Budget – Financial Planning Thoughts

NOTE: This post is more than 12 months old, and the information contained within may no longer be accurate.

Rishi Sunak’s budget was billed as a budget to protect businesses through the pandemic, fix public finances and rebuild the economy. There were few surprises, with many of the measures leaked or announced before he stood up in Parliament, he even said in his speech that the rumours ahead of the Budget were right on the money. So what has initially caught my eye in relation to financial planning.

The changes to corporation tax has been generally welcomed by business organisations. The 19% rate remains for small businesses, those with profits under £50,000, with a  rise to 25% by 2023 for businesses with profits over £250,000. Close to the 26% in the Corbyn and McDonnell manifesto at the last election that most on the right considered would be disastrous for the economy! For those businesses earning more than £50,000 but less than £250,000, there will be relief available so that they pay less than the main rate of 25%. The rises are predicted to bring into the Treasury a sizeable extra £11.9bn in 2023/24, £16.3bn in 2024/25, and £17.2bn the following year.

We have been spared immediate big personal tax rises as expected, with no rises to the rates of income tax, national insurance or VAT, thus keeping to the key Tory manifesto pledge in 2019. However, a pointless £70 rise in the personal allowance to £12,570 for the next tax year followed by a freezing of tax bands for 5 years thereafter will draw many more people into basic rate and higher rate tax, and the Treasury predicts additional tax take of £19.3bn over those 5 years.

Pensions were only mentioned briefly by the Chancellor. It is disappointing to see that the lifetime allowance will be frozen at £1,073,100 until April 2026. For pension savings above this amount, extra tax penalties are incurred, of either 55% or 25%. The allowance has been progressively whittled away over the years, thereby boosting the Treasury coffers and making it more difficult for savers to build enough pension to support a comfortable retirement. A decade ago, the allowance stood at £1.8 million. Having announced in 2017, when the lifetime allowance stood at £1 million, that it would be increased each year in line with inflation it is frustrating for all those savers (and advisers) trying to plan for their retirement. It is not just a blow for higher earners, as it could potentially negatively impact young savers with more modest incomes who are putting money into a pension for the next 30 years. The lifetime allowance is essentially a complex stealth tax that penalises investment success. It also furthers the disparity between those in final salary schemes, who can secure a pension up to nearly £54,000 pa before breaching the ceiling, whereas a 65 year old in a DC scheme will be limited to around £29,000 per annum on current annuity rates. I appreciate that a DC pension with flexi-access drawdown has greater flexibility in how income can be drawn and passed to beneficiaries on death, but the level at which the lifetime allowance tax bites for DC pension savers seems grossly unfair.

It is welcome to see that there are no changes to ISA allowances, and in spite of concerns about rises in the tax rate over the past few months capital gains tax is also unchanged, although the exemption of £12,300 per annum has been frozen until 2026. Inheritance tax nil rate bands area also frozenboth the nil rate band and residence nil rate band will remain fixed at £325,000 and £175,000 respectively until April 2026.

So it was a budget with no major shocks for financial advisers, although the Government intends to publish further tax consultations on 23 March, and we wait to see what proposed changes are included.

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