You may have gathered that I ended up pouring myself a stiff drink after I listened to the ‘mini budget’ last week. To say that it wasn’t quite as expected would be an understatement. Some would have us believe that we live in an age of being offended by any old opinion, the truth is quite different, but as ever these societal messages all have a purpose to serve, just usually not yours or mine. I felt the heading here ought to have a date, as there may be another one along any minute now … it’s a bit of a mini adventure!
Setting aside partisan politics, which is relatively easy to do these days, because no party looks anything like they should. I give you the budgie … I mean budget, a mini one, though probably one of those BMW minis on steroids that runs off a wall socket and can easily swallow a double bed.
We had tax cuts… well, more accurately, we have been promised tax cuts from April and National Insurance cuts from November. Anyone who has built up 35 tax years of NI payments since 16 will barely wake up to this marvellous news, the rest however have had an increase removed … or it will be. A saving of 1.25% within the NI threshold. As a well-known supermarket may say, every little helps … yes – if you believe that somehow your NI is not simply another tax, that for most of us is the price of membership to get a State Pension. Yes, it does provide a few other things.
A BRIMFUL OF ASHA ON THE 45… (YOU KNOW, OR YOU GOOGLE)
The big news is really the additional rate of tax being abolished. That’s the extra 5% tax that anyone with income over £150,000 must pay. Instead, they will simply continue to pay 40% on all income from the higher rate threshold. That also means that the additional rate is abolished on dividends and additional rate taxpayers can have back a £500 personal savings allowance (non-taxpayers and basic rate taxpayers have £1,000 allowance, higher rate taxpayers £500). That’s £500 of interest tax-free (all interest is taxable, it’s just that there is a personal savings allowance, which until the recent interest rate rises you’d need £50,000 to £100,000 on deposit to achieve).
For context, anyone earning £150,000 does not get a personal allowance of £12,570 which has a 0% tax rate … apparently, they don’t deserve it. Anyone earning over £240,000 a year (heaven forbid – it’s actually just about enough to get a mortgage to buy a 2up2down terraced house in Edna Road, SW20) can only contribute 10% of the £40,000 annual allowance towards a pension, meaning they are actually penalised from saving into pensions. If you are an NHS doctor in the pension scheme, you don’t even have to earn anything like these sums to get clobbered with tax on money you will not get until you retire, as you well know, but Joe Public seems oblivious to. These measures have not been altered, but the great injustice of the day is to allow them to retain an extra 5% of income above £150,000. That’s 5p in every £1 or £5,000 for every £100,000 (on which they still pay 40% or £40,000 in every £100,000).
STYLUS and STYLE LESS
What we deem fair depends on who you are and what you earn. However, one thing is clear, the Chancellor has failed to read the room, much like he did at a recent funeral. This is the age of appearances, in all but hairstyles (I write with no sense of envy at the naturally enforced lack of one).
What we have is messages that miss the target, appearing to help and appease the ‘wealthy’ which I would argue is never income, always capital when talking about money. When many will evidently struggle to pay for power and heating this winter (our little office in SW20 has had a tenfold increase, 10x good grief, I am definitely in the wrong industry!). The appearance and indeed the impact of the cuts is woefully poor messaging. Bankers’ bonuses being uncapped to most of us sounds insane, until you realise that the cap resulted in higher salaries (fixed costs) for poor performance and many that couldn’t keep the score they wanted decided to pay income tax in Paris, Frankfurt or the Caymans… scrap that last one. Anyway, keeping them here paying 40% of everything seems logical to me as opposed to nothing of nothing.
But facts don’t make for good news or even bluff and thunder. Equally neither does the promise to pay for it all at some point in the future. This is the age-old problem of Government printing money (Bonds) as an IOU and hoping enough of us buy them and believe that, as previously there will be enough tax revenues to enable them to keep paying the coupons (interest) and ultimately return the capital at redemption date.
THE GREAT RECKONING OR REDEMPTION?
Redemption is perhaps the right word – can Liz Truss salvage the car crash of politics that Mr Johnson left. Johnson has had many forgive him, at least three wives have done so at times. Whether this is a gamble that Truss has the hand or nerve to match remains to be seen. I am hopeful; but deeply sceptical. As she clearly can drive a tank, I won’t suggest we watch to see if she can parallel park a mini.
WHEN LESS IS LESS (YES REALLY)
Side note. Lower basic rate tax at 19% means on the first £37,700 (after the personal allowance) you will pay income tax of £7,173 rather than £7,540 a saving of £377 a year or £31.42 a month … the milky bars are on me! (I jest at the price of confectionary and anyone old enough will recall the advert).
Additional side note, that means your basic rate tax relief on pensions will also reduce from 20% to 19%. In maths we can relate to, £81 invested by you sees £19 added by HMRC rather than £80 and £20. So for those paying say £300 gross a month into a pension (as I advise many people to do even if retired and under 75) that means you will now pay £243 a month rather than £240 (from 6th April). Yes it costs a little more…. it’s the classic giveth and taketh away (all Chancellors do this).
I imagine you may have questions, some are being answered by the markets (which seem to be calling this a game of bluff and double-bluff). Some will appear in your newspapers, though I suspect they will be full of rather more conjecture and opinion than fact. If you wish to genuinely understand the impact of reduced taxes on your wealth, get in touch or hold fast until your next review. We are all playing the long game here, but none of us know how long.
No politicians were hurt in the writing of this article.
According to the ONS in 2020/21 the average disposable (after tax and NI) income is £37,622 but the median (the mid-point if you lined up everyone) is £31,385. If you separate out the non-retired and retired, the former has an average of £39,349 and mean of £32,934. Retirees see this considerably lower at £29,408 and £25,405. It is generally true that retirees have no mortgage payments and unless they are our clients, apparently never have any fun either (joke!).
You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email firstname.lastname@example.org