Hello, and welcome to our latest on the money podcast, which is a weekly look how to make the most out of your savings and investments.

So in this episode, we're gonna be covering the personal finance contents of the famous red briefcase, which was opened earlier than it should have been as lots of the contents and policies were announced early in error by the independent fiscal watchdog, the office for budget responsibility, prior to chancellor Rachel Reeves stepping up to deliver her budget speech.

So we're gonna be covering the announcements that impact savers and investors.

And joining me to provide his expert insights is Craig Rickman, personal finance editor at Interact Investor.

So, Craig, the budget, it's always a busy time for yourself, and you penned a couple of news analysis pieces on the day of the budget, which can be found on the Interact Investor website, which is ii.co.uk.

Craig, could you give a very brief rundown of the main budget takeaways for savers and investors?

I sure can.

So here are here are four key policies that were announced.

So the deep freeze on on income tax and national insurance thresholds, that's gonna be extended by a further three years.

The cash ISA allowance for those who are under age 65 will reduce to £12,000 in the future.

The overall 20,000 ISO allowance will remain.

There's gonna be a £2,000 cap on pension salary sacrifice contributions.

And, also, the rates of tax on dividends, on savings interest, and property income are all due to rise in the future as well.

Let's move on to talking through each of those key announcements slash reforms in more detail.

So let's start off with the cash ISA.

So there were lots of rumors and speculation ahead of this budget that there would be some sort of change to the cash ISA allowance.

So it was announced that the cash ISA allowance, it'll be cut to £12,000 a year from the current level of 20,000 per tax year.

It's gonna happen from 04/06/2027, so it's not gonna impact this tax year or the next tax year.

It's gonna impact the following one.

And it was also announced that if you're aged 65 or over, you'll still be able to put a maximum of £20,000 into a cash ISA in a tax year if indeed you wish to do so.

For me, I think this is a very sensible move as I think those in retirement arguably have a greater need for more accessible and lower risk savings, which is what a cash ISA provides.

In terms of the annual subscription limits, it was also announced that the ISA will remain at £20,000 a year.

The lifetime ISA will remain at £4,000 a year, although there are gonna be some reforms to the lifetime ISA, which we're gonna talk through a bit later.

And the junior ISA and child trust funds will also remain at £9,000 a year.

All of those allowances, they're gonna be frozen at those respective levels until the 04/05/2031.

So that actually means that the annual ISO allowances will have been frozen overall for fourteen years.

Going back to the cash ISA, so from 04/06/2027, if you're under the age of 65 and you wanna use the full £20,000 ISA allowance, £8,000 of that will have to be in either the stocks and shares ISO or the innovative finance ISO.

So, Craig, the hope is from the government that a lower cash ISO allowance will encourage more money to go into the stocks and shares ISO version, and it'll incentivize more people to consider investing.

What are your thoughts, Craig, on this aim?

Yes.

Well, I mean, ultimately, time will tell.

But my view, you know, merely reducing the cash ISO limit, how much how much is that gonna move the dial for investors?

I'm not sure a great deal.

I think the government will be hoping that it will be that that reducing the cash item allowance together with some of the other other initiatives that they've that they've launched will have will have an impact.

So during her mansion house speech, Rachel Reeves announced that in the future, they're they're gonna look to change the narrative around investing risk warnings to try and promote the benefits.

There's also the targeted support regime, which is gonna be rolled out from April, which is a way for providers to help guide savers and investors towards appropriate financial products, and that might be, you know, guiding towards perhaps a stocks and shares ISA instead of a cash ISA.

So I think the government is probably looking at, yeah, these things in aggregate to try and help, you know, funnel more money into the stock market for that sort of dual aim really to try and help improve saver returns and also boost The UK economy.

But, yeah, yeah, I guess time time will time will tell whether that works or not.

But I think the the big thing for me is is around, you know, people aren't just gonna invest in the stock market or lots of people aren't purely because there's, you know, there are tax breaks for doing so.

They need to understand the benefits of investing their money over the long term versus keeping it in cash.

So I think, you know, broadly, that's that's the big challenge that needs to be tackled.

I completely agree, Craig.

I think the big challenge, as you say, that needs to be tackled is education, and education around the benefits of long term investing, and education around the fact that investing, it isn't it isn't scary, isn't something to be frightened of.

It can it can be a real powerful goals over the long term if you follow the sort of fundamental investment principles.

There are various golden rules with investing, which we speak about regularly on this podcast, and we write about a lot on ii.co.uk, such as the benefits of compounding, which is achieved through investing over the long term, diversification, which is owning a mixture of different investment types that gives your portfolio ample opportunity to grow, but also safeguards against the risks and the risks of when stock markets go through trickier periods.

I mean, that's when when there's a budget, I get a lot of emails sent to me, and I've I've seen I've seen viewpoints from both sides of the debate.

So just to spell them out, I've seen I saw some comments come in my inbox yesterday where pointing out that they think actually the the money that's not put into cash, use, is that's gonna end up in taxable savings accounts.

And then I also saw some comments the other the other ends of the of the scale, saying that cutting the cash is a limit is a milestone towards creating a nation of investors.

For me, I'm somewhere in the middle of those two viewpoints.

I think if you can't if if you have got the means, and, you know, you've you've got you've got to spare cash, and it's not going in a cash ISA, I think it might make you think more about potentially investing and and think, okay, what is this stock and shares ISA?

How can it benefit me?

And you might go away and learn and understand more about it.

But for me, I think that the the the the the education gap that needs to be addressed first before then people then commit to do that.

Yeah.

I think the other thing to note as well is that from when ISAs were launched in 1999 all the way up to 2014, the cash ISA allowance was smaller than the overall ISA limit.

So that was that was changed in in 2014, and the limits were brought in line.

So this isn't you know, this is sort of going back to the old regime rather than a rather than a new one.

There's another question around this, which involves ISA transfers, and I haven't seen the answer to this yet.

But before 2014, because the the cash ISA allowance was smaller, you couldn't transfer from stocks and shares to a cash ISO.

And the reason for that is because otherwise, you could fill up your ISO into stocks and shares and then immediately transfer to cash in a way to sort of circumvent the rules.

So it'll be interesting to see what happens with that and whether stocks and shares to cash ISA transfers will indeed be permitted in the future.

I think what it does is it it adds a bit of extra complication to the ISA regime in terms of how this is gonna be administered in future.

Now that the allowances aren't exactly the same, who's gonna keep on top of that?

Is it is the onus gonna be on individuals keep on top of that, or will it be on providers?

Going back to my points on, you know, the education gap, I just wanted to point out that I think for investors that are considering sort of a first move out of cash, you know, one potential starting point, if you'd if you're looking for a cash like product would be a money market funds.

So what these funds do is they invest in very short term bonds, which are essentially IOUs that are issued by governments or companies.

And what they tend to do is these funds is they tend to produce a cash like return, and their returns generally tend to be in line with whatever the Bank of England's base rate is.

So if the base rate's 4%, the level of income that's being produced by these funds, which of course is not guaranteed, it'll be around about 4%.

So these funds are the most cash like type of funds that you could go into.

They are to step they are to they are to step up from cash, but that would be the next step from cash.

And in terms of other types of funds, I'd suggest investors would go away and would look at multi asset funds.

I think they're a great starting point for investors, particularly for risk of various investors, because they give investors ready made diversification as they own a mixture of shares and bonds.

They typically have different risk levels.

So it's important to look under the bonus, look at how the fund invests, and be comfortable with with with the level of risk that's being taken.

But they they but they're the types of funds I would suggest as starting points for investors.

They've only ever been in cash, and they're looking to take a level of risk up from cash.

Let's now move on to another change to ISA's Craig, which I very briefly mentioned, and that is the reforms that are gonna be made to the lifetime ISA.

The details are very thin on the ground at the moment, but there there was a little bit of detail in the budget documents that followed the speech.

So, Craig, it's been a long time coming, these reforms to the lifetime ISA.

There were two major problems with that type of ISA.

Could you run through what those problems are and what was said in the budget documents following the speech about the potential reforms to the lifetime ISA?

Yeah.

Sure.

So, I mean, yeah, the lifetime ISA has been under under review since the start of the year.

The treasury select committee has been looking into the viability of the product and whether it's fit for purpose.

So just a brief overview of of how it works and what the whole what the whole product is about.

So it's designed it has a dual purpose.

So you can either use it to buy your first home or use it to save for retirement.

So if you don't use it to buy a first home, you can access it at age 60.

And the the the big perk with the lifetime items is you get a bonus on on what you put in, which is 25%.

So you can put £4,000 in every year and get up to a thousand pound bonus to help you along your way towards your your goal, which whichever those two goals that it is.

But there are, yeah, there are at least two.

There are very a few problems with it.

The first is that there's a maximum property price that you can use the product to to buy, and that's 450,000.

That's been fixed since the product was launched in in 2017, which could pose a problem for those in London in the in the Southeast.

Another big problem is that there's an early withdrawal penalty.

So if you don't use your your lifetime ISA to buy a first home or if a home is worth more than 450,000 or you access it before age 60, there's a 25% penalty on whatever you've got in there.

So there's I mean, that those they're they're they're two big problems.

Another one is that you can't open one after age 40, and you can't pay into one after age 50.

So as many other commentators have said, it's a bit of a confused product, hence why the treasury select committee has been looking at it and looking at ways to reform it.

I get well, I guess they had a few options.

Either keep it as it is, reform it, or scrap it.

And it seems like they've sort of found a middle ground between reforming and scrapping it because from April, the product is going to be replaced.

Like you say, we don't know a great deal more detail at this stage, but, yeah, the the lifetime ISO is gonna disappear and something else is gonna take its place.

Because the only detail that was really in the document following the budget was the there'd be some sort of product that would help people get on the property ladder for the first time.

So the the retirement goal aspect of the lifetime ISA, that wasn't mentioned at all.

So I'm assuming going forwards, the however that ISA changes, the it may end up going back to something like the previous Help to Buy ISA, which was was designed for someone to use to get on the property ladder for the first time.

Yeah.

Yeah.

That seems like the way that they've gone with it and and decided that to try and serve those those two purposes, it doesn't perhaps doesn't quite work in a in a single product.

And I

think for for the for the majority of people who use a lifetime ISA, buying a first home is their objective.

So So while there are potential changes on the way for the lifetime, ISA, one thing that's not changing is income tax thresholds are gonna continue to be frozen.

Craig, could you run through the details?

How much longer are they gonna be frozen for?

And what impact does this have on workers?

Sure.

So there were rumors before the budget that the the the the deep freeze on income tax and national insurance thresholds would be extended by a couple of years, but the government government has gone a step further and prolong the freeze by three more years.

So this was a a policy from the the previous government.

So they froze income tax and national insurance threshold in 2021, and that was due to continue until 2028.

But now, yeah, now it's gonna continue until 2031.

So the upshot here is that as people's incomes naturally rise over time, more of their income will either trip into higher rates of tax or will be exposed to tax.

So it's a a stealthy way for governments to raise tax revenues without pushing up the headline rates of tax.

It is a controversial move, particularly in the, you know, the the scope of the man of the election manifesto where they promise not to raise taxes on working people.

You know, you don't have to raise the headline rates of of income tax and national insurance to increase workers' bills, and this is one way of doing it.

So it does argue arguably break the election manifesto pledge.

And out of all of the budget measures, this is the most lucrative for the government to sort of give you an idea of of how big the impact will be.

And, you know, over time, you know, there are gonna be lots and more people who end up paying income tax who weren't before.

More and more people are gonna gonna sort of trip into the the higher rate of tax and and and also some more people into the additional rate tax as well, plus get caught out by, you know, the the various tax traps or the the couple of tax traps that that exist in the tax system as well.

So, you know, this this this can have a particularly big impact on people's money over time.

I mean, the longer tax thresholds are frozen, yeah, the the bigger impact it has on our on our finances.

So, yeah, this is this is a this is a big policy.

So in short, the freezing of the income tax thresholds, what it means is the if you get a pay rise, then a bigger proportion of that pay rise is gonna be lost to tax.

Now there were no changes to the headline rates of tax for basic rate taxpayers, high rate taxpayers, and additional rate taxpayers.

They all remain the same.

There were lots of rumors ahead of the budget that the basic rate of tax may go up by a penny, but that did not happen.

What also didn't happen, Craig, was any changes to the pension rules in relation to the tax free lump sum.

There were lots of concerns and fears that that might be meddled with.

However, that was not the case.

There was also not any changes announced to the pension tax system in terms of pension tax relief.

Again, there were rumors the the higher rates of tax, the 40% rate may be changed in in regards to pension tax relief, and that there might be some sort of system introduced in terms of, like, a flat rate of pension tax relief.

However, there was no announcements.

However, there there was a change to salary sacrifice in relation to pensions.

Craig, to start off, could you explain what this arrangement is and why some employers use pension tax relief?

Yes.

So pension salary sacrifice is essentially an arrangement between you as a worker and your employer to to trade a portion of your salary for a pension payment.

And, essentially, the the idea with with salary sacrifice is that the same amount goes into your pension, but because you're getting paid a lower salary or accepting a lower salary, you save on national insurance.

And, also, your employer saves on on national insurance as well.

So it boosts your take home pay, and your employer pays a bit less tax.

So those those kind of schemes have been, yeah, pretty popular with with with employers and beneficial for businesses and their staff alike to to save money into pensions and also put a bit of extra money in the workers' pocket.

But yeah.

So one of the big announcements on Wednesday was that there's gonna be a cap on pension salary sacrifice, which is due to come in in April 2029, and the cap will be £2,000.

And what this means is that any salary sacrificed for for pension contributions above that £2,000 figure, they will will suffer national insurance.

So the rates of national insurance for a basic rate taxpayer is 8% on anything above the higher rate tax band, which is 50,270.

National insurance drops quite significantly, actually.

It drops down to 2%.

And for employers, the the rate of national insurance is flat, and it's 15%.

So, know, there's been there there were there were a lot of rumors about this in in the lead up to the budget, so it wasn't a huge shock when it was announced.

But there there are some some some big concerns about the impacts that this change could have on on, you know, workers and, you know, chipping away the the the the incentives that help people save for retirement.

You know, what what impact is that gonna have on on people's future, you know, future incomes and future retirement pots?

What's what's gonna happen, you know, to to workplaces?

Are they gonna, you know, look at how they revisit, how they offer pension contributions?

Might they not be as generous as they have been in the past?

And what could be the impact on the wider economy?

So there's there's there's quite a lot of, you know, a lot of concerns about the impacts that this may have.

I guess there's still a few years.

There's still three years or three and a bit years before this comes into play.

So I'm sure that that that, yeah, businesses will be working out what to do.

But it but it is potentially another another tax hike on on businesses who are already facing higher national insurance bills due to the reforms at last year's budget.

And the calculations show that one in four workers earning less than 50,000 will be worse off under this scheme.

Is there also a risk that some people will just disengage and be less incentivized to save towards their retirement?

Yeah.

There is there is the risk of that.

I think, yeah, whenever if you're ever if you're eroding the the tax advantages of of pensions, then there's all there's always a risk that it's gonna turn people off, and they're not gonna perhaps save as much for retirement as they would have done otherwise.

Obviously, we we hope that that doesn't happen because, you know, there's there's, you know, there's plenty of stats, there's plenty of data that shows that or that predicts that, you know, future retirees are gonna be, you know, potentially worse off than those that are there already.

I mean, some some figures from the government show that.

So there needs to be this this big push to try and foster the required levels of engagement to help people, you know, save save enough to live comfortably in retirement.

So there's the risk of that that we, you know, obviously hope it doesn't happen, but yeah.

Yeah.

That that is that that is one of the the potential drawbacks of of this policy.

Let's move on to a more positive announcement.

Although I would like to see the government go further than this in future.

So in an effort, well, as part of its aim to stimulate more investments, particularly on the shores in The UK, it was announced that there'll be a three year stamp duty holiday on newly listed company shares.

So investors will be exempt from the current naught point 5% stamp duty charge for up to three years after the listing.

Now while this reform is welcomed, I personally do think, and I and I know it's a a viewpoint that shares across interact investors as well, is that the government should go further and scrap stamp duty overall on UK shares, including investment trusts.

You know, I I just feel that why is there this barrier to investing in our home market?

The government wants, you know, to to to make us more of a nation of investors and ideally wants to increase investments in our own home market.

Why are investors being penalized?

Why are we having to pay this stamp duty on UK shares?

I I I I just think if you know, I think I think if that stamp duty on UK shares is scrapped, I think that's only gonna help, and it's gonna it's only gonna encourage greater levels of investments into our own home market.

I'm just gonna quote our chief executive, Richard Wilson, on this matter.

So he said, if the government thinks that retail investors are the answer to boost The UK stock market, then it seriously needs to go and look at scrapping stamp duty.

It's an outdated and irrational tax that is bad for liquidity and bad for growth.

It is suffocating investments in British businesses, and it has to go.

Now while our three year stamp duty holiday for newly listed shares is a positive, There there there was also other announcements that were negative for investors, including the fact that the dividend tax is gonna go up by two percentage points.

And also for savers as well, and savers that go over the personal savings allowance, they're gonna be hit with paying two percentage points more in future than they currently pay.

Craig, could you talk us through both of those?

And I mean, for me, it feels like, you know, the government's on on the one hand is trying to encourage greater levels of investments.

But then on the other hands, the the these measures in place that are making it less favorable.

Indeed.

Yeah.

And there was actually a third one as well.

There was actually a third tax that that's that that where the headline rate is gonna go up, and that's on property income as well.

So these were were probably the more I don't think there were any big shocks in in in the budget, but these were some of the more sort of eyebrow raising ones.

There have been some rumors about increases to dividend tax that emerged a few days before.

They pointed towards a a four percentage points high percentage points, sorry, hike.

So it hasn't been quite as extreme as as what the the pre budget rumors suggested.

But, yeah, two two percentage point increase to dividends.

Yeah.

That that who I guess, would that affect?

That would affect investors with with holdings outside of tax wrappers.

It would also affect small business owners as well who use private limited companies, and they use that business structure to draw a small salary and and the rest in dividends.

So both of those groups could face higher taxes from from when they are implemented.

I think what we should also note as well is that the dividend allowance, so the amount that you can earn in dividends every year tax free has been hacked away over the years.

If we go back eight years, it used to be £5,000.

You could have £5,000 worth of dividends by no tax at all.

It's now it stands at just £500, so it's a tenth of what it used to be.

Another change that's gonna impact a a sizable a sizable number of investors is the changes announced to venture capital trusts, which are known as VCTs.

So what VCTs do, they're a product in which investors are offered upfront tax relief to provide capital to early stage UK businesses.

So this tax relief is gonna be cut from 30% to 20%.

And back in the day, the pension fucking pension.

Why I said that?

Right?

Right.

One time.

One more.

Another change that's gonna impact a sizable numb not say sizable.

A small another change that's gonna impact a small, but not insignificant number of investors are those in venture capital trusts, which are known as VCTs.

So what these products do is they provide upfront tax relief for investors to put money into early stage UK businesses.

Now that upfront tax relief is gonna be cut from 30% to 20% that was announced in the budget.

Back in the day, that upfront tax relief was actually a lot higher.

It was 40%.

So going forward at 20%, that is a lot less attractive.

There are also some other changes to VCTs.

So the investment limits and the increase in size of companies that VCTs can invest in, they're both gonna be expanded.

However, at the same time, as mentioned, the upfront tax relief investors receive is gonna be cut from 30% to 20%.

I mean, for me, this is potentially another example of, you know, the government trying to do one thing, but then not doing another.

So they're curtailing the tax relief that investors receive for backing, you know, smaller UK businesses.

But then at the same time, they're reducing the cash ISO limit to try and encourage greater investments and greater investments in The UK.

They just both don't seem to add up to me.

For for me, it's one hand not talking to the other.

And going back to the changes to pensions in relation to salary sacrifice, again, that's I I feel like that that could discourage some people from engaging with their long term pensions.

I I just feel that there are some sort of contradictions at the heart of the government's policy to try and turn us into a more of a nation of investors.

Absolutely.

I mean, if you if you're taking tax efficient products and making them less tax efficient, then they're gonna be less attractive for for investors.

I mean, with with VCTs, you know, history shows that, you know, investors are sensitive to changes in in the the upfront rates of of tax relief.

When it becomes more generous, you see flows into VCTs.

Annual flows tend to increase.

When they become less generous, they fall.

So, yeah, I mean, that that that in itself sort of back backs up your point.

So so the last item on my budget bingo card is the state pension.

So it was confirmed that the government will continue to honor the pension triple lock.

And as a result of that, the state pension from next April, it'll rise by an inflation beating 4.8% as the elements of the triple lock that's being used is wage increases for the third year running.

Craig, anything further to add?

I think it's obviously good news for anyone who's in receipt of the state pension, particularly those on the lowest incomes who rely heavily on it.

That will provide a really, you know, a welcome boost for them in the bids, you know, to keep rising costs at bay, which which is still increasing faster than, you know, particularly the Bank of England would like.

So let's have a let's have a quick look at the the figures and what the you know, what this is gonna change with the state pension.

So the annual full state pension will increase from 11/1973 to 12/1947, while the old state pension, which is paid to those who reached age or reached stage pen state pension age before April 2016, that will increase from 9175 to 9,616.

So, yeah, some some healthy increases there.

We expected the triple lock to stay for this parliament.

So, you know, no big surprise that the government has rubber stamped it.

The longer term future of the triple lock, we will have to wait and see.

Craig, thank you for joining me and talking through those key policy announcements related to savings and investments in this year's budget.

Thanks a lot as always.

And thank you for listening to this episode of On the Money.

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In the meantime, you can find more practical pointers and analysis on the Interactive Investor website, which is ii.co.uk.

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