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With the autumn Budget looming, we look at 5 things we really don’t want to see in the upcoming Budget.
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
Chancellors tend to spend most of their lives stuck between a rock and a hard place, and as Rishi Sunak faces the Budget, things are looking both rockier and harder than usual.
He’s facing a mountain of debt after record peace-time government spending to tide us over during the coronavirus crisis. And thanks to the threat of rising inflation and higher interest rates, he can’t rely on cheap borrowing as his get-out-of-jail-free card forever. He’s committed to getting the public finances back on a firmer footing, so he could be tempted to use the Budget to find new ways to spend less.
For investors, there’s a risk that plans to generate cash for the treasury make doing the right thing, saving and investing for the future, harder. So, however tempting it is for the treasury, there are a handful of changes we really don’t want to see in the Budget.
While there are certain changes we don’t want to see, we don’t know what’s coming in the autumn Budget and these are just our thoughts.
This article isn’t personal advice. If you’re unsure what’s right for your circumstances, ask for financial advice. Tax rules change and benefits depend on individual circumstances.
This would claw back money for the government in two ways. It would generate more charges from people who breach the allowance, and discourage people from contributing to their pension when they approach the allowance – saving the treasury tax relief too. And because most people see £1,073,100 over a lifetime as the kind of sum that only bothers the very wealthiest, it would be unlikely to spark much of a backlash.
However, in reality, this isn’t a vast sum of money in pension terms. Lots of public sector workers could easily run up against the lifetime limit without thinking of themselves as particularly wealthy.
If you have a defined contribution scheme, at the time of writing this kind of sum would generate around £30,000 per annum from an annuity purchased at age 65 with inflation protection – hardly multi-millionaire territory. It’s also the kind of retrospective taxation that makes it nigh-on impossible to do the right thing for retirement.
A cut, for example from a £40,000 a year limit to a £30,000 a year limit, would save the government a chunk of tax relief. It also wouldn’t worry enormous numbers of people who can’t imagine ever paying this amount of money into their pension.
However, this kind of flexibility is vital for people who have had a lumpy income during their career, who need to make up for lost time. Business owners, for example, could end up neglecting their pension during their working life, because they put everything into the business and plan to retire on the proceeds of selling the business. Cutting how much of this they can put into their pension at that point could be a real blow.
With the Budget just around the corner, there’s no guarantee that all the government’s tax perks will be around forever. To check you’re making the most of current rules, visit our pension hub for tax tools and tips.
The dividend allowance has only been around since 2016 and has already been cut from £5,000 to £2,000 in that time. Reducing it further could be a mistake, not least because the rate of this particular tax is already set to rise by 1.25 percentage points in April.
It would be a major blow for people running their own businesses and paying themselves in dividends. They’re already one of the groups who struggled the most during the pandemic. Many of them have taken a serious dent to their financial resilience, so this could risk adding insult to injury.
Lowering the salary level at which graduates start repaying their student debts would have a massive impact on lower-paid graduates. Many have already lost financial resilience during the pandemic, and are now seeing their budgets stretched to breaking point.
In some cases, graduates don’t just earn lower salaries for a short portion of their career, but for long stretches. Especially when they enter fields which are comparatively poorly-paid.
Take museum careers, for example. Research in 2017 showed some roles’ pay is 12% lower than similar roles in other organisations. An assistant curator had a median salary of just over £20,395. Under the current rules, a recent graduate in this role typically wouldn’t need to start repaying until they earned £1,000 more than the £26,295 median salary of a curator. That could take years or even decades.
If the threshold was moved to £20,000, they could be repaying from day one. It would put a serious dent in their finances, and could put a generation of graduates off this kind of career.
This change doesn’t have the same kind of emotive impact as raising tuition fees or the interest rate on loans – but neither of those would affect low-paid graduates anywhere near as badly, because so much of their debt is eventually written off.
The government asked the Office for Tax Simplification to review inheritance tax and capital gains tax. It‘s also looked at how National Insurance works with income tax, and into the structure of tax relief on pensions.
So far there’s been little time and space for reform. In the interim, there’s always the temptation to make piecemeal changes to free up a bit of cash here and there. But this kind of fiddling can sometimes cause needless complications and unintended consequences.
When the chancellor’s stuck between a rock and a hard place, the idea of pinching a bit of breathing space from savers and investors might seem like the easiest means of escape. However, it can mean putting even more pressure on hard-pressed taxpayers at a time when budgets are already being squeezed.
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