BUDGET 2021 ROUND-UP

Chancellor Rishi Sunak’s Autumn Budget marked the roadmap for rebuilding public finances.

While major tax rises had already been announced earlier this year, the Autumn Budget contained a number of new measures that will affect savings, investments, pensions and financial planning as a whole.

Here are some of the most important things you need to know:

TAXES ON EARNINGS:

Lower National Insurance thresholds[1] included in the Budget would normally mean workers pay less tax.

Yet the Budget also confirmed the increase in National Insurance by 1.25% from April 2022, which means that most taxpayers will be subject to higher NI from next year. The more you earn, the bigger the impact on take home pay.

The NI increase is not the only threat to income. By freezing the income tax thresholds until 2026 – announced in the March 2021 Budget – people on more modest salaries will also be dragged into higher tax brackets and pay higher tax bills.

A major report by the Institute for Fiscal Studies (IFS) [2] said that the combination of inflation and higher taxes would outweigh any wage increases for those on middle incomes. It warned that middle earners would be around £180 worse off next year compared to their present income.

CAPITAL GAINS TAX:

While there was no change for the capital gains tax thresholds in the Budget, the Chancellor announced that there will be an increase in the payment window for capital gains tax purposes in relation to UK property disposals. It has now been extended from 30 to 60 days. 

INHERITANCE TAX:

IHT thresholds were also unchanged in the Budget. The nil-rate band has been frozen at £325,000 since 2009/10, so IHT has been increasing in real terms over time. Had inflationary adjustments not been suspended, the nil-rate band would now be much higher at £417,000. 

SAVINGS AND INVESTMENTS

ISAs:

The annual ISA allowances were unchanged at £20,000 for the 2022/23 tax year and £9,000 for Junior ISAs meaning investors cannot shelter any more savings from tax.

The Budget also confirmed the rise to dividend taxes. Each investor can receive £2,000 in dividends a year without paying tax. Above that basic, higher and additional-rate taxpayers pay 7.5%, 32.5% and 38.1% respectively.

These rates will rise by 1.25 percentage points in April 2022. For basic rate taxpayers that means the rate will be 8.75%, and 33.75% and 39.35% for higher-rate and additional-rate taxpayers respectively.

GREEN SAVINGS BONDS:

The launch of the Green Savings Bonds was highlighted in the Autumn Budget. They were made available to customers via NS&I on 22 October. The NS&I Green Savings Bond is a three-year fixed-term savings product with an interest rate of 0.65%. Customers can invest between £100 and £100,000. Backed by a HM Treasury-backed 100% guarantee, they will be on sale for a minimum of three months.

PENSIONS:

The rate of pensions tax relief is often rumoured to be on the chopping block, but was left alone.

The allowance has been dramatically cut over the last decade and is now frozen at £1,073,100 until 2026. While this may appear high to most savers, it is leading to a growing number of workers risking breaching the limit. The Office for Budget Responsibility expects the CPI inflation rate to rise from 3.1% in September to 4% over the next year, which will further erode the real value of the lifetime allowance.

Rishi Sunak announced that the government will consult on changes to the charge cap – currently at 0.75% – for pension schemes to allow investment in illiquid future growth projects.

SPENDING:

While the cost of living crisis rages on with inflation rising, there was good news in that the planned rise in fuel duty has been cancelled. “After 12 consecutive years of frozen rates, the average car driver will now save a total of £1,900,” Mr Sunak said.

However, wholesale oil prices have been soaring, pushing up the price of a tank of fuel for drivers over the last few months.

The planned rise in alcohol duty has also been cancelled. In the future, the Chancellor will streamline duty rates which are currently different across many beverages.

Under the new regime there will be just six duty rates on alcohol – the stronger the drink, the higher the rate.

Domestic air passenger duty has been reduced for flights between airports in England, Wales, Scotland and Northern Island– the rate will halve to £6.50 from April 2023.

However, long-haul flights over 5,500 miles to destinations including Hong Kong, Singapore and Tokyo there will be a price rise of £7 per person travelling in economy. For destinations between 2,000 and 5,500 miles in economy will change from £84 to £87 – a rise of £3.

What can individuals do?

It’s worth doing everything you can to take control of your finances and save and invest as tax-efficiently as possible. With inflation rising it’s even more important to keep your money working hard.

That could mean taking advantage of tax breaks such as the annual ISA allowance and where possible consider having dividend-paying investments in an ISA where no tax is due, and ensure you think about inheritance tax planning sooner rather than later.

Source:

[1] https://www.gov.uk/government/publications/autumn-budget-2021-overview-of-tax-legislation-and-rates-ootlar/annex-a-rates-and-allowances

[2] https://ifs.org.uk/budget-2021

CALLING ALL BORROWERS – is it time to remortgage?

With mortgage rates so low at the moment, it seems like a no brainer for borrowers to explore if they are getting the best deal on their home loan.

The idea of reducing mortgage payments seems even more attractive while prices for everything else seem to be rising, whether that’s energy bills or your weekly food shop.

Rates on mortgages remain extremely competitive with two and five-year rates available under 1%.

Borrowers have been taking advantage of record low rates in their droves. The latest figures show remortgage approvals in the summer grew to their highest level since last March[1].

Since a mortgage is likely to be your largest monthly outgoing, it’s crucial to get the best deal possible to ensure you don’t pay more interest than you need to.

The golden rule is not to slip onto your lender’s standard variable rate (SVR) when your existing deal comes to an end. The average SVR today is around 4.4%.

Fixed rate mortgages remain popular as they allow you to lock into a rate for a number of years, bringing peace of mind that your monthly repayments won’t rise during that time.

If you are worried about interest rates rising and you’re on a variable rate, you might want to switch to a fixed-rate loan to buy certainty over repayments.

While interest rates have been a record low of 0.1%, last month the Bank of England cautioned it may soon raise the base rate to combat rising inflation, which jumped to a nine-year high in August [2], not helped by soaring energy prices.

A rise in interest rates usually feeds through to mortgage rates.

The cheapest mortgages today are still reserved for those with the largest deposits, as they pose a smaller “risk” than those with only smaller sums. Yet savings could still be made for those with much smaller deposits.

It’s not just those coming to the end of their existing deal who might want to remortgage. Homeowners with a substantial amount of equity in their home might want to release some money – perhaps to fund a renovations or perhaps to help younger family members get on the property ladder. This works by taking out a new mortgage that is larger than your existing mortgage.

Or you want to remortgage to overpay by more than your lender will allow. If you have come into some money perhaps with a large bonus from work or an inheritance, you might be keen to pay off a chunk of your mortgage to save on interest payments and fast-track being mortgage-free. Most mortgages come with a limit on the amount by which you can overpay. Remortgaging is one way to pay down the loan and get a better rate.

Finding the best deal

Now is a very good time to check if it’s possible to secure a good rate. Lender competition is fierce, which has helped drive mortgage rates down over the last 12 months.

But it’s important to find the right mortgage – and not simply go for the cheapest rate. That’s because there are other things to factor in such as the arrangement fee and valuation and legal costs. It might be cheaper to go for a loan that carries a slightly higher rate if the fee is far cheaper than the loan with the lowest rate.

It’s also important to explore what’s on offer from all lenders in the market which is where a good mortgage adviser can be helpful.

Your adviser will look for the best mortgage for you and they can give you access to far more products than if you went direct to a lender. They also have access to exclusive deals not available to borrowers who don’t have a broker.

A mortgage adviser deals with lenders on a day-to-day basis which means they will know what the application process is like for each one and which lender can process things with minimal delays.

It can be more difficult for certain groups such as self-employed workers to get a mortgage. An adviser can help by approaching the more flexible lenders for your circumstances.

Some mortgage offers are valid for up to six months so even if your existing deal doesn’t expire until 2021, you can still secure a low rate now. It may even work out cheaper if you end your current deal early and have to pay early repayment charges.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Source:

[1] Bank of England Money and Credit report – August 2021 

[2] https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/august2021 

SOCIAL CARE SYSTEMS REFORMS – WHAT’S THE DEAL?

Britain’s social care system has long been a topic for debate, with pressure mounting on the current Government to find a solution to the challenges faced by escalating care costs and how to fund them.

The problems broadly come down to the fact that people don’t set aside enough (or in some cases any) money to pay for the cost of long-term care in later life which can runs into hundreds of thousands of pounds.

Many are forced to deplete life savings and in some instances, sell the family home to pay the bills. Crucially, there is not enough government help.

Some long-awaited changes were finally announced last week. Prime Minister Boris Johnson revealed plans that from October 2023 there will be a cap on how much pensioners will pay for care.

Proposals state that pensioners will still have to pay up to £86,000 – but then the Government will step in cover the rest of the bill.

Government estimates state that private payers would reach the £86,000 cap after three years in residential care and six years receiving care at home.

There will be other crucial changes. At the moment you have to pay for residential old-age care if you have more than £23,250 in assets if you live in England, Scotland or Northern Ireland, and £23,750 if you live in Wales. The £23,250 limit will rise to £100,000 under the government’s new plans taking effect in October 2023.

People with assets of between £100,000 and £20,000 would contribute towards the costs of their care on a sliding scale.

Anyone with savings under £20,000 will not pay anything.

The relief will be enormous for families of knowing the state will eventually step in will help protect them from stress to an already difficult time.

The reforms might not be so popular, however, with those who will have to foot the bill.

 From April 2022, the government will create a UK-wide health and social care levy on earned income, with dividend rates increasing too.

Boris Johnson announced a 1.25% rise in national insurance. The NI increase will, for the first time, include those above State pension age who are still working. They too will have to pay the tax under the Prime Minister’s plans.

Investors and business owners who pay themselves dividends will also contribute to the costs through higher taxes.

They currently pay a fixed rate of tax on income from dividends above the £2,000 tax-free limit, per person. Basic, higher and additional-rate taxpayers pay 7.5%, 32.5% and 38.1% respectively. For higher-rate and additional -rate taxpayers, this will rise to 33.75% and 39.35% respectively in April 2022 under the new plans.

Boris Johnson told MPs the combined tax rises will raise almost £36billion over the next three years. Yet the majority will be used to help the NHS recover from the pandemic, with only £5.4billion to be invested in adult social care over three years. 

Since the demand for social care continues to grow as we all live longer, more money is likely to be needed in the future to cope with such demands.

Social care requests in England have risen by more than 100,000 per year in five years, according to the NHS. Meanwhile, Age UK estimates 1.5 million people in England don’t have access to the support they need.

Even with the reforms, there is still a very real need for individuals to make provisions for their own long-term care needs. For example, one major drawback of the new government policy measures is that the cost cap only covers a person’s personal care costs – meaning all food, energy and, most importantly, accommodation costs are not covered. These are the costs that can escalate quickly.

Talking to an adviser can help secure your future in an ever-changing landscape.

THE COST OF LIVING

IS RISING

Are your savings structured to protect from inflation?

If you have booked a UK break, eaten in a restaurant or bought new clothes, you may have noticed that the price of goods and services is rising rapidly. Many people don’t have the pension savings they would like, but what they might have is a valuable home.

The rate of inflation has risen again in the last few months (April to July), from 1.6% to 2.1% – rates previously not seen since 2019 [1].

A high inflation rate erodes the buying power of your savings and when coupled with historical low interest rates, it becomes harder to get the most from your savings.

BUT WHAT ACTUALLY IS INFLATION?

Simply put, inflation is the rate at which prices are rising – if the cost of a  1 jar of jam rises by 5p, then jam inflation is 5%.

It applies to services too, like having your nails done or getting your car valeted. You may not notice low levels of inflation from month to month, but in the long term, these price rises can have a big impact on the buying power of your savings.

HOW COULD I STRUCTURE MY SAVINGS TO REDUCE THE IMPACT OF INFLATION?

It does very much depend on your individual circumstances but firstly it is widely suggested that you should have the equivalent of at least six months’ required income in easy access cash savings to cover any unexpected expenses.

A further proportion of savings could then be held in a range of fixed term products, preserving your capital, and providing some element of return but unlikely to exceed that of the current inflation rates.

It is the treatment of any surplus savings that could determine whether you can achieve an overall return above inflation.

WHAT HAPPENS NEXT?

Like so many aspects of life, the best course for stability is about having balance. If you are holding large amounts of cash savings, then it is worth considering investment alternatives such as a tax efficient Stocks & Shares Individual Savings Account (ISA) or a General Investment Account (GIA). This could include a single investment fund or a blended portfolio which meets your attitude towards taking risk and your longer-term goals. Whilst of course not guaranteed, such investments are more likely to provide returns above inflation.

If you would like to discuss your options or arrange a review of your savings and investments, please do get in touch.

Source:

[1] Office for National Statistics – inflation and prices indices.