The key announcements made in the Budget that will impact IFAs and their clients comes in the context of a massive fiscal boost for the economy of £30bn and a remarkable increase in regional, housing and infrastructure spending of more than £600bn over the life of this Parliament. Whilst this resulted in fewer and less fundamental changes elsewhere, they nonetheless deserve consideration.
Resolving the issue of the annual allowance taper turned out to be one of the more minor challenges facing the new Chancellor Rishi Sunak at this year’s Budget.
The fact that the Chancellor needed to spend big across the board may well have helped him overcome any objections about the lost tax revenues.
The Chancellor decided to raise the two tapered annual allowance thresholds by £90,000 immediately from this April. For the tax year 2020-21 the ‘threshold income’ will be £200,000 as opposed to the current £110,000.
The annual allowance will only begin to taper down for individuals who have an "adjusted income" above £240,000. Furthermore, the minimum annual allowance will reduce from £10,000 to £4,000.
In other words, tapering now applies for those with adjusted income between £240,001 and £312,000.
The Government wanted to resolve the issue for senior NHS staff and, especially, to end the disincentive for doctors to work additional hours. It believes it has now removed the vast majority of them from facing additional tax bills.
That could prove very important if the NHS is trying to catch up with a backlog when Covid-19 does finally relent.
Financial advisers will certainly have a lot to discuss with their heath professional clients.
There may also be a big opportunity for IFAs’ high earning younger clients, who are not close to the lifetime limit, to charge up their pensions.
In a more run-of-the-mill change but still a helpful one, the lifetime allowance itself will increase in line with the consumer price index (CPI) for 2020/21, rising to £1,073,100.
Our disappointment with the taper measure is that it doesn’t fully grasp the nettle. We could have had a more far-reaching reform. It’s a badly constructed element of the pension system, and although the Treasury had a lot of other things on its plate, a more permanent solution would have been our preferred option.
In fact, the temporary nature of the change may be something advisers will want to bear in mind as they discuss the new situation with clients.
More generally, we welcome the decision not to radically alter tax relief more broadly either in the quest for extra cash or indeed of ‘levelling up’ the pension system. In our view, it would really have been levelling down.
It may be an age-old complaint, but it would be helpful to have a run up to a Budget where there wasn’t media conjecture about big changes to higher rate tax relief often driven by government briefing.
There is however one final pension miss. That involves the failure to take action over the problem of low earners missing out on tax relief in auto-enrolment. The government has issued a call for evidence, but we really don’t think the net pay anomaly requires more evidence to demonstrate its unfairness.
Entrepreneurs Relief and ISA changes
It really is the bond market doing much of the heavy lifting for the spending spree and not taxpayers, however, one of the few obvious tax rises is a dramatic cut to Entrepreneurs Relief that has been pruned back from £10m to £1m. More business people will face a full 20 per cent CGT bill on the bulk of money raised from the sale of a business rather than the 10 per cent available under the relief.
This could clearly impact not just clients with businesses to sell but also IFAs thinking of selling a business too.
But the Chancellor has also given back at least a little – so for example, the national insurance threshold will rise to £9,500 and the junior ISA limit will rise significantly from £4,368 a year to a much more generous £9,000. The latter is something you may wish to discuss with clients or perhaps grandparents who can now contribute even more tax efficiently.
However, the real measure of the success of this Budget will be the effectiveness of measures to protect the economy and business from any hit from the virus.
Time for planning
Although advisers will not be directly advising on much of this – clients are likely to be financially resilient - they may run small businesses that could benefit from the government financing, rate relief or help with sick pay.
We are in crisis mood, with difficult markets and a hopefully short term but still likely significant economic hit. Advisers will, no doubt be in reassurance mode, but there are still some interesting financial planning issues to talk about as well.
David Lowe, Head of Propositions
David has worked in pensions for more than 30 years – starting with SSAS, progressing through SIPP and then into Drawdowns in the mid-90s. David went on to take on leadership roles in Product, Marketing and Strategy with GE before moving to Zurich where he was accountable for Retail Pensions, Group Risk and Workplace Platform propositions and was a member of the executive leadership team and various oversight committees.
Our emails are designed to be topical and engaging, however if you don’t like what we send, you can unsubscribe at any time. We promise never to pass your details on to a third party.