Despite the light-touch approach to tax in the Chancellor’s recent Spending Review, there were still plenty of takeaways from a financial planning perspective.With the government already announcing major tax changes earlier this year – the hike on national insurance (NI) as a social care levy and corporation tax increase – the Chancellor used his third budget to outline his plans to boost a better-than-expected UK economy1.
Even in the face of financial headwinds from the pandemic, Rishi Sunak pledged to increase the national living wage from £8.91 to £9.50 an hour, raise public sector pay and invest almost £6bn worth of funding for the NHS backlog.
Alongside a £500m package which will include financial and mental health support for vulnerable families, he avoided raising capital gains tax and further increasing corporation tax. But despite pensions and inheritance tax (IHT) largely being left alone by the Chancellor, there was still plenty in the Autumn Budget for financial advisers to consider – even if what wasn’t included was perhaps more compelling than what was. Here are our five key takeaways.
1) Wealth tax uncertainty is driving need for financial adviceEven though an enormous amount of spending was announced in the budget, there was no additional tax rises beyond those announced earlier in the year. Adding to this, the Chancellor announced his intention to lower tax rates by the end of this parliament, relying on economic growth to fund higher levels of spending. However, as this growth is not guaranteed, it creates some uncertainty around the need for future tax rises.
That aside, there are other levers that the government can use to fund spending without directly increasing taxes. Going forward this might include reducing allowances for tax advantaged investments such as ISAs and pensions. “This could mean that the amount that an individual can invest on an annual basis is reduced, which would reduce the amount the government loses in tax relief, and would also mean more is invested in products that are subject to income tax or capital gains tax,” said Steven Kransdorff, Head of Investment Product Development, VitalityInvest.
“In addition, it’s possible that higher rate tax relief on pension contributions could also be reduced or restricted, which has previously been rumoured. Individuals should therefore look to maximise these valuable allowances while they remain available. And with allowances frozen until 2026 and with higher inflation expected, the real value of these allowances are already decreasing which disadvantages savers even if no further action is taken.”
Given such complexities and the potential for future uncertainty, the role of financial advisers in demystifying tax planning for clients is likely to become more crucial – not less. “The government may eventually need to decide how to tax the wealthy, and whilst over the years there have been consultations and reports on this subject, major changes have yet to be announced,” added Kim Jarvis, Technical Consultant for Tax & Trusts at Vitality. “Eventually changes can be expected, so clients will need to seek out financial advice and start planning for them now.”
2) Clients should consider reviewing their investments as inflation risesAmid the positivity, The Chancellor did admit that inflation is likely to rise from 3.1% to 4% next year as the UK economy continues to struggle with increasing demand for goods. While this will drive up the cost of living, some might assume that corresponding interest rates will benefit savers. “This is not necessarily the case though as there is a very high chance that it would erode the real value of savings held in cash at the same time,” said VitalityInvest’s Kransdorff. “If more money is going to cover the cost of living, this will make it harder for consumers to put money into long-term savings such as retirement. Interest rate rises can also add a layer of complexity, particularly when it comes to financial planning.”
Kransdorff added that this uncertainty will make financial advice even more valuable to people who need help to manage and protect their finances. “Clients will need more support to consider tax efficient savings to optimise return potential and explore ways to invest in assets that hedge inflation,” he said.
Adding to this, protection adviser Matthew Chapman, commercial director at Plus Protect, argued that any form of financial planning, including advice around tax or investments, should be underpinned by the need to protect either the sources of income that enable such investments or those that facilitate the payment of taxes. “Protection plays an integral role in helping businesses to reduce their tax liability and ensure continuity and cash flow (that can also be used to settle tax liabilities) when things go wrong,” he said. “But the same can be said in the personal wealth space. How can any individual realistically plan financially, pay taxes, or invest their capital without protecting the very income sources that generate the capital or fund the investments in the first place?”
3) Advisers should talk about later life options despite social care levyDespite the light-touch nature of the budget from a tax perspective, the government did, in September, announce that NI would be increased by 1.25% from April 2022, with a social care levy to follow from April 2023 to help support the NHS. Yet, despite the estimated £36bn (in total) that this will make available2, it is estimated that £8bn3 a year is needed to solve the social care problem alone. This means that conversations with clients about later life care options – or specially designed whole of life plans – are as relevant as ever, especially given the heightened attention around the subject.
“It’s unlikely that an IFA would encounter a client that is unaware that they will need to consider how to fund their later life care at some point,” said Tony Müdd, St James’ Place protection expert in a recent article for Vitality Insights Hub, following the coverage the issue has received in the press. “And this issue is not going away.”
According to Müdd, much of this discussion centres around the immediate need to fund later life care, but sometimes overlooked by IFAs is the opportunity to introduce this to clients as an intergenerational wealth issue too. “If an adviser is working with a family now, they should be asking parents about how they intend to fund their own care later down the line, if, say, for example, the grandparents are planning to sell their property to pay for theirs,” he said. “With that inheritance money gone, what are they going to do?”
4) Spending for NHS backlog puts PMI in the spotlightDuring the budget and as part of his Spending Review, Rishi Sunak pledged an additional £5.9bn in funding to ease the NHS backlog, which currently sits at a record 5.7 million people4. He said the objective is to increase elective activity by 30% by 2024-25 compared to pre-pandemic levels, with spending set to increase by £44bn to £177bn by the end of the current parliament using the largest health budget since 2010. While additional spending for the NHS is hugely welcomed, there was no mention of incentives to see greater uptake of personal healthcare cover, such as private medical insurance (PMI) or corporate health insurance. Prevention was also barely mentioned during The Chancellors speech.
Matthew Chapman agreed that now is a prime opportunity to talk about PMI options alongside personal protection products with clients, both individuals and businesses. “Right now, we all know how strained the national health service is,” he said. “PMI is a great way that businesses can offer something extra, of real value, to their workforce at a time of great uncertainty.”
5) Rising corporation tax can kickstart business protection conversationsAlthough there were no changes to corporation tax during the autumn budget, a significant increase was announced earlier in the year, with rates rising to 25% where company profits are over £250k (19% if under £50k and with a taper) in 2023. With this in mind, Chapman said protection advisers should be cognizant of how they can use this to their advantage.
“Many business protection solutions (where the life assured is an employee of the business and doesn’t have a financial interest in the business) can be placed on expenses with the premiums enjoying tax relief,” he explained. “This combines protection of themselves and their business from financial uncertainty with an ability to reduce their potential corporation tax liability. A win-win situation.”
He also pointed out that these conversations can also unlock opportunities to roll out business health insurance and wellbeing benefits to employees too. “How do employers keep their workforce engaged, loyal and avoid them defecting to the competition? Simple. They look at what value and incentives they can offer their people above and beyond their competitors,” he said. “The Vitality proposition, for example, goes a step further by fusing traditional healthcare cover with employee benefits and various rewards and incentives that bring significant value to people’s daily lives and lifestyle habits.”
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1. Annual growth is expected to be as high as 7.5% for 2021 – compared to previously projected 4%, The Guardian, October 2021
3. As estimated by Damian Green in his 2019 paper for the Centre for Policy Studies: ‘Fixing the Social Care Crisis’