What the budget means for you

Many people breathed a sigh of relief after Rishi Sunak sat down on Wednesday, October 27.

The Chancellor’s long-awaited Budget did not include some of the stings that many savers and investors feared, including lower thresholds before those realising gains paid capital gains tax and more restrictions on tax relief for pension savers.

That does not mean it is all plain sailing, however. The Chancellor had already made his big announcement: a 1.25 percentage point increase in National Insurance that will later be badged as a special levy to pay for Health & Social Care. This rise, in combination with frozen thresholds for many other tax reliefs, means that many of us will find ourselves worse off in the next few years as inflation begins to bite.

The secret is something called ‘fiscal drag’, which means that, as wages rise in conjunction with inflation, frozen thresholds mean more people paying more tax.

Frozen allowances

The key frozen allowances that mean that your money won’t go as far are as follows:

  • The personal allowance – the amount most people can earn tax free – remains stuck at £12,570 until 2025/26
  • The higher rate tax allowance – the amount people can earn without being pushed into the higher rate tax bracket- remains stuck at £50.270 until the same time
  • The capital gains tax (CGT) annual exempt amount – the amount of capital gains you can realise without paying CGT – remains at £12,300
  • The pension lifetime allowance – the amount you can have in your pension without paying back some of the tax benefits – remains at £1,073,100.
  • The inheritance tax (IHT) nil rate band – the amount of your estate you can pass on free from IHT – is frozen at £325,000
  • The residential nil rate band – the amount of extra IHT allowance available on a main residential property passed to a family member – remains at £175,000
  • The level of income at which Child Benefit starts to be clawed back from higher earning families remains at £50,000

Together with the increase in NI, which will cost a taxpayer earning £50,000 a year an extra £505 per annum , many people will feel worse off due to these frozen allowances, even if their income rises with inflation, as they are more likely to be dragged into higher rate tax brackets.

Other changes

Other changes in the Budget that might affect you include:

  • A rise in the minimum wage from £8.91 to £9.50 an hour for those over 23, as well as similar rises for younger workers
  • An as-yet-undisclosed salary rise for public sector workers
  • Cuts in taxes for domestic flights but higher taxes for long haul flights
  • A change to the taxes on alcohol, meaning that sparkling wine and draught beer could be cheaper but stronger drinks could be more expensive
  • An increase in tax on tobacco

What you can do about it

Aside from giving up smoking and buying champagne instead of whisky, there are ways to mitigate the cost of the frozen thresholds and other measures on your finances.

Ensuring that you plan carefully to leave a legacy in a tax efficient manner will help ensure that your descendants receive more of your money, despite the taxman, with strategies including using your pension as a vehicle to pass money to family and gifting money regularly out of income helping to reduce liability.

Salary sacrifice schemes, where you pay money into your pension before you pay national insurance or tax on it, can be tax-efficient for you and your employer and will help mitigate the cost of the NI increase that comes in in April. It may also allow you to continue to receive Child Benefit if it takes your salary below the threshold for this.

A financial adviser could help you to plan strategies to help ensure that your finances aren’t squeezed by these measures and by the rising cost of living.