It’s a week since the government’s much anticipated budget and the dust is starting to settle. Now the hard work begins.
A number of the measures announced by the Chancellor will materially affect investors and savers. It is our job as financial planners to ensure Rachel Reeves’ changes don’t derail your future.
After months of speculation, the media frenzy surrounding Labour’s second budget is finally starting to abate and we can begin to evaluate how our clients will be affected.
It’s not an easy job. We’re all different and our circumstances vary wildly, but we want to ensure your finances remain arranged in a tax efficient manner. This means understanding how the new rules might influence your long-term goals.
A taxing issue
Our tax system is probably best described as complex, so when Ms Reeves declared there would be no changes to basic rate tax, national insurance or VAT, you could be forgiven for breathing a sigh of relief. The reality is very different.
Freezing these allowances is a covert way of making sure we all pay more tax as wages rise and an increasing number of people are pushed into higher rate bands. Make no mistake, this budget will affect tax payers at all levels. It has implications for earnings, savings and our overall financial health, yet the Labour manifesto remains intact.
There was some good news, however. Standard income tax relief and the tax-free cash you can withdraw from your pension are unchanged, as is the inheritance tax cap on gifting.
Pensions
The main headline for pension savers was the modifications the budget introduced to salary sacrifice schemes.
Sometimes, it can be beneficial to forgo part of your salary for a non-cash benefit, such as a pension contribution. Currently, you can ask your employer to pay up to 100% of your earnings, to a limit of £60,000 a year, into your pension without incurring any tax or national insurance for you or the business. Rachel Reeves is changing all that.
From April 2029, a salary sacrifice cap of £2,000 will be introduced, meaning you will have to pay National Insurance on any payments made into your pension above that amount. The silver lining here is that the new rules are not being introduced for another three years. This means you still have a little time to make the most of the current legislation. Give your pension a boost now and it will have more time to grow.
If this is a scheme offered by your employer, we would recommend finding out what their strategy will be going forward. Understanding their position on the new rules will aid your own financial planning.
Another glimmer of hope for retirees is that the state pension is to be increased by 4.8% from April next year, exceeding the current rate of inflation. However, this may mean some pensioners will earn more than the personal allowance limit, triggering a tax liability. The government is now having to investigate how to make sure those reliant solely on their state pension do not have to hand some back to the Inland Revenue.
Savings and investments
ISAs are a really useful tool for both advisers and savers alike, having a crucial role to play in any financial plan.
Unfortunately, the Chancellor has decided to cap cash ISA contributions at £12,000 for under 65s from April 2027. She is hoping to encourage more people to invest in the stock market by allowing the remaining £8,000 of the current £20,000 allowance to be allocated to investments, which offer greater potential for long-term growth.
Again, the delay in the introduction of this scheme means it’s time to start evaluating whether you are making the most of your current tax-free ISA allowance. Take proactive steps now to define your short, medium and long-term financial goals and decide if savings in cash or investments would benefit you most.
Property
Although not directly affecting your retirement plans, the news that homes worth more than £2 million will be subject to a new High Value Council Tax Surcharge, will impact the availability of investable cash for many.
Nicknamed the ‘mansion tax,’ the surcharge will be introduced in April 2028 and will see households having to find anywhere from £2,500 to £7,500, depending on the value of their property.
The government is also freezing the Nil Rate Band and Residence Nil Rate Band until 2031, at £325,000 and £175,000 respectively, which will ultimately mean more homes are subject to inheritance tax, as values increase.
Where does this leave us?
If you work hard and have saved hard for retirement, the Chancellor’s plans are a bitter pill to swallow. No one wants to think an increasing amount of their wealth will be lost in tax.
What you need now is a full review of your existing financial plan to identify where current investments will be generating more taxable income. If there is an increase, more planning is needed to work out how long your money will last. For example, married couples can transfer assets between them if one has used their allowances and the other hasn’t.
As I said at the start, our tax system is complex. That’s why it is imperative to seek advice if you feel you will be negatively impacted by the recent budget. Tax increases compound over time, eroding the value of your savings and investments, so act now.
We can’t prevent life changes, or budget changes, but by reevaluating your financial plans regularly, we can help you map out a future that best suits your circumstances now and aspirations for retirement.
If you’d like to arrange a review of your current pension provisions in light of the recent budget, don’t hesitate to contact us on (01246) 298181 or email: enquiries@belmayne-ifa.com
