From a financial planning and advice perspective, the major significance of the “mini-budget” is less about what was announced and more about what wasn’t and remains the same. Take-home pay is set to increase for many with the announcement that the additional levy on National Insurance is to be cancelled from 6th November and the top rate 45% income tax was due to be removed from 6th April 2023 but was instead scrapped due to political and social pressure.
One area potentially of interest to higher earners and more specialist/ experienced investors, was in respect of Seed Enterprise Investment Schemes (SEIS), Enterprise Investment Schemes (EISs) and Venture Capital Trusts (VCTs), all designed to encourage investment in smaller, unquoted companies. This of course fits with the intention to try and stimulate growth. The SEIS investor limit has been doubled to £200,000, with the commitment in the mini-budget that EIS and VCTs have now been extended past 2025. Certainly, for those in the current top rate of income tax, this may provide more scope to look at more specialist financial planning opportunities
There were no changes announced on the already frozen personal allowances and the higher and additional rate thresholds, and the Inheritance Tax (IHT) threshold remains frozen at £325,000 until 2025/26. Personal pension contribution tax reliefs, annual allowances of £40,000, the continued opportunity to carry forward pension contributions and the pension lifetime allowance, of £1,073,100, all remain the same.
However, as financial planners, we only need to look slightly below the surface of the headlines to understand that these allowances, reliefs and limits continue to have a significant impact on millions of taxpayers, in a number of ways.
What is Fiscal Drag?
With there being no changes to the frozen allowances it means that millions of people are still affected by “fiscal drag”. Fiscal drag happens when tax thresholds do not increase in line with pay. For example, you receive a 3 per cent pay rise, if the tax threshold has not then moved in line with this you could therefore be dragged into a higher tax bracket. Therefore, fiscal drag has the effect of raising government tax revenue without explicitly raising tax rates.
The cornerstone of financial planning has always remained the same and we always advise taking advantage of what reliefs and allowances are available now to help offset this continuing fiscal drag such as:
You could make pension contributions - to help reduce the amount of income tax you pay as you receive tax relief at the level you pay tax so it could help to move out of the higher rate tax band down to the lower basic rate. You can also carry forward this relief over 3 previous tax years. This is based on your affordability and providing you have not already reached the annual or lifetime allowance limits.
Pension Lifetime Allowance planning – If you make regular contributions to your pension over a number of decades, you may find yourself exceeding the lifetime allowance (LTA) by the time you retire. More people are being caught breaching the £1.073m limit and suffering a tax charge. If you think you might need to consider how you may be impacted by the Lifetime Allowance, either based on current benefits or when you retire, you could benefit from personalised financial advice.
Inheritance Tax planning – More families are being pushed into paying inheritance tax (IHT) with the frozen Nil Rate Band allowance. For the majority of people there are various approaches that can be taken to mitigate a future IHT liability. These range from making gifts (large or small), putting money in to trust or even insuring the IHT liability.
Maximise your ISA allowance – The annual allowance allows you to invest £20,000 and any gains and income are tax free if held within an ISA provided it meets your goals and objectives. If you don’t use it, you lose it. Utilising ISA allowances will also become increasingly important with the latest rise in interest rates announced this week.
The Personal Savings Allowance (PSA)
An issue that could creep up on the unprepared is tax on savings interest. As the Bank of England puts up interest rates it has a knock-on effect to interest upon saving accounts which tend to rise.
Since the Personal Savings Allowance was introduced in 2016, rates have been so low for so long that you have probably been unlikely to pay income tax on your savings. Most basic rate taxpayers will not have to pay tax on the interest they earn until it exceeds £1,000. Higher rate taxpayers have a £500 allowance while additional rate taxpayers have none at all. Even if the allowance means you currently escape tax on interest, when the Bank of England raises rates, or if your earnings rise, it could see you become liable to tax in the future especially if you have a large cash holding in a savings account.
With inflation currently at 8.6%, even with savings rates going up, the value of your money is reducing thus giving you the double whammy of income tax to pay on your savings while it doesn’t keep pace with inflation. Now could be a good time to review those cash holdings for those people willing to consider a medium to long-term view.
Our quest is to help our clients achieve prosperity, a secure future and peace of mind. We believe that for those people who are considering taking financial advice now may be a good time to do so to help utilise existing allowances and tax reliefs, which are still available, and could help, depending on your personal circumstances, to reduce the impacts of the fiscal drag on your finances and potentially offset the effects of inflation.
(Article updated 3rd October 2022 following the government's decision to scrap the planned removal of the 45% income tax bracket.)
To learn more about the Chancellor's Fiscal Statement and what it could mean for you and your business, you can watch our webinar from Monday 26th September using the button below.
