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Investors are essential to Chancellor Kwasi Kwarteng’s mission to grow the economy.
As a result, there were a number of announcements in his mini-Budget on Friday that will have consequences for pensions, savings and investment portfolios.
Reduction of dividend tax helps entrepreneurs
Investors who receive a lot of income from investments will receive a tax cut from April next year, the chancellor said.
Fresh start: Bloom and Wild benefited from now extended start-up schemes
The tax rate on dividend payments for taxpayers with the base rate falls from 8.75 percent to 7.5 percent and for taxpayers with a higher rate from 33.75 percent to 32.5 percent. For taxpayers, the current rate of 39.35 percent will be abolished altogether.
In reality, only investors with large portfolios pay taxes on dividends, as investments in pensions and individual savings accounts don’t attract them. And everyone has an annual tax-free dividend payment of £2,000.
Laura Suter, head of personal finance at investment platform AJ Bell, calculates that an investor would need to have a portfolio of more than £50,000 yielding 4 percent to take advantage of it. However, she points out that business leaders who pay themselves in dividends are likely to realize huge savings.
“Someone who receives £50,000 in dividends a year will save £3,288 next year compared to this year, while those who receive £10,000 in dividends a year will be better off paying £548,” she says.
Start-up schemes get a big boost
Three schemes that offer investors major tax breaks to support start-ups received a major boost in the budget.
Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EISs) and Seed Enterprise Investment Schemes (SEISs) are vehicles that allow investors to put their money into companies that are still privately owned or too small to be on the main London stock list . Stock exchange.
Companies that have successfully used the schemes to grow include flower delivery company Bloom & Wild, recipe box firm Gousto, and burger restaurant Five Guys. Some companies you can invest in have great growth potential, but they can also be more volatile and the risk of losing most or all of your money is much higher than in more traditional portfolios.
Because of the risks, the incentives to invest are high. For example, VCTs and EIS schemes offer an income tax reduction of up to 30 percent, while SEIS schemes offer up to 50 percent. An estate tax exemption is also available on EIS and SEIS schemes.
Because they are riskier, they are usually only considered by wealthy, experienced investors who have used up all their other fees for Isas and pensions.
The budget confirmed that the VCT and EIS schemes would continue – until now there was a so-called sunset clause, which could have allowed the industry to shut down in 2025. The SEIS scheme was also extended.
Individual investors’ annual compensation for SEIS schemes will double to £200,000, while the maximum a company can raise under the scheme has also increased from £150,000 to £250,000.
Top earners pay less tax on savings interest
Taxpayers currently in the supplemental rate class can earn up to £500 in interest on their savings from April without paying taxes.
Under the current system, only base-rate and higher-rate taxpayers get a personal savings deduction of £1,000 and £500 per year, respectively. Extra rate taxpayers have none at all.
But from April, the additional tax rate, which taxes income above £150,000 a year at 45 percent, will be abolished.
Extra rate taxpayers become higher rate taxpayers and therefore receive a personal savings balance.
Pensions can invest in infrastructure
The current ceiling on occupational pension benefits should be relaxed, Kwarteng said.
Currently, savers should not be charged more than 0.75 percent per year for managing investments in their retirement.
This is intended to protect savers from losing their investment returns due to unjustified high fees.
However, the chancellor wants pension funds to be able to invest in large infrastructure projects, which would stimulate economic growth. The government has committed itself to ambitious targets in the field of, for example, nuclear, solar and wind energy.
So far, pension funds have argued that these types of investments are too expensive to deliver under the current rate cap of 0.75 percent and have therefore balked.
Becky O’Connor is head of pensions and savings at investment platform Interactive Investor. She says: ‘The pension cap has for some time been labeled as a barrier to private investment by pension funds in large infrastructure projects, as asset managers have been unable to deliver on it and also keep costs for workplace savers below 0.75. percent cap.
“These large investments are costly, but also have the potential to generate growth for the economy and also for investors.”
But watch out if pensions stung
Savers will receive slightly less tax relief on pensions from April.
Base rate taxpayers get a 20 percent tax credit, which is their current income tax rate. From April, however, the base rate will be reduced to 19 percent.
The income tax cut is, of course, largely good news, as employees will love what they earn more. But the consequences are that the pension deduction also falls to 19 percent. Helen Morrissey, senior pension analyst at investment platform Hargreaves Lansdown, says: “Instead of getting £20 extra for every £80 you contribute, you now get just £19 for every £81.”
While the one percentage point cut for tax relief to 19 percent may sound small, it can add up after years of retirement savings.
Consultancy Barnett Waddingham has calculated that a 40-year-old basic rate taxpayer earning £37,500 and contributing 12 percent of his salary to a pension is likely to find that their pot is worth £5,700 less when they retire as a result of the change. This equates to a reduction in retirement income of around £360 a year.
People who are currently additional taxpayers will find that their retirement deductions are also in line with their income taxes, going from 45 percent to 40 percent. This means that instead of getting 45 euros extra for every 55 euros they contribute, they now get 40 euros for every 60 euros.
The changes will only take place from the new assessment year in April. Therefore, savers who can afford it can benefit from putting more money into retirement before then to take advantage of the more generous rates.
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