After what has been a challenging year for many financially, people all over the UK are now looking to put some plans in place to protect themselves going forwards. Even under normal circumstances, it can be a tricky task to look into the future and see what a new year has in store, but examining some warnings already issued is never a poor place to start. From government statements and legislation updates regarding tax to incremental increases in energy bills and state pensions, there are some potential changes you can still figure into your annual accounting.
Here are four key areas worth factoring in when you draw up any financial plans for the year ahead.
Possible tax increases
Following the severe blow suffered to the UK economy in 2020, a potential rise in taxes seems inevitable. While this may feel like it is a way off and an issue to worry about another day, it may strike sooner than you think, arriving in April.
Some rises may be seen in capital gains tax and potential alterations to inheritance tax. Pension tax relief cuts are also a possibility, but all information is unconfirmed and advice merely speculative at present. Chancellor Sunak, however, has so far refused to entirely rule out the possibility of changes to national insurance, VAT, or income tax in 2021.
While the end of the tax year in April may seem to be imminent, there could potentially still be time to access current benefits and allowances and take advantage of them. Inheritance tax for example can offer several ways you can pass your wealth tax effectively before you die.
Pension tax relief cuts could potentially impact many across the country but are likely to affect those nearing retirement far more. If you have already factored in your pension tax relief as an element of retirement financial planning, you may need to make a reassessment when official information is released of any changes. Always remember that benefits and assorted tax rule changes will depend on your specific circumstances.
Rising council tax and utility bills
The price that everyone pays for energy has a cap in a place known as the default tariff cap. Its purpose is to ensure that people are protected from suppliers overcharging them and only ever pay the fairest price available for electricity and gas. The price cap was originally introduced back in January 2019 and has been revised at six-month intervals ever since. The present default tariff cap will officially end on March 31.
In the last three revisions, the cap has decreased to stand at £1,042, however, it is now expected to rise when the next change arrives. Potentially this means you may be paying more for your utility bills than before. Ofgem will offer consultation on any proposed changes up until 21 December and in February, will officially release the new default tariff cap. As usual, if you are on a default tariff you will still be able to reduce the energy prices you pay by moving to a cheaper deal.
Rises in council tax may also be a possibility that people will have to contend with. To date, more than seven million people here in the UK have missed a payment for council tax, or expect they will need to, on account of the pandemic.
Regardless of the current crisis, every year council tax has the capacity to rise by two percent. However, Chancellor Sunak has stated that councils can in fact add a further three percent to this which means council tax could increase by up to five percent in total.
An essential part of any financial planning will always be to ascertain your crucial expenses and energy costs for electricity and gas and unavoidable council tax bills are an essential part of these regular outgoings. This makes it vital that you factor in any potential price hikes and balance them with a reduction in non-essential spending wherever you can. Accounting for this now will allow you to cope with price changes scheduled for 2021.
State pensions will increase
Not all financial factors to consider for 2021 are negative, however. Good news is in sight for the majority of people already receiving their state pension, and also for those who are soon to reach eligibility status.
The state pension is now set to increase by 2.5 percent from April 2021 onwards. Considering inflation this answers a general hike in the costs for everyday items. It has also been increased to reflect the depreciation rate of cash, for example, £1 of your money from in 2020 will get you more and further than £1 of your money in 2021. However, this rise in the state pension will be well received by those who possess it and will cover vital essential costs adequately.
It’s worth remembering, however, that to receive a completely new state pension, a person must have 35 years’ worth of national insurance contributions to their credit.
Changes to government coronavirus aid schemes
Whatever your employment status, any financial planning you can put in place now will be a smart investment for 2021. Government support schemes have helped many people like the self-employed during the current crisis and while the end of this assistance is never going to be welcome, it is an event that can be planned for. While a final grant is still to come, the exact amount has not yet been specified to date with the percentage of profits self-employed people will receive as yet undecided.
With this exact sum unknown, it may prove prudent to prepare to adjust how much you are paying into savings accounts or a personal pension. It may also be worth assessing your investments if you have any and reducing them to slightly smaller contributions if necessary. It’s important to remember that money from your pension will not typically be accessible until you reach the age of 55, or 57 from 2028 onwards.
If you are seeking for advice following the turn of the year, book a FREE consultation with our financial team today.