for a period of sobriety in the housing market.
Andrew Wishart, of Capital Economics, a research group, said the market’s interest rate expectations already fell in anticipation of the corporation tax U-turn and mortgage rates should come down from their 6pc level.
Yet he added: The loss of credibility is likely to prevent interest rates fully reversing the damage. The trigger for house price falls has been pulled.
Buy-to-let landlords
Large portfolio landlords who own properties in limited companies will face higher taxes as a result of Ms Truss’ U-turn on corporation tax, with the rate now expected to rise from 19pc to 25pc in April.
However, under the plans laid out by then-chancellor Rishi Sunak, this full rise would only apply to the biggest investors, whose profits exceed £250,000. Businesses with profits at less than £50,000 will see no increase in tax, and those with profits between £50,000 and £250,000 will be able to claim marginal relief.
The blow for buy-to-let will therefore be comparatively small – and it will be far outweighed by the benefits of lower buy-to-let mortgage rates.
Savings
Experts have warned banks could begin to stabilise savings rates if the new Chancellor pursues economic policies viewed as less inflationary.
Anna Bowes, of Savings Champion, said: “If the new Chancellor worked to settle the markets, the rise in fixed rates in particular that we’ve seen recently could peak.”
Saving rates for fixed bonds have soared since the mini-Budget, as the Government’s economic policies – widely viewed as inflationary – ramped up expectations that the Bank of England would be pushed to raise the Bank Rate to as high as 5.75pc.
The average rate for a one-year fixed bond is currently 2.64pc, according to the analyst Savings Champion. At the start of the year, it was 0.82pc, according to another provider, Moneyfacts.
Pensions
If the bond market continues to be volatile, then the crisis that has gripped the pensions industry over the past few weeks could persist.
A number of private sector defined benefit or final salary pension schemes use an investment strategy called “LDI” to help manage their payments to pensioners.
However, this was flipped on its head by a historically sharp increase in gilt yields, and prompted the Bank of England to step in with billions of pounds in financial support.
The pensions regulator has insisted these pension funds were never at risk of going bust, and instead bond market turmoil introduced a liquidity problem rather than solvency.
If bond investors remain concerned over the new Chancellor’s economic policies, then these “liquidity pressures” could continue. However, there is still very little risk that someone receiving an income from a defined benefit scheme will be affected.
Savers outside of the final salary scheme are not affected by the same issue but could still feel the impact of a chaotic bond market.
Steven Cameron, of pension provider Aegon, said the impact on savers using personal or workplace pensions, also know as defined contribution, will vary depending on their age and investments.
He said: There are ‘default investment funds’ for workplace pensions where younger savers are invested in stocks and shares and as you approach retirement, they are switched into safer investments, such as gilts.
If bond markets are nervous about Britain’s new Chancellor, savers closer to retirement could suffer.
Mr Cameron added: Many people approaching retirement will have seen their funds fall in the past few weeks. If you are truly close to retirement then seek financial advice. The market is so volatile at the moment, it can be hard to figure out what is best.