Holly's Blog: Frozen allowances might bother you, Elsa
5 Mar, 2021
It’s about to get colder, baby. This week Rishi Sunak froze many personal tax allowances along with income tax thresholds. Freezing thresholds and allowances does not sound that dramatic. But millions of us will be affected by these moves.
This week was of course The Budget – a financial day of reckoning which has been with us for centuries. Some of the historic awards go to:
Best Budget Bitch - the rather large George Ward Hunt arrived at the Commons in 1869 and opened the Budget box to find that he had left his speech at home. Oops. At 21 stone, was the largest Chancellor on record. Disraeli had to reassure Queen Victoria that "he has the sagacity of the elephant as well as its form."
Best Budget Bore - think you have had a boring week? The longest Budget speech was four hours 45 minutes by Gladstone in 1853….zzzz
Best Budget Boozer - the Chancellor delivering the Budget is the only politician allowed to drink in the chamber. Winston was a brandy man. Gaitskell had orange juice and rum. Rishi had water….
This week, the magic money tree was given another shake and there will be relief for many that the pandemic support will continue for months to come. Relief too for home buyers as the stamp duty holiday on the first £500,000 is extended.
We all know that there is a whopping hole to fill as we digest the destruction of 2020. Corporation tax will rise to 25% from 2023. But don’t be fooled - it is not just big companies which will pay for this. It is us too.
“The Cold Never Bothered Me Anyway….”
Well, it’s about to get colder, baby. This week Rishi Sunak froze many personal tax allowances along with income tax thresholds. Freezing thresholds and allowances does not sound that dramatic. But millions of us will be affected by these moves.
It’s a bit like telling an 8 year old that you will only buy her Frozen tracksuits to wear for the next 5 years. She will shrug. What’evs, doesn’t sound too bad. But by the time you’re dropping her off at her first school disco aged 13, she will be furious. What feels OK now will not feel OK in 5 years.
Consider inheritance tax, which has been frozen since 2009. The really quite low £325,000 threshold would be nearer £450,000 had it risen in line with inflation. This has morphed from something designed to hit the wealthy, into a hated tax to hit many.
As for income tax, nearly 1 million more people are estimated to become higher-rate taxpayers over the next 5 years.
And we also saw the lifetime allowance for pensions frozen at £1.07 million until April 2026. If you end up with more than that, you get clobbered with punitive tax. Ha ha you laugh – a million quid in a pension!? Diddums. But let’s assume a 50-year-old is a canny investor. She has £450,000 in a pension today, pays in £300 a month and gets returns of 8% a year for the next 10 years. Bang. She hits that threshold at 60.
Doctors, senior teachers, middle managers who started a pension plan early – this will probably hit you.
Higher taxes and a review of allowances down the road feel inevitable so it is worth considering taking profits from shares, reviewing your pension or considering passing assets to heirs. (Hi Mum and Dad!! Kissy kissy missing youuuu xx ) Now could be a judicious time to seek financial advice. We have more exciting news on that front next week so stay tuned……#enigmatic.
A practical list of stuff to consider
The basic rule of the game now is to assume that your tax allowances are threatened species and to use anything you can whilst you can. Do not “Let it go, let it go.”
Use your ISA allowances and don’t forget Junior ISA allowances too – that’s £20,000 every year per adult and £9,000 per rugrat. Our new Best Buys tables (https://www.boringmoney.co.uk/isas-pensions/isas-pensions/) will help you pick the cream of the crop and find an ISA to suit your needs.
Bed and ISA – the ridiculously named strategy of selling shares or investments which are outside an ISA, and then buying them back inside an ISA. This is clearly just shuffling chairs around BUT it’s a no-brainer if you have not used your annual capital gains tax allowance of £12,300, and if you have no spare cash to put into an ISA this year.
Let’s say you own the Holly Fund. Not in an ISA or pension. Because I’m a genius it has gone up from £1,000 to £4,000 this year ;0) If you sell the fund, you make £3,000 profit. If you have not made any other profits (capital gains) elsewhere, this will be tax free. You then buy back this £4,000 of the Holly Fund in your ISA. So any future profits will be tax-free too, geddit? If you have a platform, phone them and ask them if they support this Bed and ISA malarkey. If they do it, it can save time out of the market, hassle, and transaction fees.
Pensions (https://www.boringmoney.co.uk/learn/learning-paths/pension-planners/) – don’t forget that contributions get you Government top-ups and, for higher-rate tax payers, minimise that final total number you have to pay tax on when you submit your annual assessment.
Most people can pay up to £40,000 into a pension any year and carry unused allowances forward for three years. You can ‘Bed and SIPP’ too – quite a cunning ruse if you can set money aside until your late 50s and aren’t threatened by that lifetime allowance.
Mortgages – help at hand for those with smaller deposits - a new 95% mortgage guarantee scheme for properties worth up to £600,000. Most major banks will offer this from April.
That’s it for this week. Apologies to all parents of small people who now have that Frozen tune re-embedded in their brains. You can hum it maniacally as you dig out school uniform this weekend and wonder if it’s socially acceptable to send them in with trousers which barely cover their knees. Yup Monday morning at 830 here we come.