Rishi Sunak’s first Budget was by necessity an emergency reaction to the coronavirus pandemic, however there were several significant announcements which could have an impact on your financial plans in both the short and long-term.
As expected, pensions featured heavily in yesterday’s Budget. From increasing the tapered allowance threshold for pensions tax relief, to increasing the lifetime allowance, here’s everything you need to know.
A cut to interest rates could leave pension savers worse off
Technically not in the Budget, but announced by the Bank of England just before, was a 0.50% cut in interest rates to 0.25%.
Designed to help businesses and borrowers amid the chaos being caused by the coronavirus, it’s not great news for pension savers who want to buy a guaranteed income in retirement; annuity rates (connected to the Bank of England base rate) will worsen.
After the recent fall in global stock markets, which will have cost those whose pension is invested (the vast majority), it is a double whammy for retirement savers.
High earners to receive pension tax relief increase
The threshold that dictates how much higher earners can save into their pension pot has been raised. The tapered annual allowance currently kicks in on earnings over £110,000 and gradually reduces the annual amount that can be saved into a pension from £40,000 to £10,000.
From April, anyone with income under £200,000 will escape the taper, providing a much-need solution for the NHS which has seen some doctors cap their working hours to avoid tax penalties.
In reality the annual allowance will only be reduced if the total income plus employer pension contributions exceeds £240,000. For those with incomes above £312,000, however, the maximum annual allowance will fall to £4,000, from £10,000.
Everyone set to benefit from a Lifetime allowance increase
The lifetime allowance, the maximum amount someone can accrue in a pension, will increase in line with the Consumer Prices Index for 2020/21, and so rise to £1,073,100 from April.
National Insurance is on the rise
Anyone earning under £9,500 will pay no National Insurance Contributions from April, after the Chancellor raised the threshold, saving 31 million people up to £104 a year.
Importantly those taken out of paying National Insurance won’t lose out on credits towards their State Pension. Anyone earning above the ‘lower earnings limit’, currently £6,136, will still be entitled to a year’s credit.
This is important because people need at least 10 years’ credits to receive any State Pension and 35 years’ to receive the full State Pension which is expected to rise to £175.20 a week from April.
A few tax changes will take effect from April and could affect your savings strategy in the short-term.
ISA limit changes
The ISA limit was maintained at £20,000 for 2020/21 but you may need to change tack after the interest rate cut, which is set to reduce returns on cash ISAs even more. Savers who can tie up their money for longer will get better returns in a stocks and shares ISA.
The under 18s Junior ISA allowance has been doubled to £9,000, meaning that it’s now possible to save £162,000 before a child’s 18th birthday.
Entrepreneurs’ relief to be slashed
Entrepreneurs’ relief from capital gains tax – usually on profits from selling their business – will be reduced to apply on gains of up to £1m, down from £10m. Meaning that any entrepreneurs who planned to rely on the proceeds of exiting their company to pay for their retirement, may now need to consider paying more into their pension instead.
What we didn’t see in the Budget
The government announced it intends to review the ‘net pay anomaly’, which means 1.7 million low paid workers currently miss out on tax relief.
Following a Freedom of Information request to HMRC earlier this year, PensionBee found that higher and additional rate taxpayers are likely to be missing out on almost £1 billion each year in unclaimed tax relief, and is calling for a universal rate of 30% to stop consumers across all tax brackets missing out.