Our experts have been carefully analysing some of the changes Jeremy Hunt unveiled during Wednesday’s Budget and what they might mean for your finances. Here’s a breakdown of some of the key announcements and what we think could change for you. As ever, speak to your financial planner or portfolio manager if you have any questions or concerns.
National Insurance Contributions
The Chancellor’s headline-grabbing announcement was the cuts to National Insurance Contributions (NICs) for employed and self-employed earnings. While this will be welcomed by many, the move does little to help those who have retired and no longer pay NICs.
The Chancellor opted not to reduce income tax rates, raise thresholds or increase the personal allowance. This means that, as wages rise, more people will be caught by the higher- and additional-rate tax brackets. Pensioners, too, may end up paying more in income tax if their taxable retirement income, such as the state pension, increases.
The good news is that the Budget maintained the government’s commitment to the pension ‘triple lock’ whereby annual state pension increases will be the higher of 2.5%, CPI or average earnings increases. However, the Chancellor indicated a desire to scrap NICs altogether. Current NICs effectively pay for today’s basic state pension, so without them there may be no ‘money in the pot’ to maintain the triple lock in future.
Capital gains tax
Your income tax bracket affects how much capital gains tax (CGT) you pay when you sell an asset that has increased in value. As we have seen, the Chancellor made no changes to income tax so there are no CGT breaks to be found here. In fact, those realising capital gains face a double blow because the annual CGT allowance reduces from £6,000 to £3,000 a year on 6 April.
However, the Chancellor did cut the higher rate of CGT from 28% to 24% for the sale of non-primary residences in a bid to boost available housing stock. Basic rate taxpayers will continue to pay 18%.
The rates of capital gains tax for non-property gains remain at their current rates.
Inheritance tax
There were no increases in the inheritance tax (IHT) threshold which remains at £325,000 plus an additional £175,000 if residential property is passed to direct descendants. The rate of IHT remains at 40% and there are no changes to annual gifting allowances.
Along with the announcement for non-doms, the Chancellor announced the intention to move to a new IHT regime. Under the high-level proposals, IHT would no longer be based on where a person is ‘domiciled’. A consultation on how IHT interacts with the domicile status is now expected.
The good news is that the favourable IHT status of pensions is maintained, enabling individuals to pass pensions to future generations free of inheritance tax.
Planning for income in retirement and navigating the IHT rules simultaneously is complex. Speak to your financial planner to make sure you maximise the IHT-free amounts you can pass on to loved ones.
Non-dom tax rules
Currently if you live in the UK but have a permanent home overseas, you are exempt from paying income and capital gains taxes on income and gains made abroad and only pay tax when the assets are remitted to the UK. These ‘non-dom’ tax rules are complex but ultimately allow a non-dom to invest money offshore while further avoiding tax. Under the new regime presented in the Budget, the current tax breaks will be eliminated after the first four years someone lives in the UK. From this point on, they will have to pay tax on worldwide income and gains, as do other UK residents. To get ready for the new rules, transitional arrangement will be put in place over the next two years.
Non-UK assets owned by non-doms are completely outside the scope of inheritance tax (IHT). This means that if a non-dom makes a gift of their assets held outside the UK, then that gift will never be exposed to IHT. Non-doms remain entitled to the nil rate band (set at £325,000 per individual) and this includes transfers of asset between spouses which are exempt from IHT for UK domiciled individuals. It is as yet unclear how the rules for IHT will work under the new non-dom regime.
While the Chancellor’s announcement will be a blow to non-doms with assets offshore, it does present an opportunity to bring capital to the UK and invest it using a range of tax-advantageous schemes such as a pension, Venture Capital Trust and Enterprise Investment Schemes, subject to personal tax circumstances and allowances.
Dividend allowance
The dividend tax rate remains unchanged, although the tax-free dividend allowance will be halved from £1,000 to £500 in April.
British ISA
At a time when we are seeing individual capital gains tax allowances being eroded, investors are being given another path to make the most of their tax-free allowance with the new British ISA. There is scant detail on the British ISA at this stage as the government is currently inviting views on how it should be developed, but it could include shares, funds, corporate bonds and government bonds. It may allow investors to hold AIM (Alternative Investment Market) stocks, which are typically small, growing companies, as well as medium and large listed businesses.
It’s important to note that UK stocks have underperformed global stocks since 2020, so anyone interested in the concept of the British ISA should consider the proportion of their overall wealth they want to hold in the UK to maintain a good level of diversification (by this we mean not putting all your eggs in one basket, to spread your risk of capital loss across a range of different investments).
British Savings Bonds
British Savings Bonds will be available through NS&I from early April for savers who like the idea of using their money to support the UK economy. The bonds will be new three-year fixed-rate issues of NS&I’s Guaranteed Growth Bonds and Guaranteed Income Bonds. They will offer savers a guaranteed return over three years for investments between £500 and £1m, with the option to reinvest the interest earned or have it paid to your bank account. These bonds might be of interest to someone who has maxed out their ISA allowance and still has cash looking for a home. We will be interested to see more of the details when they are released next month.
Pensions
There were no new changes affecting pensions announced in the Budget, but we’d like to take this chance to remind you of the benefits of maximising your allowances by saving into pensions, as the tax year draws to a close.
You can pay in a maximum of £60,000 into a pension each year, this is called your annual allowance. For high earners, this is tapered by £1 for every £2 that your adjusted income exceeds £260,000, down to a maximum contribution allowance of £10,000 a year.
There is opportunity to maximise pension contributions by ‘carrying forward’ any unused annual allowance from the last three tax years. This could be useful if you have been paid a bonus or increased your earnings in recent years.
We will soon send you more detailed guidance on how you can make the most of pensions as a tax-efficient way to grow your wealth over the long term. In the meantime, our door is open if you have any questions about pensions, Budget changes or anything else.
The information and opinion contained in this article should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested.