All eyes were on Chancellor of the Exchequer Rishi Sunak as he took the podium at the House of Commons on 23 March 2022 to deliver his spring budget announcement.
With a backdrop of rising inflation and energy prices, the cost of living is front and centre in many people’s minds right now.
There was a lot of pressure on the chancellor’s shoulders to help assure people and businesses, and perhaps even provide some relief too.
While media and analysts debate whether or not he achieved this, it is our job to see how his announcements might impact your clients.
The idea behind splitting the budget into a March and autumn statement was that the former could function more as an economic update while the latter would offer up more fiscal policy. But this spring budget has been given extra weight by the economic uncertainty that surrounds it.
You are probably well aware of the context here, but the budget statement confirms that the economy could be in for a bumpy ride over the coming years.
The Office for Budget Responsibility (OBR) predicts that the economy is due to grow by 3.8% this year. But with inflation reaching around 8.7%, wages remaining stagnant and energy costs rising, household disposable income is likely to come under significant pressure.
The OBR sees these factors impacting growth for years to come – with growth slowing to 1.8% in 2023, 2.1% in 2024 and 1.8% in 2025.
All of this means your clients are probably looking to you to provide some guidance on how to plan for the next few years. So, did the chancellor’s announcements provide any big changes that will impact your ability to do this?
The headline measures of the March Budget 2022 were probably the changes to taxation announced by the chancellor.
With people already concerned about their spending power, any changes to taxation were sure to get people talking.
The chancellor made three big announcements with regards to tax:
The government is going ahead with its planned rise 1.25 percentage point rise in National Insurance in April, but also raised the threshold by £3,000 to £12,570. It now matches the tax-free personal allowance for income tax.
Income tax will be cut from 20% to 19% in 2024, but will remain at its current level for now – as does the tax-free personal allowance that will stay.
From 23 March, fuel duty on petrol and diesel will be cut by 5p a litre for 12 months.
The result of this is a greater level of tax for almost all workers, particularly those on higher earnings.
When coupled with a real-term decline in incomes too, your clients are going to be looking for ways to effectively manage with less.
Along with a drop in spending power, rising interest may not be good for your clients’ savings either.
If they primarily have cash savings, inflation will reduce the purchasing power of that money over time.
And while one way to try and beat inflation is to diversify your assets across different asset classes, the economic uncertainty could make your clients more risk averse than they may otherwise be.
When it comes to savings, the chancellor didn’t offer much. The ISA allowance for 2022-23 is set at £20,000 and this applies to both cash and stocks & shares ISAs.
For Junior ISAs, the allowance remains at £9,000. ISAs offer a potential way for clients to protect their earnings from inflation, but that will depend on their other circumstances.
For those in retirement or nearing the end of their working life, big changes in the cost of living could be a big worry.
Again, the measures announced by the chancellor didn’t significantly shift the dial in any direction, but there are some things to be aware of:
From April, the State Pension will rise by 3.1% - this applies to both the new flat-rate State Pension introduced in 2016 as well as the basic State Pension.
The current lifetime allowance limit of £1,073,100 will be frozen until at least 2026.
There was no change to the annual pension allowance – which remains at £40,000.
The chancellor did not offer any additional support to pensioners who, of course, do not pay National Insurance and will therefore not benefit from the threshold raise.
It is also unclear whether the raising of the threshold will have an impact on State Pension entitlement. This is an important issue to keep an eye on if you have clients who will no longer be liable to make National Insurance contributions going forward.
Similarly, the drop in income tax could influence pension contributions.
If income tax is being paid at 19% from 2024, it makes sense that tax relief on contributions will also be subject to a lower rate too.
This may mean that your clients could benefit from increasing their contributions this year to take advantage of the higher rate of relief while it is still in place.
It is important to remember that we are likely to see more policy announcements in the autumn budget.
But with so much uncertainty in the air, including the ongoing conflict in Ukraine, the situation is in flux.
What is clear is that your clients are likely to have less disposable income and will be facing rising costs. This makes effective financial planning and management a necessity.
In such unique times, more people than ever will be looking for an expert opinion to help them.
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