ISA Allowance 2022: Use It Or Lose It!

March 2022

Taking some time to start planning for 2022/23 now can be worthwhile. 

While there is often a focus on planning for the end of the tax year, much less attention is paid to the start of the tax year. The lack of an obvious deadline is probably one reason – deadlines tend to concentrate the mind. Nevertheless, some planning at the beginning of the year can be a rewarding exercise.

• Estimate your total income for 2021/22 – If you have a rough estimate of what your income will be, it will give you an idea of what to watch out for and what each extra £1 of gross income will be worth. For example, if your estimate is around £50,000, that means you are on the borders of higher rate tax (or well into the 41% band if you are resident in Scotland). £50,000 is also the threshold at which the child benefit tax charge comes into play.

• Check whether you will cover your allowances – The allowances to which you are entitled often depend upon your income, although the £2,000 dividend allowance applies universally. Couples have the opportunity to cover two sets of allowances, possibly by transferring investments between each other or changing from single ownership to joint ownership.

• Check your PAYE code – If you have received a 2021/22 PAYE coding, check that it is correct. The wrong code could mean you pay too much tax during the year.

• Top up your ISA – If it makes tax sense for you to invest in an ISA because of the potential income and capital gains tax savings, then the time to do so is as soon as possible, not just as the tax year end approaches.

• Consider making pension contributions – The sooner your contribution is invested, the longer it benefits from a tax-favoured environment and the less likely it is to be ‘lost’ in other expenditure.

  For more 2021/22 tax planning, talk to us now… not March 2022.

  The value of tax reliefs depends on your individual circumstances.

  Tax laws can change.

  The Financial Conduct Authority does not regulate tax advice. 

  The value of investments can fall as well as rise. You may get back less than you invested.

  Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.

   

  Image Credit: Photo from Pexels

We could see a jump in inflation soon

The pandemic has posed problems for the Office for National Statistics (ONS) when it comes to calculating the rate of inflation. For example:

• How do you measure the price of an item or service when a lockdown means it is not for sale? Two good examples are the ‘Restaurants and hotels’ category, which in 2020 took up almost 12% of the Consumer Prices Index (CPI) and the ‘Package holidays’ subgroup of the ‘Recreation and culture’ category which had a 4.2% weighting in the Index. In February 2021, the ONS said that in the previous month it had managed to collect only 88% of the prices it had collected before the first lockdown.

• Are the right items and services being measured? All inflation indices measure the prices of a ‘basket’ of goods and services. The ONS reviews and amends that basket each year to reflect changing spending patterns. This is often a source of humorous headlines, such as the replacement of crumpets by individual fruit pies last year.

• The new ‘basket’ for 2021 would normally have been based on expenditure in 2019. However, that was in the pre-pandemic era and spending patterns changed in 2020, as we all know. The ONS has therefore created a special 2021 ‘basket’ that uses data from both 2019 and, where there have been significant changes, 2020. As a result, the weighting for ‘Restaurants and hotels’ and ‘Recreation and culture’ have both fallen while those for ‘Food and non-alcoholic beverages’ and ‘Alcoholic beverages and tobacco’ have risen. Eating and drinking in is the new dining out…

Annual inflation over the last ten years to January 2021 has averaged 1.8%, as measured by the CPI, which means overall prices have increased by almost a fifth since 2011 – bad news for anyone with a fixed income.

Although 2021 started with annual inflation of 0.7%, by May the figure is likely to be nearer to 2% as a result of price rises already built in. These include the 9.2% rise in capped gas and electricity bills and council tax increases of up to 5%.

For all the problems of pandemic measurement, inflation is still out there and needs to be built into your financial plans.

 The Budget announced a five-year freeze to the standard lifetime allowance.

The standard lifetime allowance (SLA) is an important pensions number. It effectively sets the maximum tax efficient value of all your retirement benefits, in the absence of any legislative protections (of which there are many). To the extent that the SLA is exceeded there is a special flat rate tax charge which is 25% if the excess is drawn as taxable income and 55% if it is received as a lump sum.

When the SLA was first introduced in 2006, it was set at £1.5 million, a level which equated to an annual pension income of £75,000, based on a standard legislative assumption of an annuity rate of 5%. The initial legislation set out increases for the SLA to £1.8 million in 2010/11. That proved to be the SLA’s highwater mark. It was frozen in the following year and then the first of three cuts were introduced. By 2016/17 the SLA was down to £1 million.

For three tax years from 2018/19 the SLA has been index-linked, but from April 2021 it will be frozen for half a decade at £1,073,100. Had the original £1,500,000 level been index linked, the SLA would now be £2,082,100 – not far short of double the actual level.

The devaluation of the SLA has three consequences:

• The pension protected from the SLA tax charge has fallen. On the legislative basis which applies to defined benefit (final salary) schemes, it will now be £53,945. For defined contribution pension arrangements, such as personal pensions, the erosion is greater. Low annuity rates mean that £1,073,100 will buy an inflation proofed income of just over £31,000 a year (before tax) for a 65-year-old.

•  More people are being caught by the special tax charge. HMRC’s latest (sic) figures show over 4,500 SLA charge payers in 2017/18 against 1,240 five years earlier.

• The legislative protections, some of which date back to 2006, are all the more valuable.

 If you think you might be affected by the SLA tax charge, either based on current benefits or when you reach retirement, take advice as soon as possible. You could find that from now on it is best to exclude pension contributions from your retirement planning.

The value of your investment and income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. 

 Were you born after 5 April 1971 ?

A new consultation paper has set out more details of an increase in the normal minimum retirement age. 

In February the Treasury and HMRC published a consultation paper on implementing an increase in the normal minimum pension age (NMPA) from 55 to 57. The NMPA sets the earliest age at which retirement benefits (lump sum and/or income) can normally be drawn from a pension. The rise to 57 was originally announced back in 2014, but all then went very quiet. Eventually, in September last year, the Treasury replied to a question from the chair of the Work and Pensions Select Committee by confirming the 2014 announcement remained in force: the minimum pension age would indeed rise to 57 in 2028.

Unfortunately, the Treasury minister’s response was light on detail – there was no mention of the precise timing in 2028, whether there would be any phasing in or if transitional protection would be available. Given the deep water in which the government has found itself with the increase in women’s State Pension ages (SPA), the lack of information was surprising.

The consultation paper addresses the gaps in last autumn’s brief answer with the following proposals:

• The NMPA will rise to 57 on 6 April 2028, coinciding with the date on which the state pension age rises to 67 (after two years of phasing in).

•  There will be no legislative phasing in for the higher NMPA, although pension scheme providers can choose to bring it in earlier than April 2028. One odd effect of this is that between 7 April 2026 and 5 April 2028 there will be people who reach age 55 and can draw pension benefits but, if they do not do so within that time frame, will have to wait until age 57 is reached.

• You will still be able to draw benefits before age 57 on or after 6 April 2028 if you had the right to do so on 11 February 2021 or are a member of the firefighters, police and armed forces public service pension schemes.

If this change affects your retirement planning, make sure you take advice as soon as possible.