Using Careful Financial Planning There Are Still Many Advantages of the UK’s Generous Investment System.
Whilst there were no major changes from a personal financial planning perspective in this year’s Autumn Statement, we thought it would be useful to provide a brief summary of what was and wasn’t announced, as well as a reminder of how generous certain aspects of the system still are.
WHAT WAS SAID
In the run-up to the Chancellor’s statement, the main rumour had been around possible changes to inheritance tax. However, these rates and allowances have stayed the same. Perhaps something to look out for in next year’s Spring Budget.
Instead, the main “give-aways” were a 2% drop to National Insurance which will give workers a welcome boost, as well as a commitment to the triple-lock, meaning that people in receipt of the state pension will see a very generous 8.5% jump in this income from April next year.
There was also a renewed commitment to the scrapping of the pension Lifetime Allowance (originally announced in the Spring) which is good news for those with large pension funds. Technically, it still exists in the current tax year, albeit with a 0% tax rate, but is due to be abolished in April 2024.
WHAT WASN'T SAID
The untold story is around the cuts that had previously been announced and the number of allowances and thresholds that remain unchanged and have therefore become less generous in real terms (“stealth taxes”).
Some examples:
The capital gains tax allowance dropped from £12,300 in 2022/23 to £6,000 in 2023/24 and will fall again to just £3,000 next tax year (2024/25).
The dividend allowance dropped from £2,000 in 2022/23 to £1,000 in 2023/24 and will fall again to just £500 next tax year.
The point at which you pay 40% tax (income over £50,270 p.a.) and 45% tax (income over £125,140 p.a.) has stayed the same.
The inheritance tax nil rate band stays at £325,000 with a further £175,000 for the residence nil rate band.
Despite all of this, there are numerous aspects of the personal financial planning landscape that remain quite attractive.
SOME EXAMPLES OF WHY IT'S NOT SO BAD
1. Income tax – if you are retired and have a generous income of, say, £50,000 p.a. before tax, the first £12,570 of your income is tax free, with the balance taxed at just 20%, giving a total income tax bill of only £7,486. Less than 15% of your total income is being taken away from you in tax.
2. Individual Savings Accounts– you have an ISA allowance of £20,000 each year and any growth or income that builds up within your ISA portfolio is extremely tax-efficient. For those households who have the financial means to save and invest over a sustained period of years, it is possible to build up a substantial six or even seven-figure tax-sheltered portfolio.
3. Pension contributions – if you are fortunate enough to be a very high earner (income over £260,000 p.a.), you are restricted on what you can sensibly pay into a pension. But for everyone else, subject to your income, you can contribute up to £60,000 p.a. to your pension and not only receive a very generous tax break on money that you pay in, but also benefit from very tax-efficient returns on a year-by-year basis.
4. Pension death benefits - anything that is left in your pension fund on your death can be inherited by your loved ones in a tax-efficient way too. Prior to the Autumn Statement there were rumours that pension death benefits would be made less generous, but this change didn’t materialise.
5. Inheritance tax allowance – admittedly, the current rules favour married homeowners with children and grandchildren (which can feel unfair), but if you are eligible for the full £175,000 residence nil rate band, a couple can pass up to £1 million of assets down the generations, completely free from inheritance tax. On top of this, there are plenty of other useful allowances (4. above as an example) that can help you manage your potential liability further.
QUESTIONS
If there is any aspect of the Autumn Statement or our summary that you would like to discuss, please call us on 020 3488 9505.
The value of your investments can go down as well as up, so you could get back less
than you invested.
Tax and Estate planning is not regulated by the Financial Conduct Authority.