Fiscal drag: How threshold and allowance freezes affect you

A person going through paperwork with a calculator.

Despite intense speculation that the Labour government would slash tax allowances and exemptions, many are set to remain the same in the 2025/26 tax year. While that might seem like something to celebrate, fiscal drag could mean your tax liability increases in real terms.

To maintain allowances and exemptions in real terms, the government would need to increase them by the rate of inflation.

So, when they are frozen instead, your taxable income is likely to increase as you might be “dragged” into paying tax or paying tax at a higher rate. This generates higher revenues for the government without increasing tax rates. For this reason, freezes are sometimes called “stealth taxes”.

Several tax thresholds have been frozen since April 2022 and aren’t expected to rise until April 2028. When you consider the period of high inflation experienced recently, the effect of fiscal drag could mean you’ve paid a significantly higher proportion of tax, relative to your income, than you did previously.

Income Tax: Thresholds are frozen until April 2028

The previous Conservative government froze Income Tax thresholds in 2022 until April 2028. The current Labour government has said it will continue the freeze.

During the freeze, it’s likely that your income will rise, which would maintain your spending power. However, as the thresholds will not increase, your tax liability might also rise. It may seem like a small increase initially, but it can add up over the years.

The table below shows how the value of Income Tax thresholds would have changed if they had increased in line with inflation between January 2022 and November 2024.

Source: Bank of England

With the freeze expected to remain in place for another three years, the effects of fiscal drag will become more evident.

According to the Office of Budget Responsibility (OBR), freezing Income Tax thresholds mean that between 2022/23 and 2028/29, an extra 4 million people will pay Income Tax. In addition, 3 million will be dragged into the higher-rate tax band and 400,000 will pay the additional-rate of Income Tax for the first time.

The fiscal drag is estimated to raise £42.9 billion in tax by 2027/28.

The OBR noted frozen thresholds are the largest contributor to the rising overall economy-wide tax burden. The freeze will be responsible for almost a third of the 4.5% GDP increase in taxes from 2019/20 to 2028/29.

Freezes to Inheritance Tax thresholds and ISA limits could affect your finances too

It’s not just freezes to Income Tax you may need to be mindful of either. Frozen allowances include the:

  • Inheritance Tax thresholds: The nil-rate band is frozen at £325,000 – it has been at this level since 2009/10 and will remain the same until April 2028. The residence nil-rate band last increased to £175,000 in 2020/21 and is also frozen until the start of the 2028/29 tax year.
  • ISA allowance: The amount you can add to your ISA each tax year is frozen at £20,000 for adults and £9,000 for children until 5 April 2030. The amount you can pay into an adult ISA hasn’t increased since 2018/19, and the Junior ISA subscription limit last increased in 2020/21.

There are other allowances and exemptions that, while not frozen, haven’t increased in line with inflation either.

For example, the amount you can gift in a tax year that will be immediately outside of your estate for Inheritance Tax purposes is known as the “annual exemption”. In 2024/25, the annual exemption is £3,000 and it’s been at this level since 1981.

If the annual exemption had increased in line with inflation between 1981 and November 2024, it’d stand at £11,314.

A financial plan could help you minimise the effects of fiscal drag

While you can’t change tax thresholds or allowances, there might be steps you can incorporate into your financial plan to reduce your overall tax bill.

For instance, increasing your pension contributions could reduce your taxable income and mean you avoid being dragged into a higher Income Tax bracket. While it may mean your take-home pay is lower, it could support long-term retirement goals and may be right for you as a result.

In addition, while the ISA allowance is frozen, if you’re not already depositing the full amount, increasing how much you add to your ISA may reduce your Income Tax bill.

Interest earned on savings that aren’t held in a tax-efficient wrapper, like an ISA, could become liable for Income Tax if they exceed your Personal Savings Allowance (PSA). The PSA is £1,000 if you’re a basic-rate taxpayer, £500 if you’re a higher-rate taxpayer, and £0 if you’re an additional-rate taxpayer.

If you’d like to talk about how fiscal drag may affect your finances and the steps you might take to mitigate the effects, please get in touch.

Please note:

This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Guide: 5 key financial planning steps to consider during a divorce

Going through a divorce can be incredibly emotionally challenging, but it may also represent the beginning of a new phase of your life.

When starting a new chapter, it’s important to consider your financial plan, review your goals, and prepare for any challenges you might face in the future. This could be especially true during a divorce as the process and aftermath of a separation might significantly affect your financial position.

Financial hurdles could cause additional stress during an already difficult time. Fortunately, with our help, you may be able to mitigate some of these challenges after a separation and continue working towards your financial goals.

This guide outlines five key financial planning considerations during a divorce:

  1. Taking stock of your financial situation
  2. Making important decisions about your living situation
  3. Considering how divorce could affect your retirement plans
  4. Assessing your protection needs
  5. Reviewing your estate plan.

Download your copy here: ‘5 key financial planning steps to consider during a divorce’ to find out more now.

A divorce can have a significant effect on your finances now and in the future. A financial plan could help you maintain financial stability and continue working towards your long-term goals. Please get in touch if changes to your relationship mean you could benefit from a financial review.

4 positive mindset changes that could boost your finances

A group of friends relaxing after a hike.There are lots of factors that could affect your relationship with money. While habits and influences can be hard to break, that doesn’t mean you can’t change your mindset to boost your finances and work towards your goals.

How you view money is often shaped by a complex range of factors, such as how finances were handled in your household as a child, past experiences, and even cultural influences. Sometimes these factors might lead to a money mindset that harms your wealth and ability to secure your aspirations.

Yet, your money mindset isn’t set in stone. Embracing these four positive money mindset changes could help you get more out of your finances.

1. Forgive past mistakes

There will certainly be times, with the benefit of hindsight, that you realise you’ve made a financial mistake. It could be something small, like not shopping around before making a purchase and missing out on a better deal as a result. Or it may affect larger financial decisions, such as investing in an asset that lost you money.

It’s often useful to reflect on mistakes so you can learn from them. However, dwelling on them could mean you overlook opportunities in front of you or cloud your judgement next time you’re making a financial decision.

A common financial mistake people often regret is not saving enough for their future when they’re younger. In fact, according to a report in IFA Magazine, half of Brits expressed a regret over not saving more in the past. While recognising an opportunity missed isn’t necessarily bad, there are times when it could hold you back.

You can’t change past financial mistakes. So, accepting them and focusing on what you can do now could help progress towards goals.

2. Recognise your financial flaws

Everyone has some financial flaws. Learning to recognise these could help you take steps to minimise harmful behaviour.

For example, if you know you’re likely to splurge when you’re feeling down, having a separate account that holds only your disposable income could prevent impulsive purchases from affecting your long-term objectives. Or, if investment volatility means you’re tempted to make changes, limiting how often you check the performance of your investments could reduce knee-jerk reactions.

Recognising that past experiences, personal views, and emotions will affect your decision-making skills could help you identify when behavioural bias could influence you.

3. Stop comparing yourself to others

It’s often easier said than done, but focusing on what you have, rather than what other people have, could make you happier and boost your finances too.

Whether you’re worried your falling behind because you don’t have as much saved for retirement or a friend seems to have more disposable income than you, comparison really can be the thief of joy.

Focusing on what you’re lacking could lead to you overlooking the positives and the bigger picture you’re working towards. As you typically don’t know all the financial details of other people, you’ll often be comparing your situation with just a snapshot of theirs. What’s more, their long-term goals could be very different to yours.

So, as difficult as it might be, remember everyone is on their own financial journey.

4. Focus on what brings you happiness

Getting the most out of your finances isn’t always about building wealth. Indeed, considering how you could use the money to create the lifestyle you want may be far more valuable.

So, if you often focus on the number in the bank, shifting your perspective to think about what the money could do for you could be positive. The steps you’re taking might enable you to spend more time with your family, retire early, or enjoy splurging on hobbies now.

Striking the right balance between short- and long-term goals can be difficult. A financial plan that starts with your happiness could help you enjoy life now and in the future.

Contact us to talk about how we could work with you

As a financial planner, we could work with you to foster a positive money mindset and help you understand how your financial views could be affecting your long-term finances. Please get in touch to arrange a meeting to discuss how we might work together.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The perils of chasing stock market “winners”

Three people running outdoors.Following the stocks and shares that have experienced impressive returns can seem like fun and a way to make the most out of your investments.

Yet, a study indicates that following the crowd and investing in companies that are being hyped in the press or among investors could mean you miss out on growth opportunities from other sources.

Top stocks rarely perform well for two consecutive years

Research carried out by Schroders looked at the top 10 performing stocks on the US stock market each year.

Interestingly, in 12 of the past 18 years, not a single stock that was in the top 10 also made it into the top 10 in the following year. Of the other six years, in five of them, only a single company managed to maintain its strong position.

Even staying in the top 100 is rare – an average of 15 companies each year managed to be in the top 100 for two consecutive years. The odds of making it back onto the list in a couple of years are similarly low.

You might be surprised to learn that companies that performed well are more likely to be among the worst-performing stocks a year later.

The research noted that a similar trend can be seen in other markets. In the UK, 11 out of 18 years saw the average top 10 performers move to the bottom half of the performance distribution the next year.

So, if you’ve been hearing about how well a particular stock has been performing, automatically investing in it might not be the right thing to do. It could expose you to more investment volatility than is appropriate for you.

There’s also a risk that companies that are hyped might be overvalued.

The Magnificent Seven is a group of influential technology companies – Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla – on the US stock market that has made impressive gains over the last year. However, Schroders found collectively they are twice as expensive as the rest of the market in terms of a multiple of the next 12 months of earnings.

Some companies will deliver these expectations, but others won’t, and identifying which ones will meet targets can be difficult.

3 investing lessons you can learn from the volatility of the top stocks

  1. Don’t fall for hype

It can be tempting to invest in a company that’s experienced impressive growth recently. But the Schroders study highlights how these companies can experience a fall just as much as others, and perhaps more severely.

Chasing the “hot” stocks could result in higher costs and lower returns than if you opted for investments that were consistently delivering average returns.

That’s not to say you should avoid investing in popular stocks. Indeed, many investment funds will hold investments in the Magnificent Seven. What’s important is assessing if it’s the right option for you and focusing on long-term gains, rather than short-term rises.

  1. Accept the investment market can be volatile

As the research highlights, volatility is part of investing.

As an investor, accepting this can be difficult – you understandably don’t want to see the value of your investments fall. Yet, for most investors, sticking to their long-term plan, even when markets dip, makes financial sense if you take a long-term view.

Historically, markets have delivered growth when you look at performance over a longer time frame, including after sharp drops like those experienced during the pandemic in 2020.

While returns cannot be guaranteed and past performance is not a reliable indicator of future performance, history suggests holding investments and waiting out volatility may be the right course of action for you.

Volatility is why it’s often recommended that you invest with a minimum time frame of five years. This provides time for the ups and downs of the market to smooth out and, hopefully, deliver investment returns.

  1. Ensure your investments are diversified

If you invested in just one company that was in the top 10 performing stocks, the research suggests the value could fall within the next year. However, if you spread your investment across multiple stocks, you could reduce the risk of this happening.

Diversifying your investments means investing in a range of assets, sectors, and geographical locations. When one area of your investments experiences a drop, a rise in another could offset this.

This is how investment funds work. A fund would pool your money with that of other investors and then invest in a wide range of assets in line with the fund’s risk profile. So, if you want to diversify your investments, a fund could be a good solution for you.

Invest in a way that reflects your goals and circumstances

If you have any questions about how to invest in a way that’s appropriate for your goals and circumstances, we’re here to help. We can offer ongoing support to ensure your investments continue to reflect your needs. Please contact us to speak to one of our team.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Financial fears could be holding back millions of retirement dreams

A retired woman looking worried while using a laptop.Research suggests the fear of running out of money later in life could be holding back millions of retirees. While spending too much too soon is a risk for some retirees, it could also mean you miss out on the lifestyle or experiences you’ve been looking forward to.

According to a report in MoneyAge, 30% of retirees – the equivalent of 6.4 million people – said spending money makes them anxious. A similar proportion agreed they often don’t spend money on things they need because they’re worried about the future.

Interestingly, a quarter of those questioned said their emotions influence their financial decisions.

In some cases, retirees might need to be mindful of their budget to ensure their assets last their lifetime. Yet, the responses suggest that many retirees are reducing spending based on emotions, rather than a financial review.

Spending too much too soon is a risk many retirees may want to consider

Running out of money later in life may be a concern if you choose to access your pension flexibly or are using other assets to complement a reliable income.

When you use flexi-access drawdown to access your pension, you can adjust the income you receive to suit your needs. This provides you with greater flexibility, which could be useful if your income needs change or you have a one-off expense.

However, you’ll also need to consider how much you can sustainably withdraw from your pension each year. If you take a higher amount in your early years of retirement, it could leave you with a shortfall in the future. In some cases, that could lead to an inability to meet financial commitments or mean that you need to adjust your lifestyle.

So, the concerns raised in the survey are valid ones. Yet, being overly cautious could present a different type of risk too.

You could risk the retirement lifestyle you’ve worked hard to secure, even if you have the assets to achieve it because fear means you’re holding back.

A retirement plan could help you manage financial fears

A bespoke retirement plan could help ease your financial fears when you retire.

As part of creating a retirement plan with your financial planner, you might use a tool known as “cashflow modelling”. This could help you visualise how your wealth and assets might change during your lifetime.

A cashflow model uses information about your current finances and your plans to project how your wealth will change. So, you might want to model whether withdrawing £35,000 a year from your pension could mean you run out of money later in life. Or calculate what would happen if you wanted to withdraw a lump sum to fund a one-off cost, like going on a luxury cruise.

Not only does cashflow modelling help you understand how your retirement plan could affect your finances, but it may also be used to understand the effect of events outside of your control. For example, you might want to understand how your pension would fare if you needed to replace your home’s roof unexpectedly, or how a period of high inflation may affect your long-term finances.

As you can model these scenarios that might be a cause of financial fear, you could find your worries are eased when you realise you’re in a better position than you initially thought. Alternatively, it may highlight a potential gap that you might be able to close as a result.

It’s important to note that the projections from a cashflow model cannot be guaranteed. The data will be dependent on the information provided and will make some assumptions, such as the rate of inflation or expected investment returns.

Yet, cashflow modelling could still be a useful way to understand how the decisions you make might affect your financial security in the future.

One of the challenges of managing your finances in retirement is that it often requires a mindset shift.

During your working life, you might have focused on accumulating wealth. This may have involved contributing to your pension, creating an emergency fund, or investing with the aim of delivering long-term growth. During this period, you might have formed positive money habits that helped you reach your goals.

When you retire, many people switch to decumulating wealth as they use assets to fund their lifestyle. It can be more difficult than you expect to change the habits you’ve formed to suit the next chapter of your life.

So, it’s not just fear you may have to consider when understanding what might be influencing your financial decisions in retirement.

Again, a retirement plan could give you the confidence to start using the assets you’ve accumulated during your life to support the retirement goals you’ve been working towards.

Get in touch to understand your retirement income

If you’d like to understand how to use your pension to create a sustainable income in retirement or how you might use other assets, please get in touch with us. We could work with you to create a tailored retirement plan that considers both your financial situation and your goals.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

How to turn your child’s Christmas gifts into a nest egg

A girl writing a letter in front of a Christmas tree.Christmas is a magical time of year, especially for young children who will be eager to see what Santa has left them under the tree. Along with their gifts, your child may receive money that could be put towards long-term goals and milestones.

It’s likely not just you who will be buying presents for your child this year. Indeed, according to a survey published in Your Money, in 2023, grandparents collectively spent £4.3 billion on younger family members – roughly £140 for each grandchild.

With your child being lucky enough to have so many treats, you might want to think longer-term when deciding how to use the money your child receives during the festive period. Rather than buying more toys, it could be used to create a nest egg that may offer them a vital head start when they reach adulthood. While it might not seem as fun as the latest gadget now, your children are likely to thank you in the future.

So, here are three ways you could use your child’s Christmas money to build a nest egg.

1. Place money in a savings account

One of the simplest steps you can take to start building a nest egg is to place financial gifts into a savings account.

The money is usually accessible, so you could use it for short-term savings goals. It could also be a valuable way to teach your child about the benefits of saving and how interest works.

While interest rates have increased over the last two years, when you’re saving for a long-term goal, inflation could still erode the value of your child’s money in real terms. As the cost of living rises, if the savings don’t grow at a faster pace, the value is falling in real terms. So, you may want to consider how and when you’d like the nest egg to be used.

If you’re saving for your child, a Junior ISA (JISA) may be an option you want to weigh up.

JISAs offer the same tax benefits as their adult counterparts – interest earned on savings isn’t liable for tax. In addition, the interest rates offered may be higher than a standard savings account.

In the 2024/25 tax year, you can add up to £9,000 to JISAs on behalf of your child. However, keep in mind that the money held in a JISA isn’t accessible until the child turns 18.

2. Invest the money to support your child’s long-term goals

If you plan to build a nest egg for long-term goals, investing might be the right option for you.

Investing on behalf of your child presents an opportunity for the money to grow at a faster pace than it would in a savings account. However, returns cannot be guaranteed and investments may experience volatility. As a result, it’s often a good idea to invest with a minimum time frame of five years.

You should also consider what level of risk is appropriate for your goals when investing. This is an area we could help you with.

Again, a JISA may be an option to consider if you want to invest your child’s money. Indeed, official statistics show almost 6 in 10 JISAs are investment accounts.

A Stocks and Shares JISA provides a way to invest tax-efficiently – investments held in a JISA are not liable for Capital Gains Tax.

3. Use the money to start a pension

It might seem strange, but starting a pension on behalf of your child before they even think about entering the workforce could be valuable.

As the money held in a pension is typically invested for decades, it has an opportunity to grow throughout their life.

Longer lives and other financial pressures mean younger generations could find it more difficult to retire comfortably. Indeed, according to a Canada Life survey, more than two-thirds of people believe retiring in your 60s will become a thing of the past.

So, while retirement might be a milestone that’s more than 50 years away for your child, contributing to their pension now could offer them more financial freedom later in life.

There isn’t a minimum age for opening a pension. Only a parent or guardian can open a pension for a child, but once it’s set up, other third parties, such as grandparents, may make contributions.

Much like an adult pension, the contributions may even benefit from tax relief which provides a further boost to the nest egg. Non-taxpayers, including children, can usually pay up to £2,880 into a pension in 2024/25 while retaining tax relief.

The key benefit to adding Christmas money to a pension is the chance it has to grow – a relatively small contribution now could grow significantly when you consider how investment returns may compound. Of course, investment returns cannot be guaranteed.

If you’re considering this option, keep in mind that your child would not be able to access the money until they reach pension age, which is 55 and rising to 57 in 2027, and could rise further in the future.

As a result, contributing to a pension for your child may be an option you want to consider after you’ve taken other steps, such as maximising their JISA allowance.

If you’d like to talk about how to set up a pension for your child or balancing investment risk, please get in touch.

Contact us to discuss how you could provide your child with financial security

If you want to provide your child with financial security and more options when they reach adulthood, there may be other steps you can take too. For example, you might want to set up regular contributions to their JISA or put money aside to support them through university.

We could help make your family’s future ambitions part of your financial plan. Please get in touch to talk about your goals and how you might reach them.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.