A few weeks on from Jeremy Hunt’s Budget, financial journalist, Sara Benwell exclusively discusses the longer-term impact it’ll have on your clients in later life as well as why and how people will likely be looking to generate capital or make existing assets stretch further to help tackle the current financial landscape. Jeremy Hunt’s Autumn Statement was less controversial than his predecessor’s budget, however, it is not without its challenges. In particular, the squeezed middle, self-employed and higher earners will all be hit hard by higher tax bills. In fact, a raft of stealth taxes means that millions of people will pay more tax thanks to fiscal drag. In the middle of a cost-of-living crisis characterised by double digit inflation – people are likely to be looking for ways to generate capital or make existing assets stretch further.
Tax rises set to squeeze finances
The government said it would leave headline rates of tax untouched and it has largely fulfilled this promise. However, chancellor Jeremy Hunt also introduced a raft of stealthy tax grabs. These might achieve his aim of tackling the UK’s debt burden, but they will also undoubtedly leave many clients worse off. One key thing to note is the decision to keep the personal allowance frozen at £12,570 until April 2028, with the 40% tax threshold staying at £50,270. This is two years longer than planned and means that hundreds of thousands of lower and middle earners will pay more tax than ever. The thresholds for inheritance tax, capital gains tax and national insurance will also remain frozen, further squeezing stretched finances. Inheritance tax freezes in particular could lead to many families being caught by surprise as their assets tip beyond the threshold. The government expects to raise £30bn each year from these measures alone by 2026.
Unsurprisingly, the news is worse for higher earners as the 45% income tax threshold will be lowered from £150,000 to £125,140 from April 2023. Around 250,000 more workers will start paying the top rate, in a move that will net the government an extra £1.3bn each year. Small business owners, self-employed people with limited companies, and investors will suffer thanks to a slashed dividend allowance. This will fall to £1,000 from April 2023 and then drop to just £500 from 2024. This is an additional blow following the news that corporation tax rates will rise to 25% from next year.
The capital gains tax (CGT) allowance is also being cut from £12,300, to £6,000 from next April, falling again to £3,000 the following year. For most investors, this should be a prompt to maximise ISA allowances, but there will still be plenty of people facing higher tax bills. Homeowners don’t escape either as the increases to the stamp duty land tax SDLT nil-rate threshold from £125,000 to £250,000 will only stay in place until March 2025. The nil-rate threshold for first-time buyers will revert from £425,000 to £300,000 at the same time.
Mixed results for pensioners
One small piece of good news is the re-instatement of the pensions triple-lock, following a suspension due to Covid last year. As a result, the state pension will rise by the Consumer Prices Index inflation measure of 10.1%. This means a substantial increase for savers who have made full national insurance contributions. The New State Pension will increase from £185.15 per week to £203.85 for someone with a full record. Meanwhile, the Basic State Pension will increase from £141.85 to £156.20. In total, the annual new state pension will be worth £10,600.20, breaking the £10,000 barrier for the first time ever.
However, the income tax freeze means that more pensioners on very low incomes will pay the tax for the first time. In fact, those with no private savings whatsoever may find they have to pay income tax if the state pension catches up with the personal tax allowance. Middle earners will struggle too, with many facing a higher tax burden than before as they tip into the higher rate bracket. Like others, this group will struggle to navigate the cost-of-living crisis against this backdrop of stealth tax grabs.
Furthermore, the government has announced that the lifetime allowance will stay at £1,073,100 for yet another year. This cap hasn’t moved since 2012, when it was reduced from its peak of £1.8million. Each year the threshold remains the same, it affects more people. In particular, doctors and other professions with final salary schemes could be at risk.
Solving the income gap
The combination of these measures will make it ever harder for people’s incomes to keep pace with inflation, which hit a 41-year high of 11.1% in October. Even pensioners – relatively protected by the commitment to uphold the triple lock – are likely to feel the pinch. Homeowners in particular may find that they are asset rich, but cash poor, as faltering incomes and a higher tax burden make it harder than ever to pay the bills. One possible solution could be equity release, allowing people to draw on one of their most valuable assets to bridge the income gap.
Key’s Market Monitor shows that the number of people using equity release as a financial tool has grown each year. These solutions can be particularly useful for people who need to finance bigger ticket items such as paying off existing mortgages, repaying or consolidating existing debts, home adaptations for later life or needing a financial boost through retirement. While equity release will not be suitable for all people, it has a valuable role to play when it comes to funding later life. This is particularly true for those who have eschewed retirement saving, saying “my property is my pension”.
Downsizing is an alternative, but there are significant problems including the lack of and cost of appropriate properties, emotional attachment to the family home, and profits being swallowed up by stamp duty, legal fees and moving costs.
Equity release can overcome many of the issues, meaning it can be a powerful tool when used correctly. Protections such as the no negative equity guarantee means that people can take out lifetime mortgages without passing on a debt burden to their families. And additional flexibility mean that homeowners can choose to make repayments to cut the cost of borrowing. This could be simply repaying interest, or it could even be repaying some of the capital borrowed. Equally, many deals allow people to remortgage in the future if lower rates become available or they need to release more cash, should it be suitable for them.
The importance of expert advice
Given the complexity, advisers must play a critical role in helping consumers to understand the market and which products might be suitable for their needs. Air can support you in that role. As the industry-leading later life lending platform, we offer financial professionals, from advisers to lenders, best-in-class digital sourcing tools, personal development services and incentives; all designed to support and reward your business growth, especially through this challenging time.
Click here to register and find out how Air can help you secure better customer outcomes in the current economic climate.
Or for more information, call our expert adviser support team who are on hand help you with all your later life lending questions. Get in touch today: 0800 294 5097