The 60 minutes that made ISAs and pensions more important than ever
21 November 2022 - Chancellor Jeremy Hunt’s Autumn Statement took 60 minutes to deliver last week. And in that one hour, three tax changes made pensions and ISAs more important than ever.
First there was news that the thresholds for basic and higher rate income tax are to be frozen until 2028, while the threshold for the addition rate of 45% would be lowered from £150,000 to £125,140, dragging hundreds of thousands into higher tax brackets without them realising.
Then we were told that the government will reduce the Dividend Allowance from £2,000 to £1,000 from April 2023, and to £500 from April 2024 - adding more than £3bn to government coffers over the next six years.
The third strike to investors was the announcement that the Capital Gains Tax (CGT) Annual Exempt Amount would be slashed from £12,300 to £6,000 from April 2023 and to £3,000 from April 2024. The CGT reform is expected to raise £15bn for the Treasury in the next tax year.
Little reason for investors to cheer
Ed Caswell, Investment Manager at MHA Caves Wealth, believes the short-term outlook for investors remains dour.
“With the FTSE and pound sterling trading lower and gilt yields edging higher following the Chancellor’s Autumn Statement, there has been little for investors to get excited about today,” he said. “The reaction, negative although unremarkable, follows a sobering economic assessment by the Office for Budget Responsibility and a demanding fiscal policy required to mend the nation’s finances.
“The UK faces a triple threat for investors in 2023 with the recession due to shrink the economy by 1.4%, unemployment to reach 4.9% and inflation to remain at 7%. Furthermore, with Corporation Tax to hit 25% and capital gains/dividend tax-free allowances halving in both 2023 and 2024, global investors have little reason to revisit their UK investment case next year.
“Still reeling from the (not so) mini-budget eight weeks ago, a muted market response to an announcement of yesterday’s magnitude will undoubtedly be considered something of a success by the government, as their £55bn fiscal consolidation seeks to restore credibility and return the UK to long-term prosperity. However, for domestic and international investors, the picture remains bleak.”
But pensions and ISAs could save you money
With the real terms reduction in income allowance and reduction in dividend and CGT allowances, maximising pension contributions and ISA investments, where appropriate, looks more attractive than ever.
Tax benefits of ISAs
Both adult and Junior ISAs have a number of tax advantages:
- Free of capital gains tax
- No tax on dividends
- Interest from corporate bonds is tax free
- All income is paid without any further liability to tax
- In the case of an adult ISA, a spouse will benefit from an additional one-off ISA allowance equal to the total amount the deceased held within their ISA at the date of death.
- The current annual limit for an adult ISA is £20,000 and the annual limit for a Junior ISA is £9,000.
Tax benefits of pensions
While you will be liable to income tax when you eventually take income from your pensions, there is tax relief when you start investing.
This is because when you pay into your pension, some of the money that would otherwise go to the tax man goes towards your pension instead. This can help reduce the amount of tax you pay overall and help boost your savings for the future.
This tax relief is given based on the rate of income tax that you pay and is shown in the diagram below.
The current annual allowance for pensions is £40,000. This limit stipulates how much tax-free money you can invest in your pension, over the given year. You can find out more here.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.