As the UK grapples with strain on the NHS, a social care crisis, war in Ukraine and spiraling inflation it is unsurprising that the government is facing lots of scrutiny. A range of policies and “freeze” measures have been introduced since March 2021 to try and boost the economy and help households. Yet what are these, exactly, and how do they impact your finances?
#1 Lifetime allowance freeze
There is a threshold on how much you can save into your pensions without tax. In 2022-23, this lifetime allowance (LTA) is set at £1,073,100 for the next four years – until April 2026. Anything you take as income over this threshold will be taxed at 25% (or, 55% if taken as a lump sum). If you are worried that your pension might grow over this threshold in the meantime, speak with a financial planner. There might be other options available to help you avoid unnecessary charges (e.g. using your ISAs or other tax-efficient vehicles, such as venture capital trusts).
#2 Inheritance tax threshold freeze
Inheritance tax (IHT) is usually charged at 40% on the value of an estate over £325,000. This threshold has also been froze until April 2024. This departs from a trend up until April 2017, where the UK government steadily allowed individuals to leave more to loved ones without IHT (called the residence nil rate band). As such, your assets could increase in value between now and April 2024 – potentially leaving you with a higher IHT liability. Fortunately, there is still a wide range of strategies that can help you mitigate a future bill – including using gifts and trusts.
#3 Personal Allowance freeze until April 2026
Some have criticised the government for this move, arguing that it amounts to a “stealth tax” if average UK wages rise in the coming years. Until April 2026, you can earn up to £12,570 and not face income tax. The threshold for the 40% Higher Rate is also set at £50,270. Take care, therefore, not to inadvertently fall into a higher tax bracket. With some careful planning, you may be able to optimise your income to mitigate a needless higher bill.
#4 Freeze of the Capital Gains Tax annual exemption
Another tax allowance that has been frozen until April 2024 is the £12,300 annual threshold on capital gains (applied when you “dispose” of taxable assets, such as those held outside of an ISA). Again, if your assets grow in value between now and April 2024, then the total value may exceed this £12,300 threshold if you sell them in a single tax year. Plan carefully to make sure you do not pay more tax than you need to. Options to consider with your financial planner may include maximising your £20,000 annual ISA allowance, transferring assets to your partner and “spreading out” asset sales across multiple tax years.
Some important recent changes
In September 2021, then Prime Minister Boris Johnson announced a planned 1.25% increase in National Insurance Contributions (NICs) in April 2022. This would mainly be used to help pay for the UK’s social care crisis, eventually capping someone’s total possible lifetime care costs at £86,000. However, with the arrival of our new Prime Minister, Liz Truss, this 1.25% increase has been reversed and should take effect in November 2022. This is likely to mean that people on a lower income save about 63p a month in tax, whilst those earning over £50,000 per year could save around £16.41 monthly.
Many were also surprised In September 2021 when the government announced the suspension of the “triple lock system” for the State Pension in 2022-23 (to prevent an 8% rise in State Pension payments due to a huge rise in average earnings during the Covid pandemic). However, in April 2023 the State Pension is expected to rise by over 10% if inflation continues to rise. However, watch this space before you get excited about your weekly payments potentially rising to as much as £203.67 per week. Given the pressure currently facing the public finances, there is the possibility that the triple lock system could be “watered down” even further. As such, make sure you keep building your own pension savings if you are still working. Do not rely just on your future State Pension, which may change by the time you retire.
Invitation
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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.