The UK’s new Chancellor, Rishi Sunak, has recently announced his first budget to carry the UK forward in 2020. Certainly, the country faces great challenges as it battles COVID-19, and the £12bn spending pledge to buttress the economy will arguably help.
Closer to home, moreover, the Budget contains measures which are likely to affect your financial plan in both the short and longer term.
Below, we outline some of the key updates in March which could impact your pension and savings.
March 2020 & Savings
One of the most significant developments in March which affects your savings does not, in fact, come from the Budget. On the 11th March, the Bank of England (BoE) announced an urgent cut in interest rates by a half-point, from 0.75% to 0.25%, to reinforce the UK economy in light of the COVID-19 outbreak. One of the main reasons is to grant banks extra lending power to support businesses, many of which are likely to struggle with reduced consumer demand.
Of course, this rate cut does raise questions for homeowners about whether now might be a good time to change their mortgage deal. There is speculation that some people will see their monthly mortgage payment reduce somewhat. However, many will need to await news from their mortgage lender about how they will react to the rate cut. Tracker mortgages (which comprise about 11% of outstanding UK mortgages) could see monthly payment reductions, but those on variable rate mortgages (about 16% of UK mortgages) might not benefit in the same way, depending on their bank’s decision about how to respond to the base rate. Those on a fixed-rate mortgage will see no change.
Savers, unfortunately, will likely not greet the news about interest rates with enthusiasm. Since the 2008 financial crisis savers have struggled to generate meaningful returns from their cash investments. Those negatively affected by the cut this time round might want to draw some encouragement from the fact that the BoE’s decision has been described as a temporary measure.
The Budget & Pensions
In the months leading up to this Budget, a key question on the minds of many doctors was how the Chancellor would address the punitive pension rules on high-earning medical staff. In his Budget, Rishi Sunak has announced an increase in the annual allowance taper threshold, to prevent senior NHS staff facing excessive tax charges on their retirement savings.
From 2020-21, the ‘threshold income’ will be £200,000 (an increase of £90,000). Those earning less than this each year won’t be affected by the tapered annual allowance. Instead, the taper will begin once an individual’s adjusted income is over £240,000.
These changes also affect pension savers outside the NHS, however. If you earn under £150,000, then the most you can save into your pension each tax year will still be £40,000. However, the earnings threshold from which this annual allowance begins to taper is set to rise. Presently in 2019-20, this allowance is reduced by £1 for every £2 earned over £150,000, to a maximum reduction of £30,000. Under the new rules, however, this taper will not begin until your adjusted earnings each year exceed £240,000.
The bad news for higher earners in 2020-21, however, is that the minimum level to which your annual allowance can taper down will go from 10,000 to £4,000. All pension savers will benefit, however, from the planned rise in the lifetime allowance in 2020-21, which follows the consumer prices index (CPI). This means that the maximum amount you can save into a pension will be £1,073,100 in line with inflation, instead of the £1,055,000 cap in 2019-20.
Other Key Developments
Another key question asked in light of the Budget is what it means for taxes, in the short term. Notably, the Chancellor did not mention any tax rises on income, dividends or capital gains. Yet one significant development is the planned increase to National Insurance thresholds in 2020-21. For paying Class 4 contributions, self-employed people and employed workers, you should be able to earn up to £9,000 per year before you start paying National Insurance Contributions (NICs).
Whilst this sounds like welcome news, it’s important to note that this does not amount to much in real terms. The Government’s own estimates project average tax savings of £104 per worker, per tax year. However, this move could be seen as an important “stepping stone” towards the Government’s stated aim to eventually increase the NI threshold to £12,500 (i.e. to match the personal allowance in 2019-20).
One interesting measure announced in the March Budget is the Chancellor’s goal to support the employment of UK veterans, through the National Insurance system. The idea has been floated for the 2021-22 tax year, and it would allow employers to not pay employers NI contributions for the veteran’s civilian employment during their first year.
For contractors, the planned changes to IR35 rules concerning off-payroll working are still scheduled to come into effect in 2020-21. However, the Government has stated that these new rules will not be strictly enforced in the first year, to allow businesses to adjust to the transition. Tax returns which have been filed incorrectly after the 6th April should not immediately result in fines, yet businesses’ failure to adhere to the new rules will almost certainly result in fines.