Chancellor Jeremy Hunt has finally revealed his much-anticipated Budget on 17 November. Many are still digesting the announcements and what they mean for household finances as we near the winter. As financial planners, our team in Carlisle have carefully examined the Chancellor’s statements and has compiled a short Budget Summary for clients. In this post, we go into more depth about the new tax measures (specifically those on investors) and how to mitigate negative effects on your financial plan. We hope this content is helpful to you and please contact us if you have further questions via 01228 210 137.
Use pension contributions
Higher earners may have been surprised to see that the Chancellor will be lowering the 45% Additional Rate from £150,000 to £125,140. This will take effect from April 2023 and so leaves little time for people to make major adjustments to their finances to avoid getting caught by the tax (about 246,000 people individuals are expected to now be pushed into paying the Additional Rate). For some investors, this could leave less net income to put to work in their portfolios.
One way to potentially avoid getting dragged into a higher rate of income tax is to use pension contributions to lower your “real income”. In 2022-23, you can contribute up to £40,000 to your pensions (or up to 100% of your earnings, whichever is lower) and receive tax relief from the government – i.e. the tax you would have paid on the contribution, had you kept it as income, is instead put into your pension. Not only can this provide a nice “boost” to your nest egg, but it could also help some higher earners avoid a needless tax liability.
For instance, if your income is set to be £140,000 for 2022-23 and you worry that you will be caught out by the new Additional Rate threshold (£125,140), then making a £15,000 pension contribution (assuming you can afford this and have remaining annual allowance) could allow you to invest in your retirement portfolio and side-step the 45% levy entirely. Speak to a financial adviser if you think this could be an option for you.
Maximise your ISA
In December 2022, there is still time to make full use of an individual’s ISA allowance (£20,000 per year) to protect a portfolio before the April 2023 deadline. Investments held within an ISA generate capital gains, dividends and interest without tax. Investors have also been able to produce tax-free returns each tax year outside an ISA under various allowances. However, the 17 November Budget has announced a series of tax-free allowance reductions.
The Annual Exempt Amount for capital gains tax, for instance, will be lowered from £12,300 in the current year to £6,000 in April 2023 and later to £3,000 (in April 2024). In the same periods, the dividend allowance will be cut from £2,000 to £1,000 and then to £500. By planning ahead, however, investors can help reduce the impact of these potential allowance reductions on their returns. Of course, anything could happen in the political sphere over the next few tax years, such as a general election. However, the 17 November Budget tax changes are a reminder to make full use of ISA allowances before each tax year deadline.
Share assets with your partner
In 2022-23, there is usually no tax liability when individuals give (or sell) assets to their spouse or civil partner. This is not set to change in April 2023 and could help households save, overall, on investment taxes when partners ensure each person has maximised ISA allowances and other tax-free allowances. For instance, if a wife has maximised her ISA allowance (£20,000) and her husband has not, then she could transfer certain assets to him (e.g. shares held in an investment account). This is especially important to consider if one person is subject to a higher income tax rate and has fully used his/her tax allowances for the year.
Check tax-efficient investment schemes
For some investors (e.g. those prepared to take on more risk for higher potential returns), a range of schemes exist which can be useful for tax planning purposes. Companies which qualify for the Enterprise Investment Scheme (EIS), for instance, offer investors 30% income tax relief, loss relief and capital gains tax deferral. Venture Capital Trusts (VCTs), moreover, let investors produce tax-free dividends outside of their dividend allowance, as well as tax-free capital gains. Many of these schemes invest into earlier-stage businesses which have high growth potential, but are also at higher risk of failure. Seek professional advice to determine if these might be suitable assets for your portfolio, and if so, how how much risk may be appropriate given your goals, time horizon and personal profile.
Invitation
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.