High earners are failing to claim pension tax relief – how to claim
High earners have failed to claim around £1.3 billion in pensions tax relief in the last five years, according to figures obtained by pension provider PensionBee.
While the number of people failing to claim has fallen in the past five years, the amount of money going unclaimed is still too high. In 2020/21, the average amount that taxpayers failed to claim was £425 for basic rate payers, and £527 for higher rate payers. Anyone can claim tax relief on pension contributions, up to 100% of their income with a cap of £40,000. If you are a basic rate taxpayer, you’ll get a 20% top-up on your pension contributions, while if you’re a higher rate taxpayer, this increases to 40%. Additional rate taxpayers receive 45%.
The reason why higher rate taxpayers miss out on valuable extra contributions comes down to a technical way in which employers pay their staff. Those who pay to a pension provider using a “net pay” or “gross tax basis” arrangement will earn tax relief automatically. However, if your employer and pension provider operate on a “relief at source” method, the pension provider will claim 20% of the tax relief from HMRC and pay it into the pot. If you’re paying the higher rate of tax, the relief isn’t automatically applied at the higher level.
How to claim for higher rate relief
The first thing to do is check with your employer whether your pension payments are paid under relief at source. This also includes self-invested pension pots (SIPPs) that you contribute to independent of your employer. If that is the case, then to claim the additional tax relief you’ll need to fill out a self-assessment tax return. If you already do this annually that is good, you can use the form to make the claim. PensionBee says around 75% of higher rate payers already do this. However, this leaves one in four not claiming, while around half of additional rate taxpayers don’t either.
You can either fill out a self-assessment tax return, or instead contact HMRC to claim. Claims can be backdated for up to four years, which could add up to a highly valuable extra amount into your pension pot.
Pension savings are especially valuable because unlike in ISAs, your wealth is given a head start thanks to the tax-free element. This means over years of contribution and investment; your money will have more resources to grow with over time.
Of course, a pension is just one aspect of an overall wealth growth strategy. If you would like to discuss this or your options more broadly, don’t hesitate to get in touch.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 14th March 2023.
Budget Statement Spring 2023 Summary
The “Back to Work Budget” could create a quiet revolution in financial planning outcomes
Chancellor Jeremy Hunt’s Spring Budget 2023 took place against a backdrop of great economic uncertainty, with interest rates rising, inflation stubbornly high and the banking sector beginning to wobble. Uncertainty over inflation, interest rates, the progress of the economy and even the banking sector abounds.
However, despite concerns about how much fiscal power this would leave the Chancellor in the Budget, he managed to introduce a series of measures that could lead to a radical rethink in terms of financial planning strategies.
Spring Budget 2023 – the key measures
Economic forecasts
The Office for Budget Responsibility (OBR) has issued fresh economic forecasts showing a modestly improved outlook for the UK economy.
It predicts the UK will no longer slip into a technical recession – two quarters of economic retraction – in 2023 but growth will instead flatline, before picking up in the middle of the decade: 1.8% in 2024, 2.5% in 2025, 2.1% in 2026, 1.9% in 2027.
Inflation is set to fall to 2.9% by the end of 2023, according to the OBR, down from a peak of 11.1% in October 2022, while it expects the Bank of England base rate to peak at 4.3% in the third quarter of 2023.
The fiscal watchdog has forecast higher-than-expected employment but predicts unemployment will rise to 4.4% in 2024 from 3.7% at the end of 2022, before returning to a structural rate of 4.1% by 2028.
Employment will increase in the long-term thanks largely to the State Pension age increase in 2028 and other measures in the Budget designed to encourage people back into the workforce, it says.
Real household disposable income is expected to fall by 5.7% over two years (2022-23 and 2023-24), 1.4 percentage points less than previously expected. The fall is thanks chiefly to rising energy costs for households and will be the largest decline since 1956-57.
As for the property market, the OBR sees house prices falling around 10% between the fourth quarter of 2022 and the end of 2025. However, it believes prices will have recovered by the end of 2027.
Meanwhile, it sees mortgage rates peaking much lower than previously, just above 4% in 2027 – 0.8 percentage points lower than it predicted in November.
Business and economic measures
The Government has pressed on with the previously announced hike of corporation tax to 25% from 19%. However, Jeremy Hunt stated that just 10% of businesses would end up paying this level of tax.
He also announced the replacement of the business tax super deduction with a ‘full capital expensing’ scheme, worth £9 billion a year over three years to businesses. The OBR forecasts this will increase business investment by around 3% a year.
The Ministry of Defence has had a spending boost of £11 billion over five years, while a new potholes fund of £200 million has been created for local councils to fix roads. The Chancellor is also setting £60 million aside to help local pools and leisure centres in financial straits.
Meanwhile nuclear power will be reclassified as sustainable for tax purposes alongside wind and solar, while a new ‘Great British Nuclear’ institution will be created to oversee a transition to more nuclear power for the country. The government will also tender for the provision of small nuclear reactors.
Personal taxation
Big change comes for pensions. The pensions annual allowance is rising 50% - from £40,000 to £60,000.
The big rabbit from Jeremy Hunt’s hat came with the abolition of the pensions lifetime allowance. It had been expected to be raised from £1.073 million to £1.8 million but it has been removed completely. The charge has been cancelled from the new tax year 2023-24, while it will be abolished entirely in a future finance bill.
Alongside this, the money purchase annual allowance (MPAA) and tapered annual allowance (TAA) have been hiked from £4,000 to £10,000.
Plus, the adjusted income level required for the tapered annual allowance to apply to an individual increases from £240,000 to £260,000. However, the pensions tax-free lump sum has been capped at 25% the original lifetime allowance or £268,275.
All these changes will take effect from 6 April this year. There are no changes to income tax thresholds or ISA allowances for the new tax year. There are also no new reductions to dividend or capital gains tax allowances, other than those already announced for the new tax year.
Households, lifestyle and sins
Among the Chancellor’s banner announcements were big changes to how childcare provision is funded and regulated in England and Wales. The childcare staffing ratio is being aligned with Scotland at 5:1 while nurseries will receive a significant funding uplift and all schools will begin to offer wraparound care from September 2026.
Hunt also announced a giveaway worth more than £6,500 a year on average for young families with the extension of free childcare hours to children aged nine months and over.
Any child over two years old will be able to receive 15 hours of free childcare a week from April 2024. From September 2024 this will be extended to nine months and over and from September 2025 this will increase to 30 hours. The policy is expected to cost the Government around £4 billion a year, according to the OBR.
The energy price guarantee (EPG) has been extended for a further three months. This will cap the average household energy bill at £2,500.
It is expected that the price of energy will fall below the guarantee level in the intervening period, making further guarantees from the Government unnecessary as average bills reach £2,200 by year end according to the OBR.
Fuel duty has been frozen for another year while the 5p reduction – introduced last year amid soaring prices – has been maintained for another 12 months.
As for sin taxes, alcohol duty is increasing in line with RPI. The Government is increasing draught relief – the level of tax on fermented alcohol bought from a pub (i.e., beer, cider and wine) - giving pubs an 11p tax advantage over supermarkets. Tobacco duties are increasing again by RPI + 2%.
Download the full Budget Statement Spring 2023.
Get your finances in shape before the end of the tax year 2022/23
A new year has dawned, and there are just a matter of weeks left before the end of the tax year.
As usual, that means you need to familiarise yourself with a range of new rules, limits, and allowances. It’s really essential to be aware of this as now is the time to take advantage of left-over allowances that you have yet to use, or to prepare for new, higher taxes coming down the line. So, what is there to expect? We already know a good deal of what is coming but the Government is set to publish a Spring Budget which will take place on 15 March. While this won’t necessarily contain immediate measures, it could present some last-minute challenges for our finances.
With that in mind, here’s what we know is coming, and how to be prepared.
Things that are changing from 6 April
Capital gains tax
The Chancellor Jeremy Hunt announced a big change to the Capital Gains Tax (CGT) allowance in his Autumn Statement in November last year. The allowance has been slashed from £12,300 to £6,000 and is set to be slashed again in 2024 to just £3,000. The first cut will take effect from the new tax year, which means maximising what is left of the higher CGT allowance now is essential.
Dividend allowance
The Chancellor has also slashed the dividend allowance from £2,000 to £1,000, which will take effect from the new tax year. It will be slashed again in 2024 to just £500.
Other thresholds
The Treasury is freezing most other thresholds at their current levels for longer, including income tax and inheritance tax (IHT). This means that, while you won’t see a headline tax increase, if you receive a pay rise it will be worth less than it would have, had the thresholds moved up in line with inflation or average earnings. Jeremy Hunt also announced that the 45% additional rate of income tax will have a new lower threshold of £125,140 from 6 April. This means if you’re earning above that level, you’ll pay more in tax than you were before.
Things you can do to prepare
There are a number of straightforward mitigating measures you can take to shield your wealth and income from these changes. Here are some ideas to get you started.
ISAs
ISAs are something of a miracle product, shielding you from any tax liability for things such as dividends or capital gains tax (CGT) that you would normally have to pay if you invested using a standard account. The annual £20,000 ISA limit is extremely valuable for wealth growth and preservation, and so it’s sensible to make as much use of it as you can, be it cash or investment ISAs. ISAs are the single best way to avoid the punishing implications of dividend and capital gains tax (CGT) allowance cuts as the tax wrapper on the account protects you from any tax implications whatsoever.
Pensions
Before you get to your ISA, you’ll want to make sure you’re contributing as much as possible into your pension. The annual allowance is £40,000 and comes with extremely valuable tax relief. This tax relief makes contributing to a pension more attractive than an ISA in the first instance as upfront extra money will help grow your savings pot larger over time. However, pensions do have implications when you begin looking to draw down wealth, including when you can access the money, how much you can get tax free and the size of the pot, making them somewhat of a more complicated vehicle than the ISA.
JISAs
Junior ISAs or JISAs are often overlooked but are also an extremely valuable allowance you can call upon. Ultimately, when we think about building wealth over a lifetime, a big consideration in that is what we leave behind for our children. Before getting into inheritance tax (IHT) considerations, contributing to a JISA for a child under 18 can be a great way to begin passing some of this wealth on as early as possible, while setting up your child for a prosperous future at an early age. The current annual JISA allowance is £9,000 and this will remain unchanged in the new tax year.
Inheritance tax allowances
Inheritance – or so-called ‘Death tax’ – is the most hated of all Government levies. However, there are various allowances and carve-outs available allowing you to limit your potential liability. The main one is the annual gifting allowance. You can gift up to £3,000 tax-free to anyone each tax year, which resets each 6 April. There is also a seven-year rule on giving away wealth, so the earlier you begin to prepare that process, if it’s something you’re considering, the better. As a parent you can also make a £5,000 wedding gift, or £2,500 if you’re a grandparent – although this is contingent on when your child/grandchild gets married rather than the tax year in particular!
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 12th January 2023.
Bank account switching bonuses are on the rise again – is it worth it?
Bank account switching is back on the cards if you’re looking to earn some easy extra cash. But is it worth it?
The number of switching offers – where a bank will pay you cash to change your main current account to them – saw a big drop off during and even before the pandemic. However, banks are once again competing hard for current account customers, meaning deals for switching are popping up like mushrooms. The deals however do come and go quickly, depending on how successful they are for the bank looking to attract new customers, so you’ll often have to move quickly.
The best deals right now
At the time of writing, the best deal on the market comes from first direct, which is offering a £175 cash bonus if you switch your account to them. Until recently Nationwide offered £200, NatWest offered £175, and Lloyds Bank was offering £150 – but all of these deals have now expired. However, it is highly likely that new deals will come around again in short order, so it is worth keeping an eye out for when they do.
How to switch
For the first direct switching offer, there are a series of caveats in order to obtain the £175 cash. You’ll need to open a 1st Account and use the current account switching service (CASS) to move from your old account within three months of opening. To make the switch you’ll just have to fill out a request on the first direct website. You’ll need to pay in over £1,000 to get the bonus, which will be paid within 28 days once this is done.
Is switching worth it?
Switching bank accounts might seem like a big hassle, but the process comes with guarantees to make it as simple as possible. The CASS guarantees to switch over all your direct debits and ensure your money is moved over to the new account within seven days and promises to make the process as seamless as possible. CASS will even ensure your salary goes into the new account without you needing to do anything. This doesn’t however extend to regular card payments such as a Netflix or Spotify subscription. You’ll need to update these details with the providers yourself.
With regards to first direct in particular, the bank is owned by HSBC but operates independently. It has routinely come near or top of customer satisfaction ratings which the Government commissions. The bank is only bested by digital-only providers Monzo and Starling. Neither offer a switching bonus but come with an array of other benefits which might be more tempting than a simple cash offer. It’s worth remembering first direct is also a branchless bank, so if you need access to a local bank, this won’t be the one for you. It is also worth considering the other benefits that come with the account. For instance, first direct offers an interest-free overdraft up to £250, with anything above that charged at 39.9% EAR variable.
There are other considerations such as savings accounts on offer and other packaged benefits you might get with a current account. But if you principally just use your current account as a place to keep your spending money, then an extra £175 could be just the ticket.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 12th January 2023.
Inheritance tax at record-breaking levels
The Government earned £4.8 billion in inheritance tax (IHT) receipts between April and November 2022, according to the most recent figures. This represents a £600 million increase on the same period a year earlier and sets another record in the upward trend for the tax.
Inheritance Tax (IHT) is by no means the biggest earner for the Government – of the £490.8 billion it took in tax between April and November 2022, Income Tax and National Insurance Contributions accounted for £251.4 billion combined. However, the tax has risen steadily for over a decade and is becoming an increasing issue for many middle-class families.
Who pays IHT and why is the Government attracting more money?
Inheritance Tax (IHT) receipts have risen significantly in the past 10 years, chiefly because the Government has frozen the threshold at which families become liable to pay the tax for consecutive years. The current threshold of £325,000 has been in place since April 2009. As asset prices for wealth such as property and investments have grown, more and more estates have been pushed over the line. With the average property price standing at £296,000 in October 2022, it doesn’t take much to reach that threshold if you’re a homeowner. Chancellor Jeremy Hunt committed to keeping this threshold in place until at least 2028, meaning this trend is only set to continue.
How to mitigate IHT liability
Inheritance Tax (IHT) comes with a series of rules and extra thresholds that makes liability for paying the tax more complicated than the simple £325,000 level, however. Married couples benefit from a transferable nil rate band. This means the combined wealth of a married couple can reach £650,000 before becoming liable.
Estates which contain a main residence property also enjoy a residence nil rate band. This means the primary family home enjoys a residence nil rate band of £175,000. If a married couple combines this, the total estate can be valued up to £1 million before incurring IHT liabilities, assuming they own a home.
Pensions are also free from IHT liability, but this only applies to lump sums that are a discretionary payment from the pension provider. This does not apply for specific products such as annuities where the estate is entitled to a guaranteed payment.
Inheritance Tax (IHT) also contains exemptions when it comes to gifting. The seven-year rule stipulates that any wealth given away to others is tax free, assuming the person who is giving away money survives for seven years after it is given. There are also annual gifts that can be given tax free. Gifts of up to £3,000 can be made each tax year without incurring any liability, while a wedding gift allowance of £5,000 is also applicable for parents. Grandparents or great grandparents can gift £2,500 towards a wedding.
The exemptions don’t end there – business owner exemptions, putting assets into a trust, and certain investments also carry tax breaks with regards to IHT. However, such methods are best discussed with a financial adviser in order to ensure that IHT liability mitigation is being done in the right way.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 12th January 2023.
Top tips for saving money on holidays in 2023
For many a holiday might seem like something of an expensive luxury at the moment. But there are still ways to save on holidays in 2023.
A falling pound, rising costs and hotspot congestion – these are just some of the factors which might make you think a holiday abroad is out of reach this year. By following a few simple money tips and tricks, jetting away on a well-deserved holiday is absolutely possible for most people.
Here are some ideas to get you started in 2023.
Go where the pound is strong
The pound had a miserable year in 2022. This was compounded by a series of calamitous policy decisions taken by the Government towards the end of the year which sent the value of the currency sliding. While the value of sterling has recovered somewhat from nearly reaching parity with the dollar, it is still much weaker than it was at the start of last year, meaning some destinations remain pricey for British holidaymakers. This is particularly true in locations where the US dollar is king – mainly the US, but lots of other countries use dollars as their main currency, such as Puerto Rico and Panama, too.
However, there are still some top global holiday destinations where the pound has maintained its relative value, or even become stronger. For instance, the South African rand has remained at broadly the same level over two years compared to sterling, while Egyptian pounds have in fact become weaker versus the UK pound. Other countries such as Argentina, Hungary, India, Israel, Japan, Norway and Sweden have all seen their currencies weaken versus GBP, making the relative cost of travelling there cheaper.
If you want to see where the best rates are for your foreign exchange, then XE.com’s currency charts are a really good place to start. Of course, some of these destinations are on the more adventurous side, and others require big long-haul travel, so savings are only really worth it if you can still get a good deal on flights and other aspects.
Use price comparison
This is where making good use of price comparison comes in. We’re all reasonably accustomed to using price comparison websites to get deals for our insurance, broadband and other home services. However, travel comparison is no different, with a big selection of services that will find you the best deals out there. Price comparison isn’t just for flights – you can get quotes for hotels, car rentals and even package deals too.
Good websites to get started include Kayak, Google Flights, Momondo and Skyscanner. One thing to watch out for with price comparison though – and this is particularly the case for flights – is added extras that aren’t in the headline price. This is a common tactic used by airlines to mask the “true” cost of the flight in order to make it look attractive. Airlines will offer cheap fares, but then pile on costs from adding baggage, picking seats, and other amenities that once upon a time were inclusive of the price, but these days rarely are.
Get a good deal on foreign currency
Exchanging your pounds for the local currency can be one of the most deceptively expensive aspects of travelling abroad. We all know that buying foreign currency at the airport is expensive, as you’ll pay fees and won’t get the true exchange rate, leaving you with significantly less for your money. Even well-established high street institutions such as the Post Office don’t offer the best rates. The trick to see where this is the case is if the exchange offers ‘fee free’ currency. If you don’t pay headline fees, you’re most likely paying through a worse exchange rate.
It is much better these days to just use a bank card abroad that offers no fees and the Mastercard real exchange rate. Far and away the best for this is Starling Bank, where you’ll get the live exchange rate for your currency and there are no limits on spending.
Get a local sim card
Since the UK left the EU, roaming charges have bounced back into our lives when travelling to Europe. Some UK providers do still offer decent terms when travelling, but this is usually only the case within the EU. At the time of writing those include Asda Mobile, BT Mobile, iD Mobile, Lebara, O2, Plusnet, Sainsbury’s, Smarty and Virgin. If you use EE, Three or Vodafone then charges now apply when you use your minutes or data abroad. However, there is another way to secure a cheaper deal when you travel and that is to get a local sim card. Many modern phones will allow you to pop in a second physical or digital sim card, meaning you don’t have to use your UK minutes and data abroad.
The best thing to do when you arrive at the airport of your destination is go straight to one of the local providers’ shops to ask for a sim data deal – the airport arrivals is usually packed with them offering deals to tourists. Do your research on the destination before arriving though to ensure you pick a reputable carrier.
Come to the airport prepared
It can be really easy to find yourself spending large sums unwittingly in the airport before you’ve even left the UK. From expensive sandwiches to extortionate water bottles – the products on offer are usually very expensive compared to normal. It pays then to come prepared. Bring an empty water bottle to fill up once you’ve passed security and pack sandwiches if you think you’ll get hungry.
This also extends to other things like buying a neck pillow for your flight – you’ll get ripped off if you can’t live without one on the plane but forget it at home. This is also a salient point if you think you’ll struggle to stay within the baggage limit. Leave behind basic items like shower gel and toothpaste – ubiquitous products you can buy locally at your destination when you arrive.
Make sure you’re insured
While this isn’t a direct saving per se – failing to get good travel insurance can be extremely costly for you and your family. It’s easy to pick up good value travel insurance these days using price comparison sites to find the deal that suits you. The cost of healthcare in countries such as the US can be extraordinarily high and will be crippling if you don’t have insurance to protect you if you get injured or fall ill abroad.
With the UK leaving the EU, the old European Health Insurance Card (EHIC) is now expiring too, so make sure you apply for the new GHIC. But also remember this won’t preclude you from paying any costs, it just gives you right of access to state healthcare in EU countries and Switzerland and is not a replacement for insurance. It is also a really good way to save on rental insurance costs. Instead of paying over the odds for the premium insurance direct from the car hire firm, get car hire excess insurance instead, which will cover the premium you have to pay if you have an accident abroad with a hire car.
Be flexible
Ultimately, the deciding factor on how much your holiday is going to cost will be the destination you pick. If prices in popular destinations such as Spain, France or Italy are looking high, consider alternative up and coming destinations such as Albania, Hungary, Morocco, or even at home in the UK. You can often find staying closer to home or venturing further afield can reward you with the same top-quality experiences at much more competitive prices.