From a financial planning and advice perspective, the major significance of the mini-budget was less about what was announced and more about what wasn’t and remains the same.
Allowances and thresholds
There were no changes to the already frozen personal allowances and the Inheritance Tax (IHT) threshold also remains frozen at £325,000 until 2025/26.
Personal pension contribution tax reliefs, annual allowances, carry forward pension contributions and the pension lifetime allowance also all remain the same.
Looking below the surface of the headlines, these allowances, reliefs and limits continue to have a significant impact on millions of taxpayers in a number of ways:
Millions affected by fiscal drag
Fiscal drag happens when tax thresholds do not increase in line with pay. For example, you receive a three 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.
What can you do to offset this?
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 three previous tax years.
Pension Lifetime Allowance planning – More people are being caught breaching the £1.073m limit and suffering a tax charge at the point they retire. 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. There are various approaches that can be taken to mitigate a future IHT liability. These range from making gifts, putting money into 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.
The Personal Savings Allowance (PSA)
Rates have been so low 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. 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 per cent, even with savings rates going up, the value of your money is reducing. You could have 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.
There was one area potentially of interest to higher earners and more specialist/experienced investors, in respect of:
- Seed Enterprise Investment Schemes (SEIS) – Investor limit has been doubled to £200,000
- Enterprise Investment Schemes (EISs) and Venture Capital Trusts (VCTs) – investment has now been extended past 2025.
Investing in early-stage, EIS-qualifying companies is unpredictable and as with VCTs are generally only suitable for wealthy, sophisticated investors who are willing and able to accept a high level of risk.
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 too, depending on your personal circumstances, reduce the impacts of the fiscal drag on your finances and potentially offset the effects of inflation.
