Marc Shoffman examines what the Autumn Budget means for advisers and their clients
Much of the fizz around the Autumn Budget in October concerned cuts to duties on alcohol – but there were still plenty of changes for financial advisers to swallow.
Chancellor Rishi Sunak delivered his latest Red Book amid rising inflation and the prospect of the first interest rate rise since 2018.
Most of the financial planning-related changes had already been trailed in the press or announced beforehand, but here is how the Budget could affect you and your clients.
The Office for Budget Responsibility, the government’s independent economic forecaster, warned in documents released on the same day as the Budget that inflation could hit 4% next year and possibly even 5%.
This was blamed on increased demand as global and domestic lockdown restrictions ease, which it says have collided with supply issues, labour shortages and increasing energy prices.
Adam Walkom, co-founder of Permanent Wealth Partners, says this environment will show the benefits of a proactive approach to financial planning.
“Advisers need to be proactive and warn risk-averse clients about the dangers of holding cash and bonds in an inflationary environment,” he explains.
“This shows the traditional ‘tick the boxes and choose a risk level’ approach to risk is at best antiquated and at worst highly dangerous to clients’ financial wellbeing.”
HM Treasury reiterated the five-year personal tax allowance freeze first announced in the March Budget.
This, coupled with the freezing of the pension lifetime allowance at £1,073,100, gives advisers plenty to consider as clients start to earn more and are potentially pushed into higher tax brackets.
“Rising inflation, higher taxes and fiscal drag through the freezing of allowances is a worry at the moment,” says Scott Gallacher, director and Chartered financial planner at advisory firm Rowley Turton.
“When putting together financial plans for clients, I prefer to err on the side of caution. By allowing for ‘margins of error’, we should hopefully ensure that the client can weather some negative impacts such as higher inflation and higher taxes,” he adds.
Social care levy
One of the major tax changes for the next year from April 2022 was already revealed in September, when Prime Minister Boris Johnson unveiled a social care levy, adding an extra 1.5 percentage points to national insurance contributions (NICs) and dividend tax.
The Budget document said this would raise about £13bn per year for spending on health and social care across the UK.
There will also be a lifetime cap on care nursing costs of £86,000 from October 2023. Anyone with assets below £20,000 won’t pay anything and those with assets between £20,000 and £100,000 will get means-tested support.
This gives advisers specialising in care planning and later-life advice plenty to chew on, but there is also the more immediate impact of national insurance tax increases for clients.
Daniel Wiltshire, IFA at Wiltshire Wealth, says the impact of the levy will be hard to mitigate for clients.
“The one option available – if you can afford to do so – is to pay more into your pension,” he suggests.
“Salary sacrifice could become an even more tax-efficient way of making pension contributions, as this reduces the salary on which NICs are paid, resulting in a saving for both employee and employer.”
A pension shake-up is rumoured ahead of each Budget, with speculation often focusing on cutting tax relief for high earners.
That failed to materialise, again, but clients may be impacted by the suspension of the state pension triple-lock for this year.
Rather than state pensions increasing by the greatest of wage growth, inflation or 2.5%, the government has decided to avoid linking it to the change in salaries due to distortions caused by the pandemic.
Using the triple-lock could have meant increasing the state pension by about 8% based on high annual wage growth, but it is likely to go up in line with the inflation measure of 3% next year instead.
There was one small but significant pension change in the Budget for low earners.
HM Treasury said it would address the “net pay” anomaly in the pension tax relief system from April 2025, by making top-up payments to low earners.
Currently, members of relief-at-source pension schemes who do not earn enough to pay income tax, are granted basic-rate tax relief of 20% on pension contributions.
But these schemes are not as common as net-pay schemes, which do not offer the relief to those who are not earning enough to pay tax.
The Budget revealed that the government will introduce a system to make top-up payments for contributions made from 2024 onwards to low-earning individuals saving into a net-pay scheme.
An estimated 1.2 million individuals could benefit by an average of £53 a year, according to HM Treasury.
“While advised retail clients are unlikely to fall into this category, it is something to be aware of if providing advice to couples where one partner may be working part-time and currently affected by the issue,” says Steven Cameron, pensions director at Aegon.
“For advisers with workplace clients whose scheme operates on a net-pay basis, it will be important to encourage those affected to apply for the payment. Some may otherwise see the offer of free money as a scam,” he adds.
Marc Shoffman is a freelance journalist