On Saturday night, after a long day of taking care of the kids, catching up on life admin (and even squeezing in a workout!), I was partaking in my favourite activity – relaxing on the couch with a cold beer.
Unfortunately, I broke my own cardinal rule of avoiding the news – and was immediately punished as the headline below flashed up on my phone:
In addition, there was a picture of Mr. Chancellor himself, contemplating the bleak future of high earners across the country.
Note: while the FT and the Telegraph are behind a paywall, you can read up on Sajid’s plan elsewhere.
Of course, the headlines mean nothing. Leaking envisaged proposals to the press is what politicians do all the time. It’s a helpful tool to gauge voter reaction – or to help torpedo a proposal they don’t like.
However, the direction of travel is clear. For a variety of reasons, political and economic, tax increases are on the horizon. Like it or hate it, but better get used to it.
A Necessary Part Of Life
Let’s get something important out of the way – this isn’t a post about taxes. Yes, very few people like them. It’s easy to complain about them.
The bottom line, however, is that taxes are important. Even the most hardcore proponents of free markets have to admit that free markets are generally not great at providing a sufficient quantity of public goods.
Things like universal education, healthcare, defense, police, social services and many other goods and services are absolutely crucial components of advanced economies with high standards of living. In other words, the kinds of societies that people generally like to live in.
And it so happens that taxes are the tool via which the government collects the requisite amount of money to help fund those services. So far, so good.
At the same time, it’s hard to ignore the fact that taxes represent the single biggest expense item in most people’s budgets. And if you want to reach financial independence sooner rather than later, you may want to take advantage of legal ways to minimize your tax burden.
Too Good To Be True
I remember the day when, as a junior banker, I discovered the wonderful world of UK workplace pensions. A tax break AND an employer match!
My wife and I enrolled as soon as we could – and jacked up our contributions to take full advantage of the opportunity. If you have been reading this blog for a while, you’ll remember the chart below – but here it is again, for all the newcomers:
Yes, you can (could?) double or triple your money on the spot
I also recall discussing the topic with a colleague, who was noticeably less excited at the idea. From his point of view, a pension was too far out in the future. He simply didn’t like the idea of not being able to access the money for a long period of time.
So while he acknowledged the importance of investing, his plan was to take full advantage of the workplace pension plan closer to retirement date.
Fast forward about ten years, and two things happened:
- We are now close enough to retirement for my friend to actually care, but:
- The government introduced the pension taper
In practice, not many people affected by the taper will end up in the poorhouse. Still, my colleague certainly won’t be able to take full advantage of the pension as his contributions are now capped at £10k/year.
If the current rules hold, he could do what I was advocating for here. That is, contribute as much as possible into his wife’s (a higher tax rate payer) pension plan.
But if the government slashes the tax relief as suggested above, that door is also closing rapidly. As a result, my colleague – and many others in his shoes are about to miss the boat.
Direction Of Travel
As a general rule, things don’t tend to get better for those working salaried jobs.
Public sector finances are precarious. Capital continues to win the fight over labour, which means shareholders capture an outsized share of the value created by corporate employees.
As a result, defined benefit pension plans are now a thing of the past. Those on defined contribution plans have to grapple with a big reduction in the Lifetime Allowance. Salary sacrifice has been rejigged – and limited.
And changes in buy-to-let rules have made real estate far less attractive of an investment.
Once again, I am not here to present my views on the above topics. However, it is clear that if you are a higher or an additional rate tax payer, your tax burden will continue rising.
One of the worst mistakes you can make in life is taking things for granted. Usually, we think about it in the context of our health, families and relationships.
However, the same logic applies when it comes to the wealth-building tools at our disposal.
The ability to give your net worth an instant boost with pensions, getting free money through Lifetime ISAs, risk-free investing with Save As You Earn schemes or Share Incentive Plans might not be there forever. And at some point, you will wistfully recall the missed opportunities to give your net worth that much needed boost.
So take this weekend’s news as a warning shot across the bow. If you don’t seize the moment today, you might not have that chance tomorrow.
About Banker On Fire
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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
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