News and Analysis | Richard Ravelin | September 28, 2022

The mini-budget and the fall in the pound: how does it affect you?

It’s been an eventful few days in the world of finance, after Chancellor Kwasi Kwarteng’s mini-budget on Friday triggered a record fall in the pound versus the dollar.

Here, we look at what some of the Chancellor’s announcements – and the resulting market volatility – could mean for you and your savings and investments.

Income tax

The mini-budget included a raft of measures, including cuts to corporation tax, national insurance and stamp duty.

One of the most significant announcements, however, were the unexpected changes to income tax. Firstly, the basic rate of income tax (currently payable on taxable income between £12,571 to £50,270) is being cut from 20p in the pound to 19p at the start of the new tax year next April.

This cut might help some consumers meet the rising costs over the coming months, but it’s still only worth £31.50 per month to someone earning up to the full extent of the basic rate tax band (£50,000).  For someone on £25,000 a year it will only be worth about £10.40 a month. Real-world impact will be a lot less effective and fair than, say raising the starting threshold for income tax or more particularly the income tax that we call National Insurance.

At the same time, the 45% higher rate of income tax for people earning more than £150,000 is being scrapped. This is being replaced by a single higher rate of income tax of 40%. This seems pointlessly generous to the band of people who can most easily weather the current inflationary storm – i.e. those earning over £150K. This is certainly a statement of political intent and one which one feels Keir Starmer will be quietly sniggering about as a stick to hit the Tories with – Christmas just came early for him.

“Buy now while stocks last!” This could also have benefits for higher earners, and it may drive people to consider maximising their pension contributions while they can still get relief at 45% on the cost of saving for their retirement. If you’re in this position, it’s worth taking advice on how best to make the most of this rate of relief.  

Note, that these changes apply to England, Wales and Northern Ireland, but not Scotland, where income tax rates and bands are decided by the Scottish government.  

Dividend tax

Another key announcement for investors was the reversal of Rishi Sunak’s dividend tax rise.

From next April, the tax rate on dividend payments for basic rate taxpayers will fall from 8.75 per cent to 7.5 per cent; higher-rate taxpayers from 33.75 per cent to 32.5 per cent.

Additional rate taxpayers will have their current rate of 39.35 per cent abolished altogether. 

Investors who make money through dividends are the obvious beneficiaries here. Only investors with big portfolios pay tax on dividends, and this change won’t affect pensions or ISA’s, as they shelter dividends from tax.

The pound and your pension

With the market reacting negatively to the Governments’ announcements, UK shares, government bonds and the pound have all tumbled.

UK government bonds – or ‘gilts’ – have been heavily sold off in recent days, amidst market concerns about the Government’s ability to pay off its debt. When bond prices fall, the debt is considered riskier, and their yields climb. According to reports, yields on 10-year bonds have risen above 4% – the highest since the 2008 financial crisis. With the Bank of England intervening yesterday to a huge degree this must be a major embarrassment for Truss and Kwarteng. Rather like a parent having to clear up the mess after giving the kids access to the grown-up tool kit.

A fall in the value of bonds could hurt those approaching retirement, as allocations to bonds are often greater in such portfolios. It’s good news for savers though. Interest rates are going to be significantly higher going forward so expect to see money coming out of equities and into bank account or even paying off mortgage debt. Inflation though still haunts cash as an investment and real rates of return are still significantly negative.

For those not yet approaching retirement, pensions are a long-term investment, designed to weather short-term fluctuations. So, don’t panic. You can read more about retirement planning in a volatile market here.

If you are already retired, a falling pound can push up inflation and therefore effect your income, so you may need to be more careful with your spending.

Navigating change

As to how the mini-budget and resulting market disruption will affect the economy in the longer-term, time will tell. In the meantime, it is worth taking a step back to look at the big picture.

There may be some good news for higher earners, but bear in mind that we are still firmly in the grip of a market downturn, with higher energy bills and rising mortgage payments to consider. You can read more about navigating market volatility in our blog post here.

It tends to be the case that investing in the stock-market in the long-term is the best way make money keep pace with the cost of living and get real positive returns. We feel that sustainable technologies will roar back when the recovery comes and  continue to assert that aligning to these future winners whilst avoiding dinosaur investments such as fossil fuel will be the place to be for economic and moral reasons.

Tax rules and allowances change, and it can be tough to keep up. If you need help navigating the changes or you need advice on achieve your financial goals, get in touch today.