The Budget Breakdown Part 1- Savings & Taxes

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On the 19th of March 2014 George Osborne delivered his second budget proposal to Parliament. The Budget, or Financial Statement, is a statement made to the House of Commons by Chancellor of the Exchequer that outlines the state of the British economy. It provides a detailed outlook on the nations finances and any proposals to changes in Taxation.

The outlook of the Budget was deemed to be positive – further strengthening peoples beliefs that the UK economy is on the path to recovery, recovering at a faster rate that what was forecasted. This lead to the Governments independent fiscal watchdog, The Office of Budget 13 Responsibility, revising their forecasts for UK growth in 2014 to 2.7% an increase of 0.3% from the prediction from December. The unemployment rate has had a revised forecast of 6.8% from 7.1% predicted in December ’13. This rate is expected to fall to 6.5% in 2015, 6.1% in 2016 and 5.7% in 2017. What does this mean you may wonder? Simply less people will be out of jobs year on year primarily down to the improvement in the market paving the way for the creation of new opportunities in the UK. Inflation (Consumer Price Index) is expected to be at 1.9% which would finally lead to the money people take back from work after tax (the real wages) increasing

The focus of my post today is to breakdown the Budget’s implication on us from a savings and taxation perspective.

Personal Allowance – Personal allowance has been raised to 10,500 in 2015-16. The personal allowance is the first chunk of income that individuals can earn before they have to pay tax. Now this has been raised, this benefits people on the lower end of the income spectrum as firstly more will avoid the income tax burden and secondly it will reduce the tax bill for many more. A basic rate tax payer will save just over 200 pounds by next year on their annual income tax bill.

Premium Bonds – Premium Bonds are simply a savings account you can freely put money in and take out when you want, where the interest paid is decided by a monthly prize draw. You can win between £25 and £1 million, tax-free. The limit on premium bonds will rise from £30,000 to £40,000 in June and then to £50,000 in 2015-16. There will also now be two £1 million prize draws per month

Isa – From July a New Isa system (Nisa) will be in place which will allow cash and share Isa’s to be merged into one account with a maximum tax-free annual saving of £15,000. The Junior ISA saving limit also increases to £4,000. Demi (Thenoviceinvestor82) will elaborate about this more on his post on investments.

Higher rate tax – the higher rate tax threshold has been increased for the first time in years. Higher rate tax will be payable on income over £41,865 in 2014-15 and goes up to £42,285 in 2015-16.

Pensions – A reform of the UK’s pension system which will completely overhaul the way Britons save for retirement was announced. Pensioners have been given more control and flexibility over their pension funds. From April 2015 savers with defined contribution policies no longer have to buy an annuity when they retire. People will be free to withdraw some or all of their pension pot at any time and will only be taxed at marginal income tax rates rather than at the current rate of 55%. This had catastrophic effects to some of the players in the pensions industry – specialist annuities provider Just Retirement saw 42.4% of its value wiped out. Another provider, Partnership was hit with shares closing 55% down. In total, £3bn off the total value of some of the biggest annuities providers was wiped out.

Defined contribution: A retirement plan in which a certain amount or percentage of money is set aside each year by a company for the benefit of the employee
Annuity: a fixed annual retirement income that is paid to someone for the rest of their life.

In conclusion it was a positive Budget especially for pensioners and the reforms were seen as a strategic decision by the government to win older voters ahead of the 2015 general election. However it was a difficult day for the Pensions industry and it will be interesting to see how it recovers. Lower income earners have been made better off due to the personal allowance increase.

Make sure you read the other 3 summaries to come from the Capital Moments team sometime this week on the Budgets impact on
Investments – Thenoviceinvestor82.wordpress.com
Consumption – Lekanomics.wordpress.com
Exports – Saeedsperspective.wordpress.com

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