Impact on Taxes & Pensions

Oct 17, 2022 | Pension Transfers, Pensions, Retirement, Tax, UK

There has been a lot of change in the UK recently, with a new prime minister taking over. This article looks at how these events could impact taxes and pensions for investors. It is important to stay up-to-date on developments so that you can make informed decisions about your financial future.

With the next Prime Minister looking to make quick changes, people are concerned about how this could affect their personal finances. Pensions and investments may also be targeted for reform.

There is a possibility that this announcement will be made immediately or as part of an emergency Budget, possibly at the end of September.

Living costs

Some predict inflation reaching 18% or more early next year as fuel costs continue to skyrocket. As a result, the nation awaits news on future government support for consumers and businesses.

It’s a question of whether and to what extent the Government will provide support if energy prices continue to jump every three months. A funding deal between the government and energy companies is believed to be under consideration, with the shortfall repaid over time, possibly through income taxes and other taxes.

According to this approach, avoiding ever-higher headline inflation rates may be one of the key differences. Many may be relieved by this, but it could have implications for state benefits, such as the state pension, which is updated annually.

Pensions triple-lock comeback

The government remains committed to the state pension triple lock. Every year, the highest of consumer price inflation, national average earnings increase or 2.5% will be increased. By the time September’s crucial figure is released mid-October, inflation will already be in double figures.

Pensioners receiving 10% or higher increases may seem unfair to some workers who receive far lower wage increases. Nonetheless, state pensioners received much less than inflation last April, and their purchasing power could be further eroded if inflation continues to rise, with some predicting it may reach 18% early next year.

Frozen thresholds

The UK government announced in 2021 that income tax thresholds would be frozen until 2026 in order to help recoup the cost of covid support.

As well as the level of earnings at which people start paying basic and higher rate income taxes. Normally, these thresholds would have been increased in line with inflation each year, but because of the freeze, people pay income tax on a greater proportion of their incomes, causing some to pay higher rates of tax. In times of low inflation, this could have gone unnoticed because it was intended to gradually collect more tax revenue. While wages have lagged behind rising prices, the impact of today’s skyrocketing inflation is now significant, as no one could have predicted it in 2021.

Keeping the freeze in place for the full five years would be extremely difficult in the current cost-of-living crisis. Even though it would be difficult to make changes immediately, an announcement ending the freeze and raising thresholds from next April might be included in an emergency budget.

Other thresholds and limitations that were similarly frozen are causing problems elsewhere, although having a lesser immediate priority. For instance, the “lifetime allowance” for pensions, which is the maximum amount you can have in your pension before paying taxes, has been set at £1,073,100 ($1,249,576, €1,250,595).

Although this might sound like a lot, keeping it frozen for five years will mean that many more people who have saved responsibly for retirement may encounter a tax penalty when they go to claim their pension benefits.

Investments

The promotion of increased investment in “unlisted” assets, like long-term infrastructure projects, has received particular attention. These investments can promote the transition to net zero, spur economic growth, and ideally yield stronger returns for pension investors, he continued.

The government won’t impose any changes here, but if the regulations are loosened, you might notice that your employer pension gradually shifts where your assets are invested.

The current political situation raises many questions about how it will impact taxes and pensions. However, it is important to stay informed so that you can make the best decisions for your future. Our team of experts are here to help you navigate these changes and plan for a secure financial future. If you have any questions or concerns, please do not hesitate to contact us. We would be happy to help!

This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

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