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The Chancellor’s new “Mini-Budget” is perhaps poorly named given the shake-up it has caused in the tax system and financial markets. Analysts are still unpacking precisely what it means for households across the nation. In this article, we explore the possible implications for your wealth and long-term financial plan. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Abolition of the 45% rate
The 45% “additional rate” of income tax was introduced in 2013, lowering the 50% rate introduced by the previous Labour government. With Liz Truss’s new government announcing the complete abolition of the rate, the implications are significant for higher earners. Any income over £150,000 will now be taxed at 40% rather than 45%, possibly saving an individual £1,000s. For instance, £50,000 earned over this threshold would result in a £20,000 income tax bill, not £22,500 as it would have done before.
Other taxpayers may benefit too. In April 2024, the government plans to lower the Basic Rate to 19% (from the current 20%), potentially putting £170 back into the pockets of 31m people. Bear in mind, however, that the Personal Allowance rules have not changed. For someone earning over £100,000 per year, therefore, this allowance will still go down by £1 for every £2 you earn above this threshold. As such, if your income is £125,140 or above then you lose your £12,570 income tax-free allowance.
The impact on savings
Whilst the Mini-Budget did not change the Personal Savings Allowance (PSA), the reaction by markets has led the Bank of England (BoE) to step in and buy more government bonds (for reasons of “financial stability”). Already, it raised the base rate by 0.50% to 2.25% the day before the new Mini-Budget was released, and the widespread expectation is that rates will be raised further in the coming months to protect the currency and to try and “cool down” inflation.
Rising interest rates may have a “hidden” impact on your savings, so watch out. At present, the PSA allows a Basic Rate taxpayer to earn up to £1,000 in interest (outside an ISA) without tax. For someone on the Higher Rate, the threshold is £500. Until now, interest rates on regular savings accounts and cash ISAs have been low, meaning that an individual could store £10,000s in their accounts(s) without needing to worry about going over their PSA. However, if the base rate keeps going up then high street banks may also raise their own rates. If the BoE raises the rate to 4.5% in early 2023, for instance, then Higher Rate taxpayers may face tax on savings over £11,100 (rather than £66,666 on last December’s top easy-access account).
Consider speaking to a financial planner about how to use the tools at your disposal (e.g. your ISAs) if you are concerned that this may affect you.
Implications for investments
Many investors will welcome the Mini-Budget announcing the abolition of the 1.25% tax rise on dividends introduced in April 2022. Also, the threshold above which stamp duty must be paid on the purchase of new residential properties has gone up, from £125,000 to £250,000.
However, the market reaction to the Mini-Budget has been far from positive. Many investors are concerned about how the government will afford its planned tax cuts, leading to a sell-off of the British pound (GBP) and devaluing the currency to its lowest level in 37 years. Despite this, the Chancellor has held firm to the Mini-Budget and time will tell whether his “Go for Growth” plan will work. Presently, there are concerns that the government’s approach is similar to a previous Conservative government’s “dash for growth” plan in 1972, when chancellor Anthony Barber also announced huge levels of public borrowing and tax cuts during a time of high inflation.
The result, then, was a temporary growth boost followed by years of sterling devaluation, worse inflation and the UK needing to ask the International Monetary Fund (IMF) for a bailout. Whilst history is not guaranteed to repeat itself this time around, there is little doubt that markets are currently nervous, inflation is still high, interest rates are going up and the currency is falling. It could be that investors may face a turbulent investment landscape in the months ahead. Speak to your financial planner to ensure that you are confident in your chosen long-term investment strategy, so you can navigate any potential storm more calmly and rationally.
Conclusion
There is some welcome news in the Min-Budget. Doubtless, households will be encouraged by the 2-year £2,500 cap on energy costs from October 2022 (whereas, before, some forecasts were predicting £6,000 annual bills from next April). However, many will still be worse off given that this is still an increase from the current £1,971 energy cap. Also, mortgages are likely to get more expensive if the BoE keeps raising interest rates, and the cost of living (inflation) is likely to remain high for some time.
Whilst we wish we could say that the Mini-Budget solves these (and other) problems facing the country, many households still face challenging times ahead. Discussing your financial goals and situation with a professional will help you chart your course more confidently.
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk