By Richard Meek
The autumn statement had been trailed by the government as a moment to have to swallow hard and adjust to the economic situation we find ourselves in.
The politics of the situation also meant there was an incentive for Mr Hunt to get all the bad news out now, given that future statements are more positive and especially as, dare I say, we move toward a general election.
Time will tell on all of this and it’s not our job to opine on the political situation we’re in.
However, it is reassuring to see that the markets have reacted in a way that suggests they are much more comfortable with Mr Hunt’s approach than that of his immediate predecessor.
It is also welcome that the pension triple lock remains, keeping the state pension as a key underpin of retirement income.
What follows is a brief summary of how this might impact your finances and financial planning.
We’re always here to discuss any specific concerns you might have as a result of this statement and look forward to hearing from you should you wish to discuss anything.
What has changed?
Fiscal drag bites
Most headline allowances and thresholds for various taxes (income tax, National Insurance and inheritance tax) will not be increased until 2028, having already been frozen for some time. This causes an effect called “fiscal drag”.
As incomes and capital values rise, more tax is collected as the tax thresholds don’t keep up with these increases. The higher inflation and increased cost of living we are currently experiencing only compounds this effect.
New 45% income tax threshold
From next April, the 45% income tax threshold will reduce from £150,000 (gross) to £125,140 (gross).
This is the point at which the personal allowance has been completely lost and means the 40% income tax bracket will end at earnings of £100,000 (gross) p.a. Those affected by this will pay a further £1,253 in income tax.
Increased taxes on invested wealth - capital gains tax & dividend taxation
From April 2023 the capital gains tax allowance will reduce from £12,300 to £6,000 and then again to £3,000 from April 2024. Correspondingly, the dividend allowance will reduce from £2,000 to £1,000 and then to £500.
Many people use these allowances each year to mitigate the taxes on investment returns.
To summarise, the measures in the autumn statement mean incomes are now being taxed at levels not seen for many years. It may also suggest that attention is turning to ways in which invested wealth can be taxed more.
What can I do to mitigate the impact?
In one sense, there is very little you can do to avoid this impact - most of us would not volunteer for a wage freeze, or to mark down the value of our assets or reduce the growth we hope to achieve on investments.
However, the continued use of the sound financial planning measures that we advocate will help. Such measures include:
- ensuring all the tax allowances you have are used.
- ensuring you use all the tax privileged savings allowances you have where appropriate - ISA, Pension, EIS/VCT.
- ensuring that assets are held in the most tax efficient structure or by the individual facing the lowest tax burden.
For our clients targeting a net income we can also adjust things from next April to allow for the new regime. Where it is sensible to increase what is taken from your assets, any adjustments will be discussed and agreed at review meetings.
We don’t think any immediately precipitous actions need to be taken, just the continued “good practise” we have outlined above.
Does this affect the investment outlook?
The OBR report underpinning the autumn statement confirms the economic outlook that many of our preferred investment managers are already incorporating into their strategies. Inflation is expected to fall away during 2023 and to very low levels thereafter.
Interest rates may not rise to the levels some people fear and we will have a period of recession. This poor outlook has been largely factored in by markets and whilst investment returns may not race away, it can be argued that much of the losses in portfolio values have already occurred.
Now is certainly not a time to make bold investment decisions. The managers we use are proceeding in a relatively cautious, highly diversified way for the risk level they are tasked to follow.
Planning opportunities presented by the current turbulent times
Colmore Partners has a weekly technical meeting where we consider specific situations presented by clients, changes in legislation or regulatory guidance and the wider economic situation. Together, we decide how these things should impact our advice.
It would be easy to “freeze” in the current times and make no new plans or decisions about your existing arrangements. However, history would suggest that isn’t what you should do. Instead, you should continue to take sensible planning steps based on the circumstances presented.
The key themes we are currently thinking about are as follows:
- Debt repayment if you are subject to revised interest rates.
- Annuity purchase as part of retirement income planning. Whilst this has always been a consideration, recent improvements in annuity rates mean that your pension fund could now secure a higher level of guaranteed income than previously.
- Using current suppressed values to crystallise funds for the purpose of gifting, reinvestment, lifetime allowance and capital gains tax management.
- Investing new funds and deploying monies whilst valuations are low. Where appropriate, an elevated level of risk might be adopted. For larger sums, consideration should still be given to phasing the investment into the portfolio over a period of time to mitigate potential volatility.
We will be contacting you where we think there is action to take now as well as discussing these issues at forthcoming review meetings. We also plan to issue further newsletters setting out some more detailed thoughts.
Please get in touch with any of us if this note prompts you to have questions about your current situation. We are always available to talk.