Pickpocket Chancellor
After Philip Hammond’s brazen raid on family finances, follow our eight-point plan to safeguard your money and thwart the . . .
THE Chancellor of the Exchequer’s first – and last – Autumn Statement was very much focused on measures to keep the economy out of recession. But there were announcements that impacted significantly on our personal finances, for better and for worse. The Mail on Sunday’s award-winning Personal Finance team looks at eight key areas that will be affected – and how you can mitigate their impact or take advantage of them.
1 HOUSEHOLD BILLS WHAT WAS ANNOUNCED
BIG spending is on the way to improve the country’s infrastructure and boost the housing stock. Welcome though this is, the required increase in Government borrowing will fuel inflation and filter through in higher household bills.
Householders are already braced for higher prices, thanks to the weaker pound. This has forced up import costs and now experts believe inflation will exceed 2.5 per cent next year.
The announcement of a 4 per cent (30p) rise in the living wage to £7.50 next April (for over-25s), combined with the easing of cuts to welfare benefits and the freeze in fuel duty, is designed to dilute the financial impact for many, including the Just About Managing – JAMs.
But there is pain around the corner. Insurance bills will leap next June with Insurance Premium Tax rising from 10 per cent to 12 per cent on essential policies, including car, home, pet and private medical cover – hitting families in the pocket by at least £50 a year.
Experts condemn the tax grab. Graeme Trudgill, of the British Insurance Brokers’ Association, says: ‘The latest rise is outrageous and is a tax on prudence.’
Brian Walters, of medical broker Regency Health, says the rising cost of private medical insurance will end up squeezing the NHS further as fewer people buy cover.
He says: ‘Policyholders are already seeing premium increases due to rampant medical inflation. This cover should be exempt from Insurance Premium Tax, just like life and critical illness insurance. A failure to do so will see the NHS end up on its knees.’
HOW SHOULD YOU REACT?
SWITCH insurers at the first opportunity to get the best priced cover. Also, pay for annual cover up front rather than in more expensive monthly instalments.
Hannah Maundrell, of consumer website money.co.uk, says: ‘The tax hike has to be a wake-up call for people who stick with the same insurer year after year.’
Buyers of private medical cover should check they are not overpaying by seeking independent advice at renewal. Walters says: ‘Caution should be exercised when switching for those with preexisting conditions.’ Compare deals using an insurance comparison website or track down a broker at biba.org.uk or by calling 0370 950 1790.
2 COMPANY BENEFITS WHAT WAS ANNOUNCED
THE Government will leave millions of workers out of pocket when it clamps down on popular ‘salary sacrifice’ schemes next year. These are arrangements where employees give up part of their salary in return for benefits such as gym memberships, mobile phone contracts, annual health screens – and even Christmas hampers.
Employees save money because these perks are bought out of pretax pay and so escape National Insurance and income tax.
Employers benefit too as it reduces their National Insurance bills.
According to tax firm Deloitte, an employee who gives up £60 a month in pay to buy a gym membership currently pays no tax. But from next April, if they do not renew before then, they will face an annual income tax bill of £144 if a basic rate payer – £288 if a higher rate taxpayer. Schemes for employees who sign up before April next year will be protected until April 2018. Those already signed up to company car, accommodation or school fee perks will escape the changes until 2021.
Spared from the tax grab are pension contributions, employer provided financial advice, low emission vehicles, cycle-to-work schemes and childcare vouchers.
HOW SHOULD YOU REACT?
DO NOT panic. These changes need not hit your pocket until April 2018. Elliot Silk, employee benefits expert at Sanlam Wealth Planning, says: ‘Provided you have a scheme in place before April 2017, the perk can be enjoyed for up to a further year and a half.’
Yet it is wise to do the sums on how take home pay will be affected in future. Samantha Seaton, managing director at budgeting app Momentum Moneyhub, says: ‘Many will now have to make a choice between spending more money on health and fitness or cutting down on other household bills.’
She adds: ‘On the plus side, core benefits such as pension contributions are still eligible for salary sacrifice. Where employers match contributions, employees instantly double their savings, something that will benefit them in retirement.’
Pensions may also be the only option for those who use salary sacrifice as a form of tax planning – to reduce their income so it slips below the level where they are still eligible for certain state help, such as child benefit.
If the perks start to look too expensive once the Chancellor’s changes apply, cancel them. On gym membership, for example, consider signing up to a municipal gym or exercising for free by joining organisations such as Park Run, the free weekly 5km run organised in parks across the country (parkrun.org.uk).
3 SAVINGS & PENSIONS WHAT WAS ANNOUNCED
IT WAS a mixed Autumn Statement for savers. Although the Chancellor responded to The Mail on Sunday’s campaign for a new competitive savings account from the Government backed National Savings and Investments, the peace offering was underwhelming.
From spring next year, National Savings will launch a three-year savings bond with a likely fixed rate of interest of 2.2 per cent.
Unlike the last politically motivated offering from National Savings – George Osborne’s ‘pensioner bond’ in early 2015 – it will be available to anyone aged 16 or over. This is a plus, as is the proposed rate, which is better than any equivalent three-year fixed-rate savings bond currently available. According to rate scrutineer SavingsChampion, the best rate now is from Ikano Bank, paying 1.63 per cent fixed on investments from £1,000.
But there are negatives. The maximum investment into the bond will be restricted to £3,000. This compares with the £20,000 that could be invested across the one and threeyear pensioner bonds. Over the three years, savers will earn £202 of interest on the maximum holding.
For those in search of a regular income, the bonds are a non-starter because interest will only be paid when the bond matures. The rates are also far less attractive than those that were available on the pensioner bonds – 2.8 per cent on the one-year deal and 4 per cent on the threeyear bond. If inflation rises as expected in response to the weak pound – and the base rate starts notching up – a 2.2 per cent rate could look rank bad value by 2018 or 2019.
Interest will be paid gross. For most savers, there will be no tax to pay because they will be able to use their tax-free personal savings allowance. This currently stands at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.
On pensions, there was no mention
of possible reform of the way tax relief is given on contributions.
But in documentation subsequently released, it was stated that while ‘the Government is committed to enabling individuals to save more’ it is crucial ‘resources focus where there is most need’.
This suggests higher rate relief on pension contributions could be for the axe at some stage.
Hammond did announce a further restriction on the amount that savers can contribute into a pension once they have made a withdrawal under pension freedom rules introduced in April 2015.
Currently, anyone saving into a pension can contribute a maximum of £40,000 a year – a sum that includes any employer contributions. But for those aged 55 or over who have accessed their pension fund under the new freedom rules, this maximum annual allowance is £10,000. From April 2017, it will reduce to £4,000.
The move is designed to stop socalled ‘recycling’, where savers receive tax relief on contributions, then make a withdrawal and use the proceeds to make further contributions boosted by tax relief.
For example, for every £1,000 that a basic rate taxpayer contributes into a pension, £200 is paid by the taxman, a 25 per cent boost. Someone using the pension-freedom rules could then withdraw this sum and use it to fund another contribution boosted again by the taxman.
Finally, the triple lock guarantee that applies to the state pension will remain in place until 2020 at the very least. This ensures those in receipt of the state pension receive an annual increase in line with whichever of price inflation, average earnings growth or 2.5 per cent is highest.
HOW SHOULD YOU REACT?
GIVEN the new savings bond from National Savings will not be available until next spring, there is little savers can do but be patient and make a decision on whether to take it out when the finer details are confirmed.
Susan Hannums, director of SavingsChampion, says savers should continue to ensure they are maximising interest on cash savings. This means being bold and prepared to consider left-field options, such as interest-paying current accounts.
For example, Nationwide Building Society is paying five per cent interest on balances up to £2,500 in its FlexDirect current account. Tesco Bank, still reeling from the cyberattack that plundered £2.5million from the accounts of 9,000 customers, is paying 3 per cent on current account balances up to £3,000.
On pensions, savers – especially higher rate taxpayers – should maximise their contributions while they can, keeping an eye on the fact that if their fund tips over the £1million mark they will face tax charges.
Anyone drawing on a pension under the new freedom rules to pay for a big expense – for example, paying off a mortgage – should be aware that their ability to rebuild their pension fund from next April will be seriously compromised. Professional advice should be sought.
Investors looking to build a fund independent of a pension should remember that from next April, the annual Individual Savings Account allowance jumps from £15,240 to £20,000. Unlike pension withdrawals, money taken out of an Isa is tax-free.
4 PERSONAL TAX WHAT WAS ANNOUNCED
A COMMITMENT was made to raising the personal allowance, the amount of money you can earn in a year before paying income tax. This will rise to £12,500 by May 2020. The sum you can earn before having to pay 40 per cent income tax will also shunt higher, to £50,000 by 2020.
After 2020 the personal tax-free allowance will rise each year in line with the Consumer Prices Index measure of inflation.
Next April it increases from £11,000 to £11,500 and the higher rate tax bracket from £43,000 to £45,000. The sum you can earn before having to pay 40 per cent income tax will also rise by the rate of inflation, but not as high as south of the Border, where it will reach £50,000.
HOW SHOULD YOU REACT?
SMALL increases in tax allowances are welcome, but alone they will not make a big difference to household income. To feel richer, make use of widely underused tax perks. Figures from Revenue & Customs show more than three-quarters of couples eligible for the marriage allowance tax break have failed to take it.
This allows you to transfer up to £1,100 of your personal allowance to a spouse earning more than you, reducing their tax bill by a maximum £220 a year. But those who have failed to claim can also backdate it to last year. It works if you earn £11,000 or less and your spouse earns between £11,001 and £43,000. Apply online at gov.uk/apply-marriage-allowance.
Another tax break to boost income includes the rent-a-room scheme, with tax-free earnings of up to £7,500 a year for people letting out a furnished spare room. Find out more at gov.uk/rent-room-in-your-home.
From April next year you can earn more tax-free for odd jobs. Renting out assets such as a driveway, car or storage space in the attic can earn
you up to £1,000 tax-free. There is an additional £1,000 tax-free perk for selling goods or services online.
5 MOTORING COSTS WHAT WAS ANNOUNCED
BILLIONS of pounds will be poured into building roads, sorting out traffic ‘pinch points’ and encouraging the development of self-driving and low-emission vehicles.
Meanwhile, legislation will be brought in next year to help end the scourge of fraudulent whiplash insurance claims – a move that it is claimed will save motorists at least £40 a year on insurance premiums.
The Ministry of Justice will either end the right to compensation for minor whiplash injuries or put a limit on the sum that can be claimed. Some experts doubt insurers will pass on the savings to drivers.
The Chancellor also announced that the planned fuel duty rise has been cancelled for the seventh consecutive year, saving the average car driver £130 a year. But next June the Government will hike Insurance Premium Tax on motor insurance from 10 per cent to 12 per cent, offsetting any gains for many. Research firm Consumer Intelligence estimates the tax hike will add £15 a year to the average motor premium of £788. Experts say young drivers will be hardest hit. Ian Hughes, chief executive of Consumer Intelligence, says: ‘The tax increase will add £35 to today’s average premium of £1,831 for young drivers.’
HOW SHOULD YOU REACT?
DESPITE insurance bills rising, the gap between the average and the cheapest premium is £117, making a switch of provider the simplest way to offset higher motoring bills.
Simon McCulloch of website comparethemarket, says: ‘Annual premiums are £167 more expensive than two years ago. By shopping around at renewal, motorists can take some control.’
Graeme Trudgill, of the British Insurance Brokers’ Association, says: ‘You can reduce premiums in other ways, such as agreeing to a higher excess or adding an experienced second driver to a policy. Putting a telematics black box in a car to monitor driving can reduce premiums for younger drivers by a quarter.’
6 HOMES AND TENANCIES WHAT WAS ANNOUNCED
RENTERS will enjoy a breathing space when they move home or renew a lease as letting fees are to be banned south of the Border, as they have been in Scotland. Fees are on average £223 per tenancy, but can be higher. No date was announced but the UK Government is expected to act swiftly.
Karen Barrett, of find-an-adviser website Unbiased, says: ‘The banning of letting fees should help more young renters save for a deposit and eventually buy their own home.’ But an unintended consequence of a ban could be rising rents. Landlords, facing tougher taxes on their profits, will invariably raise rents.
HOW SHOULD YOU REACT?
IF YOU want to buy your own home but are struggling, look at the Help to Buy scheme operated by the Scottish Government.
It enables people struggling to afford a new home to buy with a 5 per cent deposit and 15 per cent from the Scottish Government.
However, it would be wise to move quickly as the scheme has run out of money rapidly in previous years, and the offer will worsen in years to come.
At present people can use the scheme to buy homes worth up to £230,000, but that only applies to deals that complete by the end of March 2017. For the following 12 months the upper limit will fall to £200,000, before decreasing again to £175,000.
The Scottish Government’s 15 per cent stake is interest-free and can be repaid at any time. The deal only applies to new-build homes and participating builders and lenders, so it is important to research before you apply.
Initially, the Scottish Government committed £305 million over three years to Help to Buy, but many were left disappointed when the fund ran out within weeks each year. Then, in January this year, it announced the fund will be cut to £195 million over the next three years, with £80 million available in 2016-17, £65 million in 2017-18, and £50 million in 2018-19.
7 CHILDCARE WHAT WAS ANNOUNCED
A NEW tax-free childcare scheme to help working parents has been confirmed. It will launch early next year and is worth up to £2,000 per child, per year. Parents of the youngest children will benefit first and by the end of next year the scheme will cover all children up to age 12. Parents of children with disabilities receive help worth up to £4,000 a year until their child is aged 17.
The scheme is open to families of two working parents, each earning between £115 a week and no more than £100,000 a year. The Chancellor also gave the go-ahead for doubling free childcare for three and fouryear-olds in England. This will rise from 15 hours per week to 30, covering a stretch of 38 weeks and starts in September next year.
HOW SHOULD YOU REACT?
FROM next year working parents will be able to benefit from the new tax-free childcare scheme by opening an account, run by National Savings and Investments.
For every £8 you put in, the Government adds £2, up to a maximum £2,000 bonus a year. Family members, such as grandparents, can contribute too and money is paid directly from this account to a childcare provider. This scheme is also available to the self-employed and part-time workers.
But parents who already receive or are eligible for childcare vouchers from their employer must choose between the schemes.
Employer-supported childcare will close to new joiners from April 2018, although people already using it can continue to do so.
Each parent can claim up to £243 a month in childcare vouchers from their employer through salary sacrifice, thereby avoiding both income tax and National Insurance. Higher rate and additional-rate taxpayers can claim £124 and £110 a month respectively. You can get more information from charity Turn2us at turn2us.org.uk.
8 FINANCIAL SAFETY WHAT WAS ANNOUNCED
FROM next year, companies will be banned from making pension cold calls. The move is primarily designed to stop rogue companies tricking people out of their life savings.
Companies that persist will be hit with fines of up to £500,000.
HOW SHOULD YOU REACT?
UNTIL the ban comes in, anyone receiving a call out of the blue from someone promising you early access to your pension should not be tempted.
If you are at all suspicious, call Action Fraud on 0300 123 2040.