Transcription
So, the day has come. The much awaited budget has finally been and gone, and there is a lot to talk about.
If you don't know me, my name is George Aen. I'm a charge financial planner, a fellow at the Personal Finance Society, and I've spent a decade in financial planning looking after quite a lot of people's financial future. I've also made over a 100 videos on tax and retirement planning. And in this video, I'm going to tell you not only the main things that have changed in relation to taxation, but specifically the things that you need to be aware of from a financial planning perspective so you can navigate this new world in the best possible way. Because the budget, it's not what they're all saying on the surface. It's really what's hiding underneath that's going to hit you the hardest.
But first, let's just quickly set the scene. Make no mistake, the measures announced today are a huge tax hike, as we were expecting. The OBR have highlighted additional 2.1% impact on the rise of tax to GDP ratio. That's in reference to how much tax we pay compared to what we produce as a country. I think the thing that we're going to have to get used to is that interest rates are going to be much closer to what's historically normal as in four 5%. And inflation is going to be stickier for much longer. And apart from an economic shock or a complete surprise, that is not expected to change. At the moment in time, bank rates are expected to be around 4%. And that means that your mortgage rates, depending on your loan to value, are likely going to be around four or five% for the foreseeable. And the cost of government debt, which is represented by guilt yields, are expected to rise. So, we're going to be paying more and more interest on our debt going forward.
Now, politicians will make the case we've made marginal improvements, and this is a financial planning channel, not political, but I think the focus here is marginal. We are in structurally higher tax stickier inflation and a low growth economy at this moment in time. And what that means without a doubt is that the tax burden has to be transferred as much as fees will be possible to the population. So what I'm going to help you do through this video is try and think about how to be as tax efficient as possible so you can mitigate that risk to you.
Okay. So here's what you have to understand as part of this budget. This budget was a huge raft of quite complex and multiple changes. I could actually spend a 30 minute video on each segment, but I'm going to focus on the big picture and the financial planning elements. Big thing is personal tax thresholds have been frozen and that freeze has been extended to 203031, which is another 3 years. This is a massive hidden tax that you might not even realize exists. Now, depending on what measure of inflation we use, if I use an RPI calculation, which is higher measure, you can see that inflation has been well over 30%. And let me just let that sink in. If you started, let's say at that point at a higher rate taxpayer and you were earning 50,270, you would now be earning just with keeping up with inflation, £68,000. That means substantially more of your income is now being taxed at a 40% rate. And we factor in that is now going to continue for quite some time. And this brilliant graph and reference Dan Needle from Tax Policy Associates who I've referenced in my work previously. It just highlights the impact over time of this physical drag, the fact that incomes are expected to increase, inflation's going to increase, but your tax bans are frozen. And because it's been such a comically long time, it would be comically if it was funny. It's really having a huge impact on the tax we all pay. So physical creep, physical drag, whatever you want to call it, is the one thing you need to be aware going forward because it affects your tax position substantially. They expect that these freezes are going to raise over 13 billion with an additional 5.2 million people brought into income tax since 2020 2023. What the OBR predicts is that higher race thresholds are about 20,100 lower in real terms than if they' just risen with inflation. Now, there's a difference in what I was stating versus how they measure it against CPI. But ultimately, whichever way you cut it, the changes are enormous.
So, so what can you actually do about all of this? The truth is not a huge amount. That's the danger of it, which is why these increases are so effective. You don't notice them. They don't hit as many headlines, but you just get slowly poorer over time because of the tax drag. There are things we can consider from a planning perspective. First, review your pension arrangements. There are salary sacrifice changes which I'm going to come on to, but they only come into place from April 2029. Therefore, we could argue there is a window of opportunity here. And 2029, by the way, is also an election year. And who could say no one would reverse anything around that, right? That's maybe too cynical. I do think this gives you an opportunity to look at your pension contributions and how you can potentially reduce the impact of physical drag via pension planning. It doesn't stop you getting any poorer because if you need the money, you need the money. So, I don't want to try and excuse it entirely, but it can increase your tax efficiency, especially if you use salary sacrifice prior to 2029. How that works effectively is your pension contribution gets your marginal rate tax relief, whether that's 20%, 40%. If it's salary sacrifice, you'll also save on the national insurance, which could be 8 or 2%. It is a very effective way of just ensuring that the government's tax drag doesn't take away from your future income.
Another key advantage could be to maximize your ISA allowances. So ISAS is always important as far as financial planning, but it's going to be absolutely key going forward. Now, currently there is a £20,000 subscription for both cash and stocks and shares, but this also changed. So I'm going to come back to this in a second. But the third thing you can consider to do to go against the physical drag is time your income where possible. Now this could be maybe you're a limited company director. So you have a look at how you take your income and how you use deductions within the company. Effectively, our tax band works on marginal rates. And the key thing you're going to have to think about going forward is how can I use these marginal rates, these pension contributions, my tax efficient rappers like ISIS so that I can reduce my tax burden as much as feasibly possible.
So let's go on to those big pension planning changes. I just want to highlight that we've had a couple of seismic changes in two successive budgets. In the last budget in 2024, they announced that from 2027, pensions are going to be inside of your estate for inheritance tax purposes. Oh, just a quick shout out. If you're enjoying this content or suddenly realizing, oh, I need to get a handle on my finances, I've just updated my email list so you can get access to the webinars I used to do exclusively for my clients and for people who follow the channel. If you click on the link in the description or scan the QR code on the screen, you can sign up to get things like my inheritance tax planning webinar where I use the example of a high net worth client. There's also another retirement master class. It's well worth joining and you can of course unsubscribe at any time if you're not getting value. Anyway, back to the pension planning. Pensions being inside the estate from 2027 is enormous. And there was also a thing that was missed by a lot of people is that inheritance tax thresholds are also going to be frozen from 1/3 the year. So instead of 2030, they're going to be frozen till 2031. In my personal opinion, I'm not confident they're going to increase inheritance tax thresholds for a very long time. Currently there is £325,000 nil rate band which you can join up with your civil partner to £650. That's how much you can leave and outside of inheritance tax. If you leave your main residence to a direct descendant depending on the value of your estate, there may be £175,000 bans in addition for each you and your potential civil partner or spouse. That's a million pounds in total. I've done loads of videos on these changes. So, um I put some in the description if you want to have a look at them in a bit more detail.
So, the big thing that hit headlines was the salary sacrifice bombshell. And yes, pensions are going to be inside the estate. That was the last budget. But salary sacrifices the pension change in this one. So, just to be clear what salary sacrifice is, it's as the name suggests where you sacrifice part of your salary. And the key benefit here is that well for your employer they save on national insurance contributions which can be 15%. And you as an employee save on national insurance contributions as well and get tax rate at your marginal rate. So if you're a basic rate that's 8% on national insurance and 20% basic rate tax relief. If you're a higher then it's 2% national insurance and 40% higher rate. Now the tax relief at marginal rates that's the 20 and the 40 that remains the same and they the the way the government positioned this is they're leveling the playing field against higher rate individuals. Now I actually think that's not the right framing for this because I think it is much better to say this is an additional hit on businesses because it really is businesses who are going to see the big difference in this tax change. If you've got all your employees on salary sacrifice and there's a decent amount going in when we factor in all their salaries and their bonuses, if you're now going to have to pay 15% on everything that's going into pension contributions from 2029, that is going to be a big hit. When we also factor that national insurance in the last budget went from 13.8 for them to 15. Again, these are just two big things coming down the pipe for employers. where people will definitely get hit is if your employer is good enough to give you the pension contribution saving they would have made. So basically that's kind of fancy way of saying a netneutral basis. So some employers if you're good and supportive of your employee um they pay the national insurance that they would have paid had you taken in the bonus as cash or as payment the 15% into your pension. And the rationale behind this is that well they would have had to pay it anyway so why not pay it into your pension? It's a good thing to do. Now, that clearly is going to start from 2029 because the employer will no longer be saving. So, that is potentially a big hit. But if we look at higher rate taxpayers, because of the national insurance rate being 2% there, there isn't actually going to be an enormous difference for you. You're still going to get the 40% tax relief, especially if your employer doesn't sacrifice and pay the 15%. It's actually just going to be 2%. So, it's not actually a big hit on higher earners, it's a big hit on employers and basic rate taxpayers using salary sacrifice.
Okay. Okay, so the planning actions here are around that 2029 window. That's quite a long time and I think that's just kind of a sign off to how fafy pensions are and that's technical term. So I would strongly suggest looking if you're using salary sacrifice, consider the impact of this and try and maximize this before 2029. One of the big things I said before the last budget is I said that pensions are probably the most generous they're ever going to get. That was after the lifetime allowance got abolished. I think I definitely got that one right because since then we've had pensions inside the estate. We've had salary sacrifice getting eroded. A lot of things had happened. The thing that does remain to be true though is the annual allowance is still £60,000 and you can still potentially carry forward the last 3 years of unused allowance. Again, important to get advice here because it can be quite specific. Now, of course, you have to do very well to be in a position to be doing that. But if you're on the cusp of retirement, now more than ever, you've got to be looking at how can I maximize these benefits where I
So let's move on to the ISA changes or the cash cut. The big big change was the cut to cash is. So the 20,000 subscription allowance for ISAS still remains and this is available for stocks and shares is however the cash is from 2027 is going to get cut crucially for only those that are under 65. It's going to go down from 20,000 to 12,000. Oh, from 2027. This is a part of the overall 20,000 limit. Whether that's cash, stocks, and shares ISO, a lifetime ISO or innovative finance ISO. If you're over 65, you can continue to save 20,000 into the cash is. Now, just from a planning perspective, by the way, for if you're not a finance nerd like myself, an alternative even with a stocks and shares is can be what's called a money market fund within a stocks and shares is. It's not exactly the same as cash, but it has a very similar profile to cash. And in the description, I'm going to put a link to the excellent pension craft where he talks about ramen where he talks about kind of money market funds. As ever, that's not a recommendation, but I just want to kind of open the door if you weren't aware that actually you can hold cashlike things in a stocks and shares is as well. Now, one of the things we haven't had is we haven't had the legislation. So, they might legislate that out going forward because lovely people like me tell you about the loophole. Now, there's been no change to lifetime ISER in this budget, but hopefully going forward, we're going to see some increases to the £450,000 limit for first-time buyers because that hasn't increased since the lifetime is put in place and it's ridiculously low, especially if you're in the south of England.
Okay, so let's move on to the just the outright tax increases. And interestingly here, it seems they're going to create an additional type of taxable income for our tax system, which is called property income. Now, some of you might not know this, but at the moment, the types of income tax don't include a specific carve out for property. It's kind of earning, savings, dividends. There's no such thing as a separate property type of income with specific tax rates. So, from 2027, they're going to create a separate tax rate for property income. And they're going to increase it by 2% on current rates. So, basic rate instead of 20 will be 22%, instead of 40, it will be 42, and instead of 45 it, it'll be 47. So if you have a B select property and it's in your own name, so you pay income tax, you will pay an additional 2%. So who's going to get hit by this? Well, it's clearly landlords who don't use limited companies and don't pay themselves a salary. They're also going to be having to deal with the changes with the renters reform act. So again, being a landlord is becoming less and less attractive by the day. There's no two ways about it. But I think this and what's happened in relation to the sort of mansion tax, I think the most interesting thing around this budget is having these different taxes on things like property does open the door for structural change going forward. Once you create a tax structure where you can kind of uh identify certain things and certain tax rates, it's going to basically mean that they can fiddle around with these going forward in a much easier way. I also want to acknowledge they've increased the ordinary and the higher rate or the basic and higher rates of dividend income by 2% as well. They're doing the same on savings income. So basically whether it's dividends, savings income or property, you're going to see a 2% hike. So this all leans into the importance of tax planning going forward. These are just outright tax rises which in combination with the physical drag is an enormous change to taxation which means tax efficient rappers whether it's ISAS pensions using your limited company effectively or even the higher stuff like venture capital trusts or or trusts in general is going to be more and more important depending on your wealth level.
Just going back to estate planning at the moment. The nil rate bands are going to be frozen till 2031 because property and equity values are expected to rise and people's bands are frozen. That basically is now going to mean that in addition to the changes to agriculture and business property relief in the last budget and watch my last video if you're not sure about this. Estate planning is going to be more and more critical. What we didn't see in this budget was any changes to gifting exemptions. Only some minor changes to trusts which don't affect 99.9% of people. So again, much more intentional gifting is going to be key.
Okay. So let's go over the the mansion tax or council tax changes and what that means. So it would be wrong of me even though I know it's not going to affect very many people to not talk about this change because I think actually more than what this is. It's more about what a signal of what this is going to be going forward which is the most important bit. So the government is going to introduce a high value council tax sirch charge and if you have a property identified being over 2 million and here's quite a crucial detail by the valuation office in 2026 never heard of them either you will be affected and you will see a significant increase to the property values. Now, I know, look, there's going to be a lot of people saying world's smallest violin, and that's totally fine. I understand that. Council tax bans at the moment are currently valued based on 1991 valuations. And this does admittedly create huge distortions, which this isn't the point of what I'm saying. My my point is that I believe this will be the first step into wider council tax reforms because what we're doing for the first time since 1991 is we're changing the way that properties are valued. Now, this isn't an easy thing to do. Who's to say your house is worth 1.9 or 2 million? Well, the valuation office now apparently they're going to it's going to be so kind of like clipboardy, isn't it? Oh man, the valuation office. I think also, as always happens with this kind of stuff, when they mess with the property market, we're going to see really weird niche distortions. We're going to see people kind of, if their house can allow it, segment bits of their property. We're going to see conversions from larger properties to smaller. We're going to see things like this going forward definitely. So, what are the rules? Well, basically they're going to be four price bands with the sir charge rising from £2500 on properties worth2 million all the way up to £7,500 per year by the way on properties in the highest band of 5 million. And these increases are going to go to up with CPI in places each year. The truth is this isn't an enormous amount of properties. However, I think it's more the signal of what it's going to be going forward because once they've got valuation structures in mind, once they can do that in a way that, you know, if at the moment doesn't feel like it affects many people, I would wager they're going to bring it down and down on valuations. There's also going to be pretty much overnight a drop in property prices over 2 million or 2.5. If you were fortunate enough to have a really expensive property, overnight it's dropped by a couple hundred thousand. I would say the market will adjust to this new expect.
So this budget really was sort of an attack by a death by thousand cuts sort of budget on the tax rises. I actually think the impact of all these freezing of bands is is huge. Um and you know and it is without a doubt it's going to have a big impact on the disposable net income we all have as shown by these documents from the OBR themselves. When I was reading the OBR forecast which got leaked early so that was that was easy for me researching it. It just kind of makes me look realize especially when I look over the video I did on the last budget is that things like Trump tariffs and with let's be honest ever changing economic scenario is that these kind of forecasts are just that they are guesses and even the OBR mentioned that there are significant risks here to this forecast being a load of nonsense but we're so tied on to them. The things they picked up on is that they think that a fall in equity prices, let's say we saw a market correction, maybe could be due. That would reduce UK GDP by 0.6% if there was a 30% fall in UK or world equity prices. Not saying that's going to happen. At some point it will though. And they think that would worsen the budget by 16 billion. So so much of the headroom that we have at reportedly 22 billion would be wiped by that by market movements. The UK government yields are still way higher than the majority of our G7 counterparts. We are still dealing with the so-called premium. And the truth is our government for the economy we are shouldn't be as expensive as it is on a rational basis. We it does really feel like politicians need to try and encourage the markets to see the UK as sound money once again. And until we can have a really coherent narrative in relation to how we're going to increase productivity and get down inflation, it feels like we're still going to have a premium on our debt, which is going to cost us year in year out. And in line with that, one of the big risks is interest rates in the UK. They are expecting them as part of these forecasts, which are so key to all the figures, that they're going to bottom out in 2026 before rising. That's going to affect mortgage rates, cash allocation, and just the general cost of doing things in the economy. That's without even factoring in that property income tax changes are going to add additional strain to the buy to let market and landlords. And I'm not going to make the case about landlords versus tenants or anything like that, but whatever you think of them, we need them. So, it's going to be interesting to see how that plays out and the state of the market going forward.
So, the things you can do today is get intentional with your planning. I wish I could say we're in a world where planning with any amount of wealth is easy, but in a world of physical drag, the best defense is a good offense, I think, here. So, really think about how you're going to use your tax bands in the best possible way. I appreciate that's not going to solve everyone's issues. I don't want to pretend like it's going to, but that's certainly what I'm going to be thinking about as a planner with my clients going forward. As I mentioned, there's a link to my email list in the description if you're interested in staying ahead of things like inheritance tax planning and retirement strategies and how to navigate these changes. And the final thing I want to leave you is my good friend Damian did a brilliant video a couple of days ago. So, if you ever wondered what your taxes actually spent on in the UK, I'm going to put a link up here to The Man, the myth, the legend, Damian. Uh, it came out this week. It's great. Give it a watch. Thanks for watching.