Friday 29th October 2021
There was slight feeling of fear with so many pre budget announcements, that there would a sting in the tail on the day and with much lauded potential tax changes to Capital Gains and Inheritance and indeed Pensions that may be coming.
As it turned out from a financial planning perspective it was a relief as nothing of note happened. Indeed much of the impact changes had already been announced with allowances frozen and national insurance and dividend tax rising. For a reminder see our previous "Power of Three" and "Spring Budget 2021" articles. Indeed the headline grabbing was around the reduction in alcohol duty, which we smiled at, as our youngsters will be delighted as they "double park" with a pint of beer and glass of prosecco at the same time being the trend!!
Back to Planning
It's a relief to have this out of the way and for us back to planning as usual and ignoring the noise. However, frozen allowances and increase to national insurance and dividend tax do make planning even more imperative. One aspect in this respect is being able to make pension contributions for your family members (indeed anyone) known as 3rd party contributions. The contribution is treated as though your family member had made the payment. There are a number of advantages:
1. The usual tax relief applies to the family member, not you, so if they are a 40% tax payer for example save 40% tax.
2. You can contribute up to 100% of the family members earnings (less any personal contributions they make).
3. Even if a non tax payer with no earnings (for example a grandchild) you can still make payments up to £3,600 gross costing £2,880 after basic rate tax relief. The negative here is that the funds cannot be accessed until age 57 at the earliest currently.
4. There's the added advantage that making a gift is treated as a Potentially Exempt Transfer (PET) for Inheritance Tax Purposes, unless one of the exemptions is used. However, it is the net payment that is the gift so in our example in 2 above is a gift of £2,880 for £3,600 invested.
5. It is very useful for helping the family member keep child benefit when it may well be a squeeze for they themselves to make pension payments, as they have children to fund and care for.
6. The personal allowance is lost for earnings once over £100,000 so an effective tax rate of 60%. Pension contributions can reduce the taxable income back to or below the £100,000. You may argue if they are earning £100,000 they don't need my help!!
Let's explore the Child Benefit aspect a bit more. Child benefit is currently at a higher rate of £21.15 a week for the eldest child, then £14.00 a week per additional child. Children are classed as under 16 or under 20 if in full time education or approved vocational training courses. The problem lies that an income tax charge is made to those who receive Child Benefit and whose income (or partner's income) is more than £50,000 in a tax year. If income is between £50,000 and £60,000, the charge is a proportion of the Child Benefit received. If it's over £60,000, the amount of the charge is the same as the Child Benefit so is lost all together. The tax charge is 1% for every £100 of income over £50,000.
Pension contributions in simple terms reduce the earnings, if we assume an individual with earnings of £60,000 and two children they would not only receive a 40% income tax savings so £4,000 it is an additional savings of £1,827.80. So in this case an effective 58.27% tax relief. A slightly different double parking of tax relief and tax charge reduction.
Stock Markets continue the theme of double parking but this time a positive and a negative which has led to a mixed performance. Much focus is on inflation leading to an expectancy of interest rate rises. The inflation figure for September was 3.1% and the Bank of England's chief economist Huw Pill told the Financial Times that inflation is likely to hit or surpass 5% by early next year. As seen inflation fears have begun to unsettle central bankers who have until now maintained that inflation is mainly temporary as the economy bounces back.
Market anticipation of rate rises before the end of the year have shot up and have now priced in a big chance of two rate hikes before the end of the year in the UK. However, the Bank of England have to tread carefully as any rises could strangle UK growth. What seems hard to work out is if inflation is currently caused by supply issues, energy price increases or shipping costs how will increasing interest rates solve the issue? You would expect these global issues to eventually reduce as the COVID-19 related disruption eventually dissipates. The question is how much of the inflation is permanent that will require Central Banks to increase interest rates. The Jury is out. The dual aspect here is back to our Budget with unprecedented borrowing and spending together with the announcements by President Biden yesterday of his $1.75 trillion Build Back Better expansion plan.
One fund manager made a very telling comment, watch where Government money is being spent as this will lead to winners and partly our belief in the Socially Responsible funds.
We have now occupied the ground floor of 6 Gay Street and are fully operational for you to visit us, we hope, not only for reviews but also to pop in when in Bath for a coffee, and we look forward to seeing you here.
Likewise we look forward to seeing you on 9th December this year from 6.00 p.m. for our relaxing drinks and nibbles at the Victoria Art Gallery in central Bath, and a formal invitation will be issued to our clients shortly.