So, after lots of speculation about how Rishi Sunak will start to ask for his furlough money back, the facts have been released. Having watched his 50-minute speech and analysed various documents since, I believe the main issues, from a personal financial planning point of view, are as follows-
Annual Allowance Freezes
In April, the personal allowance (the amount you can earn before paying income tax) will rise from £12,500 to £12,570 but it will then remain at this level until 2026. The true effect of this to your pocket will be determined by the inflation rate over the next 5 years or, if you are still working, by your income increases. If inflation and interest rates stay low, then the effect will be less damaging. If the price of goods rise then, those that are retired and drawing on pensions, will slowly have to start increasing the potentially taxable income from their pensions to cover living costs. Likewise, those that have inflation linked salaries will also start to feel the pinch over the 5 years.
The higher rate tax threshold (the amount you can earn in total before you pay 40% income tax) will rise from £50,000 to £50,270 and then, just as the basic rate threshold, this will remain the same until 2026.
Experts anticipate that this move will raise £8 billion for the Chancellor, I still feel this option is a little less painful than a rise in income tax rates.
Planning tip – Using your allowances wisely and using pension contributions to maximise tax relief whilst minimising income tax will therefore remain an important strategy.
Pension Lifetime Allowance Freeze
Similarly, the pension lifetime allowance (LTA) has also been frozen for 5 years. This will remain at its current level of £1,073,100 until 2026, instead of increasing in line with inflation.
Planning tip – For those of you that are ‘fortunate’ enough to have an LTA problem, care will have to be taken around how to avoid or minimise this moving forwards. Of course, as your adviser, if you do have a potential LTA then these options will be discussed in our progress meetings.
For Business Owners
For business owners the main news is the future increase of corporation tax to 25% (in 2023). However, the chancellor indicated that this will only apply to companies making profits above £250,000. Corporation tax for companies making £50,000 or less will remain at 19% and there will be a taper between £50,000 and £250,000 – the details of which I have not seen at the time of writing this article.
Planning tip – as pensions are a business this increases the importance of using company profits to fund pension contributions. Whether the chancellor will amend any pension tax reliefs when the 25% tax rate starts will be an interesting watch.
For the younger generation, the major point of interest is the re-introduction of 95% mortgages – backed by a Government guarantee for the lenders who choose to get involved. I do remember this scheme being introduced in 2013 – unsuccessfully may I add – as the lenders decided that the Government guarantee wasn’t that attractive (it did make me smile to observe the naivety of the Government to think they were powerful enough to tell the bank what’s to do!!).
Should this 2nd attempt get off the ground then the good news is that this will help ‘generation rent’ onto the property ladder. However, if it becomes popular, it could start to push property prices up if demand is higher than supply – especially as this inventive coincides with the extension of the stamp duty relief until the end of June. The irony being that first time buyers could still be edged out of the property ladder by rising prices.
Planning tip – if you are saving for a deposit and have at least 5% of your planned purchase price seek advice NOW on the costs of a mortgage. If the Government guarantee is removed (and house prices have risen due to new demand) then it could be even harder to purchase your first home in the future.
Other points to note
From an individual financial planning point of view there have been no changes to income tax rates, thresholds, National Insurance or VAT. Also, despite the usual scaremongering in the media, there were no changes to pension tax relief and savings allowances.
Inheritance tax and CGT allowances also remain unchanged.
Finally, don’t lose your purse or your wallet…
There were lots of sector specific amendments too (that I do not feel need to be included here for personal financial planning purposes). However, one final thing to note is that contactless payments are being increased to £100 – so make sure you don’t misplace any of your bank cards!!