Gordon Brown made his pre-budget speech on 27 November confirming many improvements to things like working families tax credits, increasing spending on public services and state benefits with effect next year. But what about the small print for Mr and Mrs Average? We thought it pertinent to offer a summary of some of the main points that may have been missed from a personal finance point of view and how some of these proposed changes may affect your pocket next April.
Basic Personal Tax Allowance Frozen for 2003/04. Effect: This means that you technically will pay more tax as your earnings increase over the year but your allowance has not. Even some people who are currently non-taxpayers may end up paying tax next year as allowances are frozen. They have however been increased for the over 65s.
Visit the Tax Tables in Savings Adviser.com.
Additional 1% National Insurance Contributions on all earnings above £89 per week. This used to have a maximum ceiling for employees contributions, which will now be removed. Effect: You pay more, your employer will also pay more. For many this is a real increase in 'taxes' of just under 2%! But the Chancellor can still say that he has not increased income tax!
Visit the Tax Tables in Savings Adviser.com.
Government borrowing increasing to £102bn over the next 5 years. Effect: This may be excellent news for people looking to retire soon. One way for the Government to borrow is to issue Gilts (Gilt Edged Securities). In simple terms, instead of investors buying shares in Sainsbury's Plc, BT Plc, BP Plc etc investors buy shares in the "United Kingdom PLC". You effectively own shares in this country. For lending your money to the country, you get a secure interest rate return (yield) from your Gilt. The effect of attractive Gilts being available would improve the pension annuity (income) rate that somebody could get when they retire i.e. you may receive a higher pension income. The downside is those who already have investments in Gilts and Corporate Bonds, either directly or through fixed interest funds, may see a fall in the capital value of their investment.
Inheritance Tax Threshold increases from £250,000 to £255,000. This is an increase of 2% and means a potential additional inheritance tax saving of up to £2,000. Effect: Most peoples homes have increased in value by well over 15% in the last year, let alone previous years. This means that many more have wealth now above the nil rate tax threshold. The result is more people are breaching the inheritance tax nil rate threshold and will pay inheritance tax on death, once thought the domain of the wealthy. Result - the treasury collect more tax at a rate of 40%!
Care should be taken and advice sought now as there is speculation of other changes to Inheritance tax rules before the actual budget in March that may close some attractive 'loopholes'.
To learn more about how to save on Inheritance Tax visit the Inheritance Adviser.com. Why not try our Inheritance Tax Calculator to see how much you would have to pay?
Capital Gains Tax Threshold increases from £7,700 to £7,900. This enables disposal of gains 'profit' made on assets with each person being able to maximise special tiered rules depending on how long your have owned the asset. This is particularly important because whilst many may not have made gains on stock markets linked investments, people will have made gains on property. Many of you may not be aware that if you have bought second properties you are liable to capital gains tax when you sell them.
Other New Tax Efficient Savings Plans discussed by the Chancellor. "The Child Trust Fund" and the "Savings Gateway". The Child Trust Fund proposes to make a cash sum gift to a child on birth and at vary ages by the Government. This must be invested in a special savings account and can then be added to by others to save for the child. The Savings Gateway is proposed to be targeted at lower earners where the government will encourage lower earners to save by matching contributions that they make into savings on a 1:1 basis up to a maximum limit. For example, if you put in £50 pm, the Government will put in £50 pm to double your savings for say 3 years.
Visit Savings Adviser for more on tax efficient savings.
Pensions. There was not much cheer or news in this problematic area. The Chancellor confirmed that the Government will
1) not remove the requirement to purchase your pension income annuity by age 75 (search the archive on annuities).
2) That State Pensions plus winter fuel benefits and the Minimum Income Guarantee will increase next year.
Learn more about pensions in the Pensions Adviser.com.
Take a look at last years Tax Savings Tips Article. We will publish another shortly for this years end of year planning season.