If your personal finances benefited from Friday’s mini-Budget, the chances are you were well off already.
Additional rate taxpayers will be popping champagne corks (never mind waiting for changes to alcohol duty) at the supersized boost the new chancellor has just delivered against the backdrop of a cost of living crisis.
I’ve summarized the key ways this will benefit the highest earners below – and added some thoughts about how you might want to redirect some of this unexpected largesse at cash-strapped family members, including your children perhaps.
Considering how markets have reacted to Kwasi Kwarteng’s political gamble, I would stress that the short-term tax gains are unlikely to outweigh the long-term costs of inflation and interest rates surging – but here are some things to think about as you conduct your own personal finance “mini-Budget” over a cappuccino this weekend.
Delay bonuses and dividends
Scrapping the 45 per cent additional rate of tax was the “rabbit” the chancellor pulled from his hat – and it’s also a carrot for workers to ask to defer their bonuses until the new tax year begins in April 2023, when the lower 40 per cent tax rate will apply.
However, the largest 2023 tax cut – which was buried in the mini-Budget documents – will be to additional rate dividends, falling from 39.35 per cent to 32.5 per cent next April.
This substantially stands to benefit investors who have shareholdings held outside of tax wrappers (pensions and Isas) as well as limited company directors. Directors will also benefit from lower corporation tax on profits.
This includes the growing number of buy-to-let landlords who hold their properties inside a corporate structure. If they want to roll some profits into expanding their property empires, they will also benefit from stamp duty cuts.
The government thinks that 45 per cent taxpayers who delay their bonuses and dividends from their companies will cost the Treasury £ 2.3bn in the current tax year, says Nimesh Shah, chief executive of accountancy firm Blick Rothenberg. For the wealthiest, it pays to postpone.
Accelerate pension contributions
Additional rate taxpayers currently receive 45 per cent tax relief on pensions contributions, but this will drop back to 40 per cent from April when tax rates are equalized.
So it could make sense to prioritize pension payments now – but many higher earners will not be able to save much into pensions due to the annual allowance taper.
They will no doubt be pleased that the chancellor has extended schemes offering upfront tax relief – Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) – beyond 2025. He has also doubled the amount that can be invested into Seed EIS schemes from £ 100,000 to £ 200,000 (something to start planning for the next tax year).
Meanwhile, in a small sop to basic rate taxpayers, the drop in tax relief to 19 per cent on pension contributions will not apply until April 2024.
Consider cash savings
Scrapping the 45 per cent rate means giving the wealthiest access to the personal savings allowance for the first time – meaning they can earn £ 500 in interest per year on their savings without paying tax.
This is equivalent to 2 per cent interest on cash savings of £ 25,000 – and as interest rates tick up, there’s every chance you could find an account paying this rate by next April.
Helping adult children
Bomad (the Bank of Mum and Dad) is technically the ninth-largest UK mortgage lender and its gifts will go further following Friday’s stamp duty announcements.
First-time buyers have seen the stamp duty threshold raised to £ 425,000 and can use this on a property valued up to £ 625,000 (from £ 500,000). However, there was no boost to the Lifetime Isa property cap, which remains stuck at £ 450,000.
Interest rate rises announced the day before the mini-Budget could pose a much bigger issue. With millions of fixed-rate deals set to expire next year, borrowers need to prepare for the “income shock” of higher rates (note that average five-year and two-year fixes are now above 4 per cent).
On a £ 250,000 repayment mortgage, an interest rate shift from 1 per cent (the best historic rate) to 4 per cent adds up to a £ 378 monthly increase in payments. Get your paperwork out this weekend if you haven’t already, find out when your rate expires, and start shopping around for a new one seven months before it expires (some lenders will let you “lock in” to a new rate six months ahead of time).
There were thin pickings in this Budget for the lowest paid, but also for young people in general. The removal of the top rate of tax technically means that some graduates with student loan debts face paying a higher marginal rate of tax than top earners (due to the so-called “graduate tax” of 9 per cent levied on income above £ 27,295) .
Promising to make the tax system simpler and fairer whilst continuing to freeze the child benefit threshold at £ 50,000 is another incongruous move – especially considering the soaring cost of childcare.
At least this was referenced in the Budget documents, with promises to “bring forward reforms to improve access to affordable, flexible childcare” but until then, Nomad (the Nursery of Mum and Dad) will be doing a brisk trade.
I couldn’t write all of the above without expressing my disbelief at the lack of further targeted measures to help those who suffer the most as inflation surges higher. Our tax savings table shows how little benefit these cuts will bring for lower and middle earners compared to the better off. The political bet is on “trickle down economics” although the jury is still out on whether this will provide any benefit. Over to you, dear readers!
But even these big handouts will not spare the richest from the effects of higher inflation, a falling pound and the danger that taxes may have to rise in future if the political gamble doesn’t pay off.