From a Financial Planner’s perspective, the budget offered few surprises. How the furlough scheme and other government spending will be recovered will start to become clearer from 23rd March, once tax consultations commence, but the key aspects of the Chancellor’s speech related to financial planning are listed below.
The Lifetime Allowance (the maximum limit an individual can accumulate within their pension without incurring a tax charge) will now remain at its current level of £1,073,100 until 2026.
Prior to COVID-19 the intention had been that this limit would increase annually in line with inflation. An inevitable consequence of this allowance freeze is that more pension savers may be drawn into a position of incurring a tax charge on the excess in the coming years.
However, accruing an amount in excess of the Lifetime Allowance may still retain some benefits depending on your circumstances, and you should speak to your Financial Planner if you feel that you may be affected by this amendment.
Despite a great deal of prior speculation, the current regime of tax relief at the marginal rate on pension contributions remains for the time being. As such, pensions continue to offer an exceptionally tax efficient vehicle for long-term financial planning.
In addition, pensions remain an efficient way of reducing any potential Inheritance Tax bill, as money held in a pension falls outside of your estate for Inheritance Tax calculation purposes.
Inheritance Tax (IHT)
Turning to Inheritance Tax, both the Nil Rate Band (an individual’s personal allowance, which is not subject to inheritance tax) and the Residence Nil Rate Band (which only applies to your main residence and may be subject to a tapered reduction depending on individual circumstances) will remain at the current levels of £325,000 and £175,000 per individual until at least 2026.
As my colleague Joe previously commented in his article/blog on IHT in December, this has not come as a surprise and it is important to consider that the nil rate band has not increased from £325,000 since 2009. Early indications are that without proactive planning, an ever-increasing number of people will find their estates creeping towards and potentially beyond these limits, resulting in an inheritance tax bill.
This situation may develop further in the consultations from 23rd March. Whatever the outcome, history tells us that it is unlikely to result in any increase in the nil-rate band.
Many of our clients own and operate their own limited company. At this time there are a number of details yet to be published to provide full clarity, however we do know that companies with profits in excess of £50,000pa will face an increase in corporation tax, up to 25%, as of April 2023. Tapers to reduce this rate will apply, with the full rate only becoming payable at a profit level of £250,000pa and above.
This is the first time in almost 50 years a Chancellor has an announced an increase in Corporation Tax. However, for those businesses committing to capital investments over the next two years, a generous tax break worth 130% will certainly soften the blow.
The Income Tax personal allowance for the forthcoming tax year has marginally increased to £12,570pa, rising in line with the Consumer Price Index (CPI). As a result, the higher rate of income tax will apply on income above £50,270pa.
It has been confirmed that these allowances will remain frozen until 2025/26 with no increase for inflation. Again, this will result in a creeping increase in the amounts of income tax paid by many over this time as salary increases and bonus payments lead individuals to move into the next tax band.
For many, the appeal of tax relief on pension contributions (both regular and lump sum) to both reduce their personal income tax liability and provide greater wealth in retirement will prove irresistible.
Capital Gains Tax (CGT)
Again, there was much speculation about an increase in CGT rates, but this has not materialised. However, the annual exempt amount has not even had the minor CPI increase seen with the income tax personal allowance; it will remain frozen at £12,300 until at least 2026.
The budget has triggered thoughts about the future.
What is now evident is that the coming years will see many fall into tax brackets that they had previously not given much thought to, as asset values and incomes increase at a faster rate than their tax-free allowances.
The Chancellor has had to tread softly with this budget, as he does not want to scupper chances of economic recovery. However, he has made it clear that there will be future pain and some of the expected negative changes to IHT, CGT, Income tax and Pensions tax relief could well still come to fruition in a few years’ time.
Careful and conscientious planning will be needed to ensure that you make the most of the current allowances and do not stumble into a position where you or your family incur more painful tax charges than necessary in the coming years.
The above information is for educational purposes and is not a personal recommendation or investment advice. Content is accurate at time of writing and tax limits may change. The value of investments can go down as well as up. Wise Investment is authorised and regulated by the Financial Conduct Authority (FCA 230553).