Budget 2017: the Moneywise verdict
Philip Hammond failed to address the issue of high inflation eating away at Britain’s £700bn cash savings pot. With inflation on the rise and interest rates at rock-bottom, the purchasing power of savings held in most cash individual savings account (Isas) is rapidly declining.
The Chancellor only delivered a teeny tiny bit of help for savers, by confirming the new NS&I three year bond will pay 2.2%. It’s not going to solve your income problems. In fact, investing in the new bond is probably a dilemma in itself.
It’s time to consider investing at least some of your savings for better returns, if you haven’t already. Calculations by Fidelity International show if you had invested £15,000 into the FTSE All Share index 20 years ago you would now be left with £53,974. If, however, you had invested £15,000 into the average UK savings account over the same period, you would be left with a paltry £19,877. That’s a difference of £34,097 – too big for any sensible saver to ignore.
The main surprise of the Budget was the announcement of a cut to the dividend allowance – from £5,000 to £2,000, which makes holding your investments in a stocks and shares Isa more important than ever.
Any dividend income above £2,000 will now be subject to income tax. You don’t need a massive portfolio to have a dividend income of over £2,000 - only around £50,000.
However, there were few other rabbits pulled out of the hat in today’s Budget as pensions tax relief was left untouched and no new social care Isa was announced.
Most notable were the omissions: No help for first-time buyers, for example.
As the tax experts at Rutherford Wilkinson point out, what is often overlooked is what hasn’t been changed, which results in a gradual ‘stealthy’ increase in taxes.
The Chancellor could have increased the gifting threshold, to help more people pass on modest sums without concerns over inheritance tax. The £3,000 annual limit on gifts has not increased since 1981. Had it increased with inflation, this allowance would be closer to £11,000 by now.
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The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.