A “mini-budget” for those with maximum incomes

If your personal finances benefited from Friday’s mini-budget, chances are you’re already well off.

Extra rate taxpayers will be popping champagne corks (never mind waiting for liquor tax changes) on the oversized aid the new chancellor has just provided amid a cost crisis life.

I’ve summarized the main ways this will benefit the highest earners below – and added some thoughts on how you might want to redirect some of that unexpected largesse to cash-strapped family members. , including perhaps your children.

Given how markets have reacted to Kwasi Kwarteng’s political gamble, I would stress that the short-term fiscal gains are unlikely to outweigh the long-term costs of inflation and soaring interest rates – but here are a few things to consider when conducting your own “mini-budget” personal finances over a cappuccino this weekend.

Late payment bonuses and dividends

The abolition of the additional 45% tax rate was the ‘rabbit’ the Chancellor pulled out of his hat – and it’s also a carrot for workers to ask to defer their bonuses until the start of the new year tax in April 2023, when the lower 40% tax rate will apply.

However, the biggest tax cut of 2023 – which has been buried in the mini-budget documents – will be for additional dividends, falling from 39.35% to 32.5% next April.

This substantially benefits investors who hold holdings outside the tax envelope (pensions and Isas) as well as managers of limited companies. Directors will also benefit from a reduction in corporation tax on profits.

This includes the growing number of rental landlords who hold their properties within a corporate structure. If they want to invest part of their profits in expanding their real estate empires, they will also benefit from stamp duty reductions.

The government thinks 45% of taxpayers delaying their bonuses will cost the Treasury £2.3billion in the current tax year, said Nimesh Shah, chief executive of accountancy firm Blick Rothenberg. For the richest, it is better to postpone.

Accelerate pension contributions

Additional rate taxpayers currently get a 45% tax break on pension contributions, but this will drop to 40% from April when tax rates are equalized.

So it might make sense to prioritize pension payments now – but many high earners won’t be able to save much on pensions because of the annual reduction in benefits.

They will no doubt be delighted that the Chancellor has extended programs offering initial tax relief – Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) – beyond 2025. He also doubled the amount that can be invested in Seed EIS programs from £100,000 to £200,000 (something to start planning for next tax year).

Meanwhile, in a small concession to base rate taxpayers, the lower tax relief to 19% on pension contributions will not apply until April 2024.

Consider saving money

Removing the 45% rate means giving the wealthiest access to the Personal Savings Allowance for the first time, meaning they can earn £500 a year in interest on their savings without paying tax .

That equates to 2% interest on cash savings of £25,000 – and as interest rates rise, there’s every chance you’ll find an account paying that rate by next April.

Help adult children

Bomad (Mom and Dad’s Bank) is technically Britain’s ninth largest mortgage lender and its donations will go further after Friday’s stamp duty announcements.

First-time buyers have seen the stamp duty threshold raised to £425,000 and can use it on property worth up to £625,000 (was £500,000). However, there has been no increase to the Lifetime Isa ownership cap, which remains stuck at £450,000.

The interest rate hikes announced the day before the mini-budget could pose a much bigger problem. With millions of fixed-rate agreements set to expire next year, borrowers should prepare for the “income shock” of higher rates (note that five- and two-year average rates are now above 4%) .

On a £250,000 repayment mortgage, a change in interest rate from 1% (the best historical rate) to 4% corresponds to a monthly increase in payments of £378. Get out your paperwork this weekend if you haven’t already, find out when your rate expires, and start looking for a new rate seven months before it expires (some lenders will allow you to “lock in” a new rate six months from now). time advance).

There were meager choices in this budget for the lowest paid, but also for young people in general. Removing the top tax rate technically means that some graduates with student loan debt have to pay a higher marginal tax rate than high earners (due to the so-called “graduate tax” of 9 % levied on income over £27,295).

Promising to make the tax system simpler and fairer while continuing to freeze the Child Benefit threshold at £50,000 is another incongruous move, particularly given soaring childcare costs.

At least that was referenced in the budget documents, with promises to “propose reforms to improve access to affordable and flexible childcare,” but until then Nomad (the nursery for mom and dad) will do a quick trade.

Help others

I couldn’t write all of the above without expressing my disbelief at the lack of new targeted measures to help those who suffer the most as inflation rises. Our tax savings chart shows how little benefit these reductions will bring to low- and middle-income people compared to the better-off. The political bet is on “economic trickle down”, although the jury is still out on whether this will bring benefits. Over to you, dear readers!

But even those big donations won’t spare the wealthy from the effects of higher inflation, a falling pound and the danger that taxes may have to rise in the future if the political gamble doesn’t pay off.

Claer Barrett is the FT’s consumer editor: claer.barrett@ft.com; Twitter @Claerb; instagram @Claerb

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