With the government determined to get the country’s finances on an even keel, the finances of millions of people across the country are coming under increasing strain. To take one example, by the time the freeze on tax thresholds comes to an end in 2027-28, one in five taxpayers will be paying the 40% higher tax rate, according to the Institute of Fiscal Studies (IFS). To add to the mix, inflation, which accentuates the impact of stealth taxes as incomes and asset prices rise is only just starting to edge down from double-digit levels while markets remain volatile.
Meanwhile, a sense of uncertainty about future tax policy pervades. The ending of the Lifetime Allowance (LTA) charge and the complete abolition of the LTA from April 2024 was welcomed by some, although the Labour Party promised to reverse the decision, should it come to power at the next General Election. There was some good news – the state pension rose by 10.1% in April.
With so much happening and previous decisions taken by government on taxation impinging on people’s finances in so many ways, I asked Graeme Clark, Head of Private Clients and Paul Kemsley, Senior Private Client Manager, what were clients’ main concerns.
Graeme and Paul agreed that the decision to abolish the Pensions Lifetime Allowance (LTA) had been brought up by a number of clients. “Some have put more into their pension thinking it’s a good thing, but others are worried about what might happen should the Labour Party win the next General Election and have decided to be a bit more cautious,” said Graeme. The uncertainty lies not only in whether Keir Starmer would reintroduce the LTA but also whether protection, which currently allows some clients to have a higher LTA and with it a higher 25% tax-fee lump sum, would be honoured.
With taxes on the rise, Paul emphasised the importance of clients making use of their £20,000 annual ISA allowance. If you hold different ISAs from previous years, consider consolidating them so you only have one set of charges, suggested Graeme. This also makes tracking investments easier.
Confirmation of the rise in corporation tax from 19% to 25% and the halving of the dividend allowance is already having an impact on clients, said Graeme. Clients who run and own their own limited companies are looking at upping the employer’s contribution to their pension. This also has the advantage of reducing the company’s taxable profits.
With inheritance tax (IHT) allowances among those to be frozen, the rise in house prices and financial assets over the years means that this tax remains a concern for clients, said Graeme. Paul said the standard advice applies, including, “make sure you use your regular annual £3,000 tax exempt gifting allowance”, or perhaps “spend a bit more”. Another way to mitigate the impact of IHT is to give at least 10% of the net value of your estate to charity in your will. This cuts the IHT rate from 40% to 36%.
With the capital gains tax allowance having been cut from £12,300 to £6,000 at the start of this tax year, Paul said one way he was helping clients mitigate the effects was to report any capital gains early in the tax year when they were less likely to have exceeded the newly reduced allowance. This left the option of reporting any further gains later in the year should that be necessary. It’s a good example of how as the government’s stealth taxes and cuts to allowances continue to bite, Courtiers Advisers are working with their clients to lessen the impact.
The lure of cash
The ongoing volatility in the markets combined with interest rates of 4% plus on high street savings products means that cash is “slightly more attractive” than it was a year ago, said Graeme. However, Graeme explained that choosing between investing more, say in Courtiers Funds and putting money into a fixed rate account for one or two years isn’t quite as simple as it might seem at first. In a year’s time, interest rates are likely to be lower, said Graeme, while if “markets race away in the meantime” there’s a risk of missing out by entering the market too late. “Once you’re out of the market, it’s always tricky to know when’s best to dip your toe back in.” Also, if you put money into an account that is paying a fixed rate for one or two years, its value could be eroded by rolling inflation.
Planning for future generations
Graeme said he’s seeing a continuation of a trend that started “a few years ago” for clients to plan more for their grandchildren than for their children. “It could be to do with it being so difficult for them to get on the housing ladder,” he suggested.
The use of trusts by clients had been steady, said Paul. Trusts are more about the longer term, about putting aside money for future generations, he explained. “It’s quite common to give children and grandchildren the money now so they can get on the housing ladder, in which case there’s no need for a trust.”
If you’d like advice on how to mitigate the impact of stealth taxes, or help with intergenerational financial planning, or anything else, please contact us, or speak to your Courtiers Adviser.