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Why Is The Pound Falling And What Does It Mean For Me?

On Friday 23rd September the Chancellor (Kwasi Kwarteng) delivered his Mini-Budget which sent the pound falling to a record low against the dollar.

What's in the Mini-Budget?

The main points of the budget in relation to tax cuts are:

  • Corporation tax will not rise, as expected, and will remain at 19%.

  • The basic rate of income tax will be cut from 20% to 19% in April 2023.

  • They announced that the 45% higher rate of income tax would be scrapped but they have now U-turned on this and it will no longer be abolished.

  • The recent 1.25% increase to National Insurance in April will be reversed from 6th November 2022.

  • The 1.25% increase in dividend tax in April will be reversed from April 2023.

  • There will be no Stamp Duty Land Tax (SDLT) payable on the first £250,000 of a property's value in England and Northern Ireland, effective from September 23rd. This has increased from £125,000. For first time buyers this has increased to £425,000 from £300,000. The maximum value of a property on which first-time buyers' can claim relief increased from £500,000 to £625,000.

What does the Mini-Budget mean for me?

The Government has claimed that the tax cuts mean that employees will take home, on average, an extra £330 a year from the National Insurance reduction. Basic rate taxpayers will save an extra £130 a year from the income tax changes and the dividend tax cut is expected to save dividend taxpayers an average of £345 next year.

Next tax year, when the National Insurance and tax reductions have both kicked in, someone earning £25,000 will save around £280 a year and someone earning £50,000 will save around £840 a year. Someone earning £75,000 will save around £1,160 a year.

According to Rightmove, the stamp duty cuts will see 33% of all homes in England exempt from stamp duty, compared to just 7% when the threshold was £125,000. The Government have claimed that an additional 200,000 people per year won't be paying stamp duty on their homes.

Why is the pound falling?

On Monday 26th September the pound fell to it's lowest level against the dollar of $1.03. This was because of the large tax cuts announced in the Mini-Budget, which is to be paid for by borrowing billions of pounds.

The Mini-Budget has knocked investors' confidence. They're worried that the tax cuts aren't going to be fully funded and also that the cuts will lead to people spending more which will then push up prices. This would then lead the Bank of England to raise interest rates sooner and faster to try and bring down inflation. However, these increasing interest rates will make mortgages and loans more expensive, and could actually leave people with less money.

How does a falling pound affect me?

The falling value in the pound may affect you in the following ways:

1. More expensive trips abroad

For those in the UK who are travelling abroad, you will get less for your money, particularly if you are travelling to the US, making your trips more expensive. The fall in the value of the pound could also see airlines and package holiday providers face increased costs (such as an increase in the costs of fuel, which are usually denominated in dollars), which they may pass on to the customers. However, the falling pound could make the UK more attractive to tourists who are looking for a cheaper holiday.

2. Higher prices of goods and services

When the pound is weak against other currencies, for example the dollar and euro, it costs more for companies in the UK to buy things such as food, parts and raw materials from abroad. According to the Government's most recent food security report, the UK imports around 45% of the food it consumes. Companies could choose to pass on those higher costs to their customers, although supermarkets are often the last to increase their prices to try and remain affordable. The British beer industry imports beer and hops from Europe and the US and the cost of beer is therefore likely to increase.

A lot of our technology, such as smartphones and tablets, are manufactured abroad and could get more expensive in the UK due to the weak pound.

3. Higher fuel and energy costs

Oil is priced in dollars which means that a low pound will buy less fuel and filling up your car will be more expensive. Gas is also largely based on the dollar, and therefore will suffer from a poor exchange rate. Although wholesale gas prices have fallen internationally from recent highs, the UK won't experience the benefits.

4. Higher repayments for some mortgages

Last week a record number of mortgage products were withdrawn as lenders feared that interest rates could rise sharply following the Mini-Budget. A falling pound can lead to higher costs for companies who import goods and services from abroad. If companies choose to pass on those higher costs to customers then this will push up inflation. People also think that the tax cuts will encourage people to spend more and push up prices.

When inflation is high, the Bank of England tries to bring it down by increasing interest rates. This increases the cost of borrowing and is meant to encourage people to borrow less, spend less and save more. Some economists have suggested that the Bank of England may call an emergency meeting soon to raise rates ahead of schedule.

Forecasts are predicting that interest rates will hit 6% next year. Increasing interest rates will lead to increases in people's mortgage repayments who are on a tracker or variable rate, which is around 2 million people in the UK. Those coming to the end of their fixed rate or looking to buy for the first time will have fewer and more expensive deals to choose from. Fixed rate mortgages depend on interest rate expectations as well as the rate today, which is why lenders are withdrawing mortgage deals in order to re-price them.

5. Lower retirement pots for pensioners

Many workplace pensions are invested in lifestyle strategies, whereby the portfolio invests more in Government bonds as they get closer to retirement. Government bonds, known as gilts, are seen as low risk but last week some bonds fell by 20% in 2 days. In response to the pounds fall, Government bonds were being sold off and the Bank of England had to step in to avoid a panic in the pension market and also to prevent Government borrowing costs from spiralling out of control. The Bank of England has promised to buy up to £65bn of bonds over the next few weeks to support their values. Pensioners with a lot of gilts in their pensions will see a fall in their retirement pot. Those who live abroad will also suffer as their pensions are paid in pounds, which won't go as far as before as their expenses are in stronger currencies.

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