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Wealthy readers could be forgiven for thinking that they don’t need to make changes to their financial plans following Monday’s Budget.
With no end in sight to the Brexit negotiations, the prime minister’s pledge to end austerity meant that advisers were braced for tax rises. However, due to better than expected forecasts from the Office for Budget Responsibility (OBR), chancellor Philip Hammond did no such thing.
“Usually, we are deluged with calls from clients following the Budget as they seek advice about the impact of any changes,” says Michael Martin, relationship manager at Seven Investment Management. “This year, it’s like the Budget never happened.”
However, advisers stress the risk of the chancellor being forced to raise taxes if Brexit negotiations go awry. Mr Hammond himself said at the despatch box that he was “confident, but not complacent” about a deal being secured, and that the Spring Statement next March could be upgraded to a “full fiscal event” if necessary.
Here, FT Money presents the main areas where readers should consider taking action.
Pay into your pension
Pensions tax relief was untouched in this week’s Budget, providing some breathing space for higher earners who have endured a dozen reductions to their savings allowances in the past decade.
Before the chancellor was handed his Budget windfall from the OBR, he had described the £25bn annual cost of pension tax relief as “ eye wateringly expensive”. Experts warn there is no certainty how long current savings limits will last, and advise clients to make the most of their full tax allowances while they can.
Currently, the annual pension savings limit is £40,000 before tax charges apply. For those with total incomes of £150,000 or more, the annual allowance taper introduced in 2016 gradually reduces this to £10,000 for those earning more than £210,000.
However, it is possible for unused annual allowance from the three previous tax years to be carried forward and added to the annual allowance for the current tax year.
“It’s possible to get tax relief on pension contributions up to the amount you earn, but there’s a cap of £40,000 every year for most people, says Nathan Long, senior analyst with Hargreaves Lansdown.
Those who are affected by the annual allowance taper might find that it is possible to pay contributions above the cap by capitalising on unused contributions from the previous three years.
If you don’t have enough spare cash from income to boost your contributions today, consider tapping into savings and investments to mop up unused tax relief, suggests Mr Long.
“This is likely to involve selling any investments and making a contribution in cash,” he says. “The money will be locked up until your mid-50s, so you’d need to be sure that you wouldn’t need it until later life, but it could allow you to maximise a tax advantage now.”
But while pensions are very tax efficient, they are also inflexible for younger people, who won’t be able to access their money until at least the age of 55.
“For many people the best approach for long-term investing is therefore a combination of pensions and Isas and so maximising pension contributions might not be the most suitable choice,” says Patrick Connolly, chartered financial planner with Chase de Vere.
Speak to your employer and check whether you can make your pension contributions using “salary sacrifice”, which is another tax efficient way to save for retirement.
This method means you don’t pay national insurance on the value of the contribution, saving higher and additional rate taxpayers 2 per cent and basic rate taxpayers 12 per cent, says Mr Long. However, be aware that salary sacrifice arrangements can impact how much you can borrow from a mortgage lender, or the level of maternity pay you will receive.
Even if you have used up all of your tax allowances, don’t neglect those that your spouse may have. It is possible to fund their pensions contributions so long as you have sufficient earnings to generate the tax relief, says Christine Ross, head of wealth advice with Handelsbanken Wealth Management.
If one partner does not work it is still worth them contributing up to £3,600 each year. The contribution attracts tax relief at the basic rate even if the member is a non-taxpayer, making a net cost of £2,880.
“If a partner is unlikely to have any other income of their own in retirement the pension will use up some or all of that individual’s personal allowance, providing tax-free income,” says Ms Ross. “Under current rules, a quarter of the fund can also be taken tax free.”
The same £3,600 allowance may be used to fund pensions for children. In all cases the funds cannot be accessed until after the age of 55 although there are proposals to increase this.
Watch your marginal tax rate
Most people will pay less income tax from next April after the personal allowance and higher rate tax thresholds were unexpectedly increased in the Budget — but higher earners will see part of that gain cancelled out by linked increases to national insurance.
Accelerating the changes planned for 2020 was the “star bunny” that Mr Hammond pulled from his hat. Although this was a Conservative manifesto pledge, many expected it to be scrapped to fund increased spending on public services.
The personal allowance threshold, after which basic rate income tax applies, will rise to £12,500 from April 2019, from its current level of £11,850. The higher rate threshold — after which income tax of 40 per cent applies — will also rise to £50,000 from the current level of £46,350.
The changes mean that in the next tax year, basic rate taxpayers can expect to pay £130 less income tax, rising to £860 for higher rate taxpayers earning up to £100,000.
However, these calculations fail to take account of linked increases to the upper earnings limit for national insurance contributions. Sir Steve Webb, director of policy of Royal London, calculates the difference to net take home pay for higher earners would only be about £500.
“The chancellor should have come clean and mentioned this in the Budget speech, rather than leave it in the Budget small print,” Sir Steve says.
Readers in Scotland will have to wait until the Scottish Budget on December 12 to see if Scotland’s higher-rate tax threshold — currently £43,430 — will also rise. However, national insurance rates are not devolved, so next April’s changes will apply across the UK.
Assuming Scottish tax thresholds are unchanged, this means someone in Scotland earning £50,000 will pay an extra £30.41 per month in national insurance contributions without saving anything in income tax, says Steven Cameron, pensions director at Aegon.
The enlarged personal allowance will also complicate matters for those earning more than £100,000. Once you earn more than this amount, the £12,500 personal allowance is withdrawn at the rate of £1 for every £2 of income. This effectively creates a marginal tax rate of 60 per cent on the slice of earnings between £100,000 and £125,000.
This “cliff edge” existed before the Budget, but it now covers a slightly larger band of income.
Nimesh Shah, partner at Blick Rothenberg, says those who are approaching these thresholds may be able to reduce their taxable income by making higher pension contributions, claiming Gift Aid on charitable donations or controlling the timings of other income, for example dividend payments from family companies.
“For future years, income may be reduced by replacing taxable income streams with tax-free returns by investing through an individual savings account (Isa) or investing for capital growth rather than income,” he says. “In addition, individuals can benefit from tax relief by making certain tax-efficient investments in a Venture Capital Trust or shares in an Enterprise Investment Scheme.”
If dividend income or savings interest takes your annual earnings into six figures, you could also consider transferring assets to a lower-earning spouse.
Given the anxiety over future pensions tax changes, increasing contributions to your retirement fund could prove doubly attractive to taxpayers within this bracket.
Even if an employee is already making the maximum contribution that is matched by their company, additional voluntary pension contributions (AVCs) can be made tax-free so long as that individual has not breached their annual or lifetime allowances.
However, Lucy Brennan, partner at Saffery Champness, an accountancy group, says taxpayers should not regard this route as a panacea. “On pensions contributions, for example, it feels like you are putting money away for less but the tax payment is really just being deferred — depending on your circumstances in retirement — and, in the meantime, the money is locked away,” she says.
Will you still count as self-employed?
IT contractors, consultants and TV presenters are among self-employed workers in the private sector facing a steep rise in taxes and a potential drop in income following changes announced at the Budget.
The government wants to crack down on freelances who hire themselves out via personal service companies, but are effectively employed.
Self-employed workers pay lower rates of income tax and national insurance than those on the payroll. The companies who employ them also benefit as they don’t have to pay employer national insurance contributions (NICs), pensions, or sick pay.
From April 2020, reforms to the “off-payroll” working rules will mean private sector companies who cannot prove their workers are self-employed will become liable for paying employer NICs and deducting higher taxes from their workers’ pay.
The change will not affect all companies according to HM Revenue & Customs — the 1.5m smallest businesses in the country will be exempt — but medium and large businesses have until April 2020 to implement the changes.
The measure was the biggest revenue raiser in the Budget, forecast to generate £3.1bn in the four years after its introduction, and is an extension of the rules introduced last year for self-employed workers in the public sector. According to the Treasury, these changes have resulted in an extra 58,000 individuals paying higher income tax and national insurance contributions in any given month.
Workers affected by the new regime could see their take-home pay drop significantly. Bookkeeping software company Pandle calculates that a self-employed contractor currently earning £50,000 per year could see their net annual pay fall by almost £6,000 after becoming an employee on the company payroll with extra tax and national insurance costs. A contractor on £90,000 could see their net pay reduce by more than £10,000.
Financial planners say the first step for anyone affected is to work out whether they are genuinely self-employed or not. HMRC’s definition of self-employment hinges on the extent to which workers are taking financial risk, whether they have several contracts or rely on just one, and whether they can set their own working rules and the price they charge for their labour. But the definition is not clear cut.
Dawn Register, tax disputes partner at BDO, says the definition of what constitutes self employment is highly subjective. “The criteria is not clear cut,” she says. “There have been a lot of cases [at tax tribunals] where one case is found to be self-employed, and another very similar one is found to be employed.”
The next step is to check with the companies that hire you as to how they plan to approach the new rules. Come April 2020, the burden will rest with companies, and many of them might choose to err on the side of caution.
“Speak to the companies you work for and test the water,” says Ian Dyall, head of estate planning at Tilney, a wealth manager. “Those workers on the ragged edge of being employed might choose to be employed instead of continue as a contractor, but there will be a financial impact.”
Faced with such a cut in income, it would be a wise move to clear debts and lock in a better mortgage deal in the run-up to the changes.
“You should also negotiate a deal on your pension if you are going to become an employee,” Mr Dyall says. “It’s one of the big advantages of being employed and a good way to mitigate tax, by paying more in.”
On the other hand, Petronella West, chief executive of Investment Quorum, a wealth manager, adds: “It might be worth trying to look for other contracts so you can prove you aren’t reliant on one source of income.”
Get ready for property changes
Buy-to-let landlords have had little to cheer about in Budgets of the past few years, with a succession of tax crackdowns and new regulations choking off growth in the sector.
Now so-called “accidental landlords” face a headache after Mr Hammond announced changes to the rules governing lettings relief. This tax break has been available to anyone who lets out a property that is — or has been — their primary residence. A maximum £40,000 in lettings relief can be claimed against capital gains tax when the property is sold, rising to £80,000 for a couple.
From April 2020 — subject to a consultation — owners will only qualify for this relief if they occupy the home alongside the tenant. Scrapping the relief would bring in £150m by 2023-24, according to Treasury forecasts.
Under the current system, sellers receive CGT relief for the last 18 months that they own the property, but from 2020 this “final period exemption” could be halved to nine months.
David Lawrenson, owner of property consultancy Letting Focus, says lettings relief has been ripe to be picked off by the Treasury. “It’s relatively little known apart from by accountants and smart landlords and therefore quite a clever move by the chancellor. People will think: ‘why did they get it anyway?’ But it’s quite a significant hit for amateur landlords.”
Conventional buy-to-let landlords will be little affected, since the relief is only available when a person’s primary residence is rented out. But the changes would hit those who have been unable to sell their homes, and have decided to let their properties instead. As sales have slowed across swaths of the south in recent years, more owners have chosen this option.
The Budget was not devoid of good news for landlord investors, however, as the rise in personal income tax allowances — to £12,500 for basic rate and £50,000 for higher rate payers — could see some landlords at the margin become basic rate payers from April 2019, and thereby qualify for cheaper mortgage financing.
Andrew Turner, chief executive at buy-to-let mortgage broker Commercial Trust Ltd, says: “If these landlords suddenly find themselves in the lower tax bracket from next April, they might benefit from more generous borrowing calculations on some buy-to-let products. This is because some lenders apply less strenuous rates in their income calculation ratio (ICR) assessments for non-tax payers and basic rate taxpayers.”
Reporting by Josephine Cumbo, James Pickford, Kate Beioley, Lucy Warwick-Ching and Claer Barrett
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