The budget: challenges & opportunities

Posted on: 11 May 2009 by Gareth Hargreaves

Financial expert Graham Kerner gives his summary on the recent budget as well as detailing why he thinks the economy is on the verge of picking up.

In a Budget which Chancellor Alistair Darling said was designed to take Britain through the most serious global economic turmoil for over 60 years, a mixture of challenges and opportunities presented themselves to investors, those on higher incomes and people planning for their retirement.

The Government plans to introduce a 50% income tax rate on annual incomes over £150,000 from 2010/11 and at the same time reduce personal allowances for those earning over £100,000.  It also aims to restrict tax relief for individuals with income of £150,000 or more from 22nd April 2011. 

Additionally from 6 April 2011, relief will be tapered so that those individuals with income of more than £180,000 will only receive 20% tax relief, the same as a basic rate taxpayer.

The vast majority of higher rate taxpayers will continue to receive higher rate tax relief on their pension contributions.  And for people with earnings of less than £150,000 in this and each of the previous two tax years, there is no impact whatsoever.

So dealing with pensions first, there was nothing in the Budget that diminished the absolute need for people to continue to save hard for their retirement.  With people living longer and the reduction in State and other support, retirement planning and setting aside sufficient funds remain absolutely critical.

Whether people are affected or not by the Budget changes, the majority have to save more for their retirement and people who do not accumulate enough run the risk of outliving their savings.  People therefore need to determine how much they will need to save, understand the cost of delaying, commit to a plan and take action.

Although it is good news that higher rate tax relief is retained for most people, the Budget introduced changes for those whose relevant income exceeds £150,000 and it will not be possible for people to reduce income below this figure by sacrificing some earnings in return for a larger employer pension contribution. 

Her Majesty’s Revenue & Customs (HMRC) have said that any salary sacrifice agreed on or after 22 April, to increase pension contributions, or provide additional pension benefits will, for the purposes of relevant earnings, be disregarded.  People’s income will be regarded as their pay before the salary sacrifice took place.

However, those people earning less than £150,000 can use salary sacrifice to maximise their pensions now in order to get full tax relief at their marginal rate while they can.

As far as investors are concerned, ISA’s remain the trusted haven for investing savings with freedom from income tax and capital gains tax, and from 6 October this year, the maximum contribution for those born before 6 April 1960 is raised to £10,200 for the 2009/10 tax year, with the maximum contribution in cash being £5,100.  From 6 April next year, the new limits will apply to all ISA investors, regardless of age.

This is welcome news for those adversely affected by the removal of higher rate tax relief on pension contributions and those who will pay the higher 50% rate of tax on income.  After pensions, ISA’s are the most tax efficient way to save and invest for the future, representing the cornerstone of many an investment portfolio.  They are readily accessible, free of any further liability to personal income tax and capital gains tax, giving a similar advantage over time to pension funds. However, the future tax treatment of ISA’s or pensions cannot be guaranteed to remain as they are, as they are subject to legislative changes.

Finally, the Budget presented various implications on taxation, with higher earners the hardest hit.  The introduction of a 50% rate of income tax for those earning over £150,000 and the removal of the personal allowance for those with income over £100,000 present difficult challenges to people. 

However, for people with investment income, which causes their gross income to be just over the £100,000 threshold, consideration could be given towards reinvesting into capital growth orientated investments like unit trusts and bonds, or those that produce tax-free income like ISA’s.

With Inheritance Tax (IHT), the nil rate band for 2009/10 has been increased from £312,000 to £325,000, and to £350,000 in 2010/11. For a married couple or registered civil partners this can mean that up to £650,000 of the combined estate could pass free of IHT.  This may provide further scope for lifetime gifting with discretionary trusts.

The various nuances and complexities within the Chancellor’s Budget do not readily provide simple off-the-shelf solutions that meet everyone’s needs.  Each person has his or her own personal concerns, which makes the need for specialist wealth management advice – particularly in the area of retirement planning - of paramount importance.

To receive a free guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, produced by St. James’s Place Wealth Management, contact Graham Kerner of the St. James’s Place Partnership on 0207 638 2400 or email graham.kerner@sjpp.co.uk.

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