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Budget

Comparing your spending with others

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Our clients are often interested in how their household spending compares to others.  Do they spend more than their neighbours, about the same, or less?  This financial curiosity has been satisfied with the publication of new official figures reporting on household spending across the UK.

The latest Family Spending Survey from the Office for National Statistics (ONS) offers an insight into the spending habits of UK households, broken down by household characteristics and types of spending.  At a headline level, it shows that average weekly spending is up to £572.60 for the year ending March 2018.  This is the highest level of weekly spending since 2005, when adjusted for inflation.

According to the ONS, this rise in UK household spending is correlated with an improvement in the employment rate, which reached a record high of 75.6% in the first quarter of last year.

The ONS reports that the biggest outlay for households was transport.  The average household is now shelling out £80.80 a week on its transport costs.  A further £76.10 per week was spent on average on housing costs, fuel and power.  This was followed by an average of £74.60 a week on recreation and culture.

In addition to spending habits, the report also looks at how much we are saving.  It found that our savings ratio has fallen to its lowest level since records began, to just 3.9%.  Such a low savings ratio suggests that households are dipping into their savings, and even taking on new debt, in order to spend more and keep up with their lifestyle costs.

Looking at spending habits across different parts of the UK, the ONS report found some interesting differences.  Perhaps unsurprisingly, London households are spending the most each week with an average weekly spend of £658.30 in the City.  Other parts of the country to report above average levels of weekly spending were the South East, South West and East of England.

In contrast, the lowest average spending was reported in the North East of England, where households were spending an average of £457.50 each week.  There was also below average spending in Scotland, Northern Ireland and Wales, at £492.20, £488.50 and £470.40 a week on average respectively.

Another trend identified in the report was less of an outlay on alcoholic drinks.  It’s not the first time the ONS has spotted this downward trend.  Households are now spending an average of just £8 a week on alcohol.  A decade earlier, this figure was £10.90 a week, when adjusted for price inflation. More is being spent on food and non-alcoholic drinks compared to a year earlier; £60.60 a week now compared with £58 a week (inflation adjusted) back in 2008.

Commenting on the figures, Helen Morrissey, pension specialist at Royal London, pointed out they represent a home maintenance time bomb for the over 50s.  She said:

“Today’s figures show that just because people may have paid off their mortgage it doesn’t mean they stop spending on their house and many are facing a home maintenance time bomb.

“The stats show almost a quarter of all housing expenditure in households headed by people aged between 50-74 was on alterations and improvements such as central heating installations and double glazing. This figure is much higher than the average for all households which is more like 14%.

“It demonstrates the importance of having the necessary savings to meet these sizeable and often unexpected expenses for those approaching and in retirement. Being unable to meet these expenses as we get older can lead to people being forced to move from much loved homes because they no longer meet their needs.”

Of course, how you allocate your own household spending each week is likely to vary from these national averages.  What matters is that expenditure is intentional and forms part of your overall financial planning, helping you to achieve and maintain your desired lifestyle.

At Wells Gibson we put your life at the centre of our conversations and design a Wealth Plan which makes it easier for you to visualise and achieve the life you want; answers your big questions and helps you prepare for your life’s transitions; and gives you the greatest chance of a successful investment outcome and fulfilled life from the money you have and will have.

Here’s what you need to know about the Budget

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Chancellor Philip Hammond has delivered his latest Budget to parliament, the first to take place on a Monday since 1962.

It was also the longest Budget speech in a decade, with Hammond announcing an end to austerity and some generous tax breaks as economic forecasts suggest a smoother ride ahead.   Quoting figures from the independent Office for Budget Responsibility, he explained the deficit has fallen by four-fifths since 2009/10.  Back then it stood at 9.9% of GDP, falling today to reach 1.9%.

According to the Chancellor, public debt peaked in 2016/17 and is now falling.  Average spending on public services is forecast to grow in real terms by 1.2% each year, from next year through until 2023/24.

Hammond was in a relatively jubilant mood, confirming that the UK economy has grown in each year since 2010, with projections suggesting it will continue to grow in each year of the forecast term.

He also talked about the unemployment rate standing at its lowest in more than 40 years, with more than 3.3 million more people in work than there were back in 2010.  In fact, the Office for Budget Responsibility is forecasting 800,000 more jobs by 2022.  Despite these positive figures, the Chancellor reaffirmed his fiscal rules and promised to upgrade the Spring Statement next year to a full Budget, should this prove necessary to keep the economic forecasts on track in the light of Brexit.

Hammond saved his biggest announcements until the end of his speech; a faster-than-planned increase in the income tax personal allowance and higher rate tax threshold.  This means that for Scottish and English tax-payers alike, the personal allowance (the amount you can earn free of income tax each year) will rise to £12,500 in April 2019.  This formed part of a Conservative manifesto pledge, but is now happening a year earlier than promised.  According to the Treasury, it means a basic rate taxpayer will pay £1,205 less tax in 2019/20 than they did back in 2010/11, as a result of a rising personal allowance.  As for the higher rate tax threshold, this will increase from £46,350 to £50,000 in April 2019, for English tax-payers.  It means that there will be nearly 1 million fewer higher rate taxpayers in 2019/20 compared to 2015/16.

It was a long Budget speech but pensions were notable by their absence.

Within the accompanying Budget papers we discovered that the lifetime allowance for pension savings will rise to £1,055,000. This is slightly higher than expected, with the September figures for the Consumer Prices Index suggesting the new lifetime allowance would be £1,054,800.

There was plenty of speculation ahead of the Budget that pensions tax relief was under threat. However, no changes were made to the annual allowance for pensions, associated rules or tax reliefs.

Steve Webb, Director of Policy at Royal London said:

“The Chancellor’s windfall from better-than-expected borrowing forecasts meant that he did not have to cut back pension tax relief in this Budget.  But having described the system as ‘eye-wateringly expensive’ it is likely to be only a matter of time before this Chancellor – or his successor – comes back for more.  Today’s respite for pension tax relief is likely to be only temporary.”

The Budget also featured very little for savers, other than some minor changes to Premium Bonds from National Savings & Investments, making these more accessible in the future by lowering the minimum investment amount to £25 and making it easier to gift them to a child.

The annual subscription limits for Individual Savings Accounts (ISAs) will stay at £20,000 next April, but the Junior ISA allowance will rise in line with CPI price inflation to reach £4,368.

This same limit will also apply to Child Trust Funds (CTFs), although a consultation will be published next year to consider draft regulations for maturing CTF accounts.

Business owners should be relieved to hear that entrepreneurs relief on capital gains tax remains in place, despite calls for this tax break to be scrapped.  The qualifying rules do however become slightly more onerous, with the minimum qualifying period extended from 12 months to 24 months, from 6th April 2019.

As with every Budget, the devil is in the detail and it could take some time for all of the nuances from this Budget to become fully apparent.

In the meantime, please contact Wells Gibson if you have any questions about the impact of this Budget on your own personal financial planning.

2018 Autumn budget and pension tax change speculation

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With the summer holidays drawing to a close, the inevitable round of speculation about pension tax relief changes in the Autumn Budget has begun.

Media reports suggest that Chancellor Philip Hammond has his eyes on cuts to higher rate tax relief on pension contributions when he presents his Budget statement to the House of Commons in November.  The Chancellor has a challenging Budget ahead, with a desperate need to find extra funding for the NHS, the £20bn already pledged by the Prime Minister.

According to an unnamed senior government minister, Hammond believes higher rate tax relief on pensions represents ‘one of the last remaining pots of gold we can raid’.  This suggestion will worry higher rate taxpayers who currently enjoy this generous tax relief on their pension contributions.

As things stand, basic rate relief is added to the pension pot, with the ability for higher rate taxpayers to reclaim the difference between basic and higher rates of income tax through self-assessment.  However, the unnamed government source is also reported to have said Hammond is only likely to target those who can afford to contribute tens of thousands of pounds to their pension pots each year.

Pension tax relief is always under threat in the Budget, if media reports leading up to the big day are to be believed.  The last major round of speculation was a couple of years ago, when then Chancellor George Osborne had his eye on £1.5bn of tax savings by changing pension tax relief to a flat-rate.

Lending weight to the speculation on this occasion is a Treasury Committee report, published last month, which concluded existing pension tax relief was neither an effective or well-targeted way of encouraging people to save into pensions.  Despite recommending the Treasury considered making fundamental reform to pension tax relief, the report recommended that the current system could be improved through further, incremental changes to tax relief.  According to the report, ‘Household finances: income, saving and debt’:

“The government should consider replacing the lifetime allowance with a lower annual allowance, introducing a flat rate of relief, and promoting understanding of tax relief as a bonus or additional contribution.”

Cutting the pension annual allowance is an option on the table for Hammond.  The annual allowance is a limit on how much you can contribute to your pension each year, while still receiving tax relief.  It currently stands at £40,000 but is tapered down to as low as £10,000 for higher earners with earnings exceeding £210,000 a year.  For those who have taken taxable income flexibly from their pensions, a Money Purchase Annual Allowance (MPAA) of £4,000 applies instead of the £40,000 figure.  In any case, your earnings in the tax year need to be sufficient to justify the size of the pension contribution, with opportunities to bring forward any unused annual allowance from the previous three tax years – unless that is, the MPAA applies to you.  This ability to carry forward unused annual allowance could also be attacked in the Autumn Budget, changing to a ‘use it or lose it’ approach, similar to use of Individual Savings Account (ISA) allowances in each tax year.

Should the Chancellor decide to cut the annual allowance in his Autumn Budget, to a yet unknown figure, he might give back the abolition of the lifetime allowance as a concession.  The lifetime allowance is a limit on the total value of pension benefits you can draw from all pension schemes, either as lump sums or retirement income, without it triggering an extra tax charge.  Since April 2018, the lifetime allowance has been set at £1,030,000 and is due to increase at the start of each tax year, in line with price inflation.  A relatively low number of people are caught by the lifetime allowance, and many of those who will be, are entitled to a higher lifetime allowance figure by virtue of applying for ‘protection’ certificates when it was historically set at a higher level.  For some of those individuals with lifetime allowance protection certificates in place, this entitlement to a higher lifetime allowance came at a cost, that is, not being able to make any future pension contributions, or losing that protection and seeing more of their pension benefits being subjected to a future tax charge.

Abolishing the lifetime allowance entirely would be a popular move for those fortunate to have this level of pension benefits, even if it came with a corresponding reduction in the annual allowance.

Another possibility is the Chancellor will scrap the current system of pension tax relief, replacing it with a flat-rate tax relief.  Earlier this year, the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) put forward the case for a flat-rate of pension tax relief at 30%, specifically as a way to help the self-employed.  They estimated this reform would leave three-quarters of savers better off, including those earning low incomes and the self-employed.  It would also save the Treasury a great deal of money each year in tax reliefs.

Of course, the one pension perk where conspiracy theories circulate ahead of each Budget is pension tax-free cash.  Since tax-free cash was renamed the ‘pension commencement lump sum’, it has seemed fair game for the Treasury to place a cap on how much lump sum can be taken tax-free, or simply subject all cash withdrawals from pensions to income tax charges.  This form of attack on pensions seems far less likely than a cut in the annual allowance or even the introduction of flat-rate pension tax relief.

Other potential opportunities being considered for the Budget will undoubtedly include cutting tax breaks on smaller company investing, which could spell bad news for higher-risk, tax planning products such as Venture Capital Trusts and Enterprise Investment Schemes.

If you find yourself potentially worse off should the annual allowance be cut, ability to carry forward unused annual allowance removed, or pension tax relief changed to a flat-rate, then taking some action ahead of the Budget could make sense.

Talk to Wells Gibson about your options, and we can help you understand the impact of any of these changes on your own long-term financial planning and in particular, your desired lifestyle and goals.

Three steps towards a more financially organised life

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Are you managing your finances or are your finances managing you?

We’ve all got money, but how much we have is dependent on the work we do or did and the life we lead. Furthermore, managing our finances and staying organised can be a real challenge for most people.  We’re not always taught how to be financially well organised as part of our education, so a lot of us have had to figure it out as we go.

At Wells Gibson we want all of our clients to be better organised financially so we’re going to look at a few steps to help you achieve this.

Budgeting

Your biggest and perhaps best step to a financially organised lifestyle is learning how to budget effectively.  A budget is something that everyone needs as it helps to allocate funds to particular areas of your life; household bills, social events, debt repayment… they all need to be taken into consideration when it comes to you and your life.

By having a budget, you help to ensure that no matter what happens, you’re taking the time to plan out what you spend and when.

Have An Emergency Fund

You never know when a disaster will strike.  Something can easily occur which will require a lot of money.  Your car might break down, or you might find that something in the home needs to be replaced.  When this happens, it’s important to have an emergency fund, so that if you need to, you can pay for things without upsetting your main finances.

An emergency fund gives you peace of mind, stops you relying on family or friends and doesn’t leave you relying on your main finances to desperately find the money you need.

Consolidate Your Debt

Do you have a lot of debts scattered about?  Most people do.

With various loans and new items available on credit from companies, a lot of people balance multiple loans, all of which come from different places.  However, that’s a chaotic and stressful way to track them.

If you can consolidate your debt, it’s well within your interest to do so.  Consolidation means that all the money you owe to various places is condensed down into one place, which means it’s so much easier to keep track of what you’re paying, when you’re paying it, and most importantly who you’re paying to.

Overall, these are just a few of the steps that you can take to ensure that you are working towards a financially organised life.  It’s difficult at first and we appreciate that people aren’t always conservative with their funding or forward thinking with debt.

It’s so worthwhile trying to make sure you are better organised financially as you’ll soon discover that it’s so much less hassle, and also much easier to keep track of everything.  Better still, you will probably be less anxious about tomorrow.

 

The Scottish Draft Budget 2018/19

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A “fairer and more progressive” tax system?

Last week saw the eagerly awaited Scottish draft Budget which followed draft proposals from the Scottish Government for reforming the structure of income tax.  As the SNP does not have a majority, the Budget only represents draft proposals and these may change before becoming law.

Derek Mackay, the Scottish Cabinet Secretary for Finance and the Constitution, claimed that around 70% of Scottish taxpayers in Scotland earning less than £33,000 will not pay more income tax in 2018/19 than in 2017/18, but time will only tell if the revised income tax framework will “make Scotland’s tax system fairer and more progressive”.

Unfortunately, Mr Mackay has complicated the tax structure by creating two new rates of tax – a starter rate at 19% and an intermediate rate at 21% and has added 1% to the current 40% higher and the 45% additional rates.

The proposed new income tax bands above any available personal allowance for 2018/19 are as follows:

Taxable Income

Band Name

Tax Rate

0 – 2,000 Starter 19
2,001 – 12,150 Basic 20
12,151 – 32,423 Intermediate 21
32,424 – 150,000* Higher 41
Over £150,000 Top 46

* Those earning more than £100,000 will see their personal allowance reduced by £1 for every £2 earned over £100,000.

The above new structure will mean:

  • The Scottish basic-rate band will run from the personal allowance of £11,850 set by Westminster to £24,000 of income;
  • The 41% higher-rate threshold for 2018/19 will be £44,273, which compares to a 40% higher-rate threshold and £46,350 for the rest of the UK; and
  • The basic-rate remains at 20%, however, there will be a band of intermediate-rate taxpayers who will be able to reclaim an extra 1% tax-relief on their pension contributions.

Land and Building Transaction Tax

After last month’s Westminster Budget, a widely expected change to help first time buyers was made to Land and Building Transaction Tax (LBTT).  Mr Mackay increased the nil rate slice of LBTT by £30,000 to £175,000, giving first time buyers a maximum saving of £600 from 2018/19.