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.
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Banker On FIRE is an 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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Could you expand on the 10k limit please mentioned above?
Yes – once your annual income exceeds 150k, your pension allowance starts declining. Once you make above 210k, you can only contribute 10k.
See this link for more info: https://www.telegraph.co.uk/money/wealth-management-services/decode-pension-taper-rules/
It’s a high quality problem to have which is why I said my ex colleague won’t end up in the poorhouse.
However, as the pension rules get tightened up this could start impacting many more people on much lower incomes.
Amen. This rumour rears its head every budget but this time it feels legitimate. Which is why I’m currently investigating how to use previous unused years allowances and ramp up my AVCs to use up every penny of the 40% tax relief while it’s still there!
Thank you for this blogging by the way Banker on Fire has quickly become my favourite of the UK FIRE scene for being well written, thorough and genuinely interesting!
Thanks! And indeed, now is probably a good time to take advantage of carryforward allowance.
I’ve found this calculator pretty helpful in figuring out how much room I’ve got left to carry forward:
https://www.hl.co.uk/pensions/contributions/carry-forward-rule/annual-allowance-calculator
Let‘s hope it doesn‘t happen (yet)! It‘s a shame for people like me who are just starting out, and may not be at the income level to take full advantage of all of these tax breaks yet.
Thanks to your earlier post, I‘ve opened my LISA (and received the top-up 😀 ) this year. I‘ve also told a few other people about it, and at least one has said they‘ve opened one, too!
Great to hear re: LISA. Never know if that scheme will survive the next time the government needs to raid the piggy bank, so better take advantage now!
And you are spot on about income levels. Very often, people are only in higher tax brackets for just a few years – and those are the years when they really need to put money aside. It’s not right to represent them as fat cats who are disproportionately rewarded by the system. It completely ignores the sacrifices (time, money and opportunity cost) that they’ve made to get there.
Thank you for writing this blog! I work in PE so in theory I should be ahead but I have been terrible at personal finance! Most of the other blogs are not really relevant. I found your blog not long ago and have read everything and started taking actions (just before a potential major Budget shakeup! Better late than never!) Please keep up with the excellent work!
Thanks Jamie, appreciate the kind words!
I think there are quite a few people in your boat. Between busy jobs, families and other life commitments it’s not always easy to prioritize personal finance.
I’ve come across many bankers who were nowhere financially despite having made good money over 10+ years in the industry.
The good news is that once you do get started and build some momentum, you’re pretty much unstoppable.
Hmm you don’t lurk on the money saving expert forum do you? I’ve literally just asked this question over there.
It’s tricky (and a nice problem to have) but I’m now sat on 223k pension at 39. Contributing 1500 a month and average growth means I believe I breach the current allowance at 58 (accepting it’ll be higher then but my point is that will continue to grow)
My plan is to get this to 350 to 400k in next 5 years (markets allowing) then just drop it to enough to get the employers match. Like you say make hay while the sun shines
Its tricky though as I could potentially do better by filling mime and my partners isas. I do have about 110k in isas so not exactly strapped but do feel like the balance is a little wrong.
I am also wondering whether to risk going interest only on my mortgage given then above *gasp*
The thing is although I agree it does feel different I’m not sure how they’d enforce it vis a vis sal sac. Unless they scrap that as well and they still want to encourage savers. I also know plenty of high earners who have naff all retirement savings so I’m not sure they want to dissuade an already un motivated population further
You’re right, pension changes would have to be done in conjunction with a salary sacrifice revamp, otherwise they won’t have any teeth.
Reason I’ve always maxed out my pension is that I thought the government will eventually move the goalposts and make it harder for me to breach the LTA. I guess I was on to something 🙂
I’m not on MSE – prefer the Financial Independence UK FB group.
What’s your view on interest only on the mortgage.
For ref. Salary 94k. Partner (when not on maternity) 35k. Mortgage 274k house value 490k mortgage rate 2.59% fixed ten years with 7 years left on fix. 29 years remaining on mortgage
It’s ultimately down to personal preference and risk appetite. If you know you’ve got a better alternative use for the cash it could be a decent option.
You’re at a very reasonable 55% LTV at the moment and it’s going to decline over time as the value of the house increases. You just need to have a plan for paying off the balance at the end of the term.