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Prepare to be taxed, higher earners — but first, invest some time in tax planning. Many of the changes announced to pensions, Isas and investments at the Budget this week will not kick in for a year or more, giving those with the wherewithal the opportunity to wring the most out of them for a while longer. Here are three money moves to consider.
Get sacrificing!
In her Budget day speech, the chancellor castigated financial services workers who save their bonus tax-free into their pension. She might as well have taken out an ad for salary sacrifice on the side of a bus.
Reducing your taxable pay by saving more for retirement is fantastically tax efficient, especially for those hovering below the next income tax band ahead of a five-year threshold freeze. The good news? We have until 2029 to stuff our pensions to the brim before national insurance charges will be applied to contributions above £2,000 — a measure that could also cause employers to reduce the generosity of pension schemes.
Most big employers already use salary sacrifice arrangements, and allow staff to change the percentage of salary sacrificed pay every year. If your firm operates this on a calendar year basis, the deadline for making changes is around now. Missed it? Seeing as employers save 15 per cent national insurance on sacrificed pension contributions, I’m sure HR departments will give tardy employees a few days’ grace.
Want to check how tax efficient this could be for you, or what impact it will have on your take home pay? Get on TheSalaryCalculator.co.uk website and play around with different contribution levels.
Unless you’re a super-high earner and affected by the pensions taper, most people can pay in up to £60,000 a year to a pension (the combination of what you and your employer contribute). Max out this tax year, and you can also top up the last three tax years if you did not use your full annual allowance (known as carry forward). When bonus season comes around, as Reeves helpfully reminded us, many firms give staff the option of sacrificing all or part of their bonus straight into their pension.
This is particular advantageous for those earning £100,000-£125,140, who pay an eye-watering 62 per cent marginal tax rate on this slice of income (or even higher if they’re repaying a student loan).
Once inside a pension, your money can grow tax free over the decades, and you can take 25 per cent of it tax free when you retire (currently capped at £268,275). However, some FT readers are wary of stuffing their pensions like a turkey, in case defined contribution pots prove a tempting target at future Budgets. Investing in venture capital trusts presents an alternative — albeit higher-risk — option. However, the chancellor announced she will restrict upfront tax relief on these from 30 per cent to 20 per cent from April 2026, so if you’re keen, get on with it.
Get tax — and family — planning
For readers who want to start a family — or add to their brood — could this Budget spur you into action? If one parent earns more than £100,000 you lose the entitlement to free childcare support from the government; a cliff edge that many use salary sacrifice to avoid.
If couples get their act together, in a little over 18 months from now they could be holding a bouncing nine-month old baby who would qualify for “free” childcare under the newly expanded government scheme. They would still be able to use salary sacrifice to stay under the £100,000 threshold until April 2029 — assuming we don’t see any more rule changes. After that, they’d have to pay some NICs and might have the admin hassle of using a personal pension to stay under the threshold.
I say this with my tongue slightly in cheek — but the sky-high cost of childcare means it is very common for professional couples to time the arrival of child number two for when child number one is at school — or to decide against having more than one (read the case studies of parents I interviewed in this FT article).
A further worry? Nearly half of companies say they plan to cut staff benefits to recoup the cost of higher salary sacrifice tax charges. This survey did not ask firms to specify which, but if your company currently offers very generous parental leave arrangements, you may wish to take this into consideration too.
Devise an Isa strategy
Many readers are smarting at the intergenerational unfairness of slashing annual cash Isa subscriptions to £12,000 for the under-65s while simultaneously raising tax on savings interest.
These changes won’t happen until April 2027, so it pays to plan your near-term cash flow requirements. My husband and I have made good use of our high-interest cash Isas in the past few years, saving for a house move and stamp duty. You may use yours to get a great rate on your emergency fund — but does it need topping up, and are you maxing out the interest available? Trading212 currently offers the best cash Isa rate at 4.56 per cent. If you need to hold higher levels of cash, UK adults can save up to £50,000 using Premium Bonds (which pay tax-free prizes).
If you’re under 40, I’d also be tempted to take an option on a Lifetime Isa. You can open an account with just £1 (cash, or stocks and shares) and save up to £4,000 of your £20,000 Isa allowance until you are aged 50, receiving a 25 per cent bonus worth up to £1,000.
The Budget announced a review of the Lisa next year. It is expected to be replaced with a new product just for first-time buyers. However, judging by the long run-off period for the discontinued Help to Buy Isa, there’s a chance those who have already opened an account could keep on investing and receiving a bonus.
Claer Barrett is the FT’s consumer editor; claer.barrett@ft.com; Instagram @Claerb
