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Every week, Kyle Caldwell and guests take a look at how the biggest stories and emerging trends could affect your investments, with practical tips and ideas to help you navigate your way through. Join the conversation, tell us what you want us to talk about or send us a question to OTM@ii.co.uk. Visit www.ii.co.uk for more investment insight and ideas.
Hello, and welcome to our latest on the money podcast and a very happy New Year to all of our listeners. So in this episode, we're gonna be covering the key personal finance changes in 2026 that will impact your money. And joining me to discuss this topic is Craig Rickman, personal finance editor at Interactive Investor. Craig, thanks for coming on.
Craig Rickman:Thanks very much for having me.
Kyle Caldwell:So, Craig, we'll be talking through key policies that are gonna be implemented in 2026, but we're also gonna look towards the end of the podcast ahead to some of the changes that are gonna be coming in place in 2027. Let's firstly start off with tax. Of course, in the autumn budget, we did not have any income tax rises, but that's not to say that people aren't gonna be paying more tax in future. In fact, many people will be due to the extension of the existing freeze on income tax and national insurance thresholds. They've been extended from three years from 2028 to 2031.
Kyle Caldwell:Craig, could you firstly unpick the impact this is gonna have on a lot of people?
Craig Rickman:Indeed. Well, it will have a a, yeah, a big impact on a lot of people. So essentially, when tax thresholds are are frozen, that as people's income sort of naturally ticks up over time, that, you know, sort of more and more people or millions more people will trip into higher rates of tax without necessarily feeling better off. This is a as a phenomenon known in industry jargon as as fiscal drag, and it has the greatest impact over time. And, yeah, next year, income tax and national insurance thresholds will remain frozen.
Craig Rickman:So that's something for for people to watch out for, particularly as, you know, as we we sort of head towards bonus season early next year. If you receive a bonus, it could that bonus could trip you into a higher rate tax bracket. It could also expose you to to some of the tax traps that that line the system. So if you earn start to earn more than than £60,000, you can pay a charge on on child benefits, so that would impact parents of, you know, young young children. And then also at a £100,000.
Craig Rickman:If you, you know, for every £2 you earn above a £100,000, your personal allowance which 12,570, that's the amount you can earn every year tax free, that is withdrawn so essentially means once you earn a 125,000 a 140 you lose your personal allowance and you pay an effective tax rate at either 62% if you're under state pension age or 60% if you're above. The reason for the difference there is because if you're understate pension age, you pay National Insurance. So, you know, this can have, yeah, a big impact over time, and it's something for for people to watch out for next year.
Kyle Caldwell:To put the issue into perspective, in 2010, only one in 10 taxpayers pays higher rate tax. At the moment, it's not far off being one in five. And in 2030, it is for the around a quarter of people will pay either high rate tax or be additional rate taxpayers. Whereas under the old inflation link system, you'd normally only get bumped up into a higher tax bracket if he's enjoyed a notable increase in your income.
Craig Rickman:Yeah. I mean, there's there's quite a few stats on or there'll be some stats published around that the the sort of number of people are being impacted by the the 60% tax trap above a £100,000. So I think when we did some research looking at people over state pension age, and it tripled in a in a three year period just because of that sort of threshold being frozen and and sort of people's incomes ticking up. So yeah. It's yeah.
Craig Rickman:And and especially, you know, like you say, tax thresholds are gonna be be sort of remain or gonna be remain frozen until 2031. So it's something to watch out for next year and sort of every year thereafter until until, you know, yeah, 2031.
Kyle Caldwell:You just touched on the state pension. So let's move on to it. So in April, the state pension is gonna rise by 4.8%, and it's the earnings element of the triple lock equation that is being used once again. So state pensioners, they'll receive an above inflation increase on their state pension. So in terms of things to watch out for from a personal finance perspective in 2026, this is indeed one of the positives.
Craig Rickman:Definitely. Yeah. Yeah. Particularly for those on the lower incomes who have rely heavily on on the state pension, That's a really important increase, but it also, you know, it illustrates the importance for those who aren't at state pension age, to make sure that you get the full amount. It's a it's, you know, you you couldn't, there's very few people who could sort of rely on the state pension to make ends meet in retirement.
Craig Rickman:You're probably gonna have it. You you aren't almost certainly gonna need to have some extra savings. But that said, it's a it's a form of guaranteed, you know, in income that that uprates every year and due to the triple lock mechanism that the entry increases can be can be really healthy. So, that's a it's a really it's good news for people who are either already retired or approaching retirement. But for those who are who are sort of looking to retire in the future and reach state pension age, yeah, it really highlights how important it is.
Kyle Caldwell:While that's a positive for those receiving the state pension, there are lots of negatives for others. So for investors that have money outside of tax free wrappers, like an ISA and a SIP, and you are generating income from your investments, you're gonna be hit with a higher rate of dividend tax. And this is also gonna impact a lot of small business owners negatively as well. Could you talk for it, Craig?
Craig Rickman:Sure. Yeah. So this was an announcement in the autumn budget 2025, and there will be increases to the rates of dividend tax from April. So the basic rate is rising from 8.75% to 10.75%. That's paid on on dividends when added to other income that fall below or fall below 50,270 and then down to the the tax free allowance 12,570.
Craig Rickman:So it's in between those two in between that bracket. On anything above that at the higher rate so from 50,270 all the way up to the additional rate the the rates of dividends there are going to increase from 33.75% to 35.75% and then but at the additional rate, that is going to remain the same at 39.35%. The the dividend allowance, which is the amount of or the value of dividends that you can receive every year tax free, is remaining at £500. But this I mean, this this change is a is a further blow to investors who are who are already facing, you know, high capital gains tax bills because the rates capital gains tax rates on shares were increased at the previous budget. We should also note that the tax free allowances that apply to dividends, as I've just mentioned, and capital gains have been hacked away at in in recent years, so we're less generous.
Craig Rickman:So, you know, for for for holdings outside of tax wrappers, the tax penalties over the past few years or the tax rates and, you know, the amount that you could potentially pay have have increased and and, you know, if for some people that might be, you know, quite a steep increase.
Kyle Caldwell:And it's not the only allowance or tax incentive that have been hacked away. There've been a couple of changes that are gonna negatively impact UK smaller companies and indeed investors back in entrepreneurial businesses. So the first one is, and this was announced a while ago, is as part of the inheritance tax changes, the amount of tax relief that you can get through investing in aim listed companies is gonna be cut from a 100% to 50%, and that comes into place at the start of the new tax year in April.
Craig Rickman:That's right. Yep. Yep. So as things stand, if you invest in AIM shares and they're in eligible companies and you hold them for two years, they can be a 100% free from IHT. So that's been quite an attractive thing for investors for you to use, especially those with an IHT problem, but that's gonna become less generous.
Craig Rickman:Yeah. So you so you're only gonna get sort of effectively, you were paid 20% inheritance tax on those. You could you can still use your your tax free lifetime allowances. So the nil rate band, which is 325,000 and the residents nil rate band. So it's it's anything that's on on top of over the top of that.
Craig Rickman:You can still leave them tax free to to spouses and civil partners. But, yeah, that's another it's another change to watch out for, particularly those who like to use and invest in in smaller companies or in AmeShares for the inheritance tax breaks.
Kyle Caldwell:And another change relates to venture capital trusts. So this was announced in the autumn budget. So the amount of upfront tax relief investors receive for backing small UK businesses is gonna be cut from 30% to 20%. Craig, could you talk through this? And do you think that this will naturally mean that less money will go into venture capital trusts?
Craig Rickman:Well, I think what we've seen already and according to reports is that the the the sort of number of subscriptions or the interest in in VCTs has increased quite dramatically or increased after the budget because naturally, investors who are thinking about using them are gonna want to use them, you know, during this tax year while the rate of upfront relief is still 30% before it falls to 20%. So and and like we've seen in the past, investors are sensitive to changes in the rates of upfront tax relief on venture capital trust. It's one of the big attractions of of using them. Yeah. VCTs aren't aren't for everyone.
Craig Rickman:I guess that, you know, that applies to AIM shares as well because you're investing in smaller companies. There are there are sort of bigger risks involved. There's there's more volatility. There's more chance of your investments losing money. So they're not for everyone.
Craig Rickman:But that, you know, people still do use them and it's the tax perks. The tax perks is is one of the main incentives for for for doing so. So, you know, particularly with with ECTs, I think we will see sort of more interest in them as as the new tax year draws closer, yeah, for people to capitalize on the on the more generous rate.
Kyle Caldwell:And, of course, it goes back to the old saying of don't let the tax tail wag the investment dog. It's it's really important that people go away and do their own due diligence, and they're not just purely investing for the taxpayer.
Craig Rickman:Absolutely. Yeah. Yeah. So I mean v I mean, VCTs have often or perhaps have been sort of popular with people who have especially, you know, those who have who earn quite a lot of money or big earners and are restricted by things like the tapered annual allowance, which reduces when if your income is more than 200,000, you can start to lose your your your annual pension allowance. It's reduced.
Craig Rickman:And it can reduce as low as £10,000. So, you know, for some big earners, if they only put £10,000 into a pension and want to get upfront tax relief, they've often turned to to things like well, some of them may have turned to things like VCTs. Again, like you say, VCTs aren't for, you know, right for everyone. There are risks involved. Some of the charges can be quite high.
Craig Rickman:It doesn't mean that, know, you shouldn't look to do them and it doesn't necessarily mean you shouldn't look to do them after April, but there are things to consider, you know, before putting putting your money into those sorts of sorts of investments. It's typically those who are experienced and who can afford to stomach any potential losses.
Kyle Caldwell:And there are other changes to business relief and agricultural relief. Could you talk us through the impact of both of those?
Craig Rickman:Sure. Yeah. So these were part of the the sort of sweeping inheritance tax changes that we saw at the autumn budget 2024. So from April, both both business relief and agricultural relief, the first million pounds will be tax free. And then anything above that, the inheritance tax relief will be 50%.
Craig Rickman:So it'll be an effective, you know, IHT rate of 20%. But this can also impact investors as well because some companies offer sort of these inheritance tax investing schemes for investing in in in smaller businesses. So, I mean, the the the the change there, if that's you know, if you're looking to invest in these things, the change there isn't quite as harsh as with with Aim shares because the first million pounds is still tax free. But it's something something to watch out for. And, you know, we we we know that from the reaction to these policies that particularly around agricultural relief, which, of course, will impact farms that they haven't been particularly popular.
Craig Rickman:But, you know, the the opposition to them hasn't been successful and yet these will come in from April.
Kyle Caldwell:So let's now move on to changes to personal finance rules. They're gonna go into play in 2027, which means that in that people have plenty of time to get get their heads around the new rules and plan accordingly. So the first one is the cut to the cash ISA allowance. So it was announced in the autumn budget, the cash ISA allowance will be cut from £20,000 a year to £12,000 a year, and that cut will take a place from April 2027. If you're aged 65 or over, you are excluded from it.
Kyle Caldwell:You'll still be able to put £20,000 a year into a cash ISA. Now, Craig, we did a reaction podcast following the autumn budget where we gave our initial thoughts on the cut to the cash I show allowance. Since then, there has been some documentation published in which it has said that cash like investments may no longer be included in the stocks and shares version follow from April 2027 due to the cut to the cash ice allowance. Could you talk us through what we know so far? Details are very thin on the ground, but there has been a bit of information.
Craig Rickman:Yes. So they've said that, yeah, cash cash like investments will be prohibited. So, yeah, we can assume that means things like money market funds, but that's that's another thing to watch out for this year. We'll be hoping for some clarity. Certainly, investors will be hoping for some clarity on exactly what that applies to because as we've seen particularly this year, there's sort of strong appetite for for the things like money market funds for investors within their ISAs, but also in their in their SIPs as well.
Craig Rickman:So, yeah, hopefully, well, I mean, not just not just hopefully, you know, certainly we will get some more clarity. We're gonna have to get some more clarity before the change to cash ISAs comes in in April 2027.
Kyle Caldwell:I mean, my thoughts are that if you put any barrier or restriction in place, then it's not gonna be very helpful. It's not gonna inspire, you know, people thinking of switching from a cash ISA to stocks and shares ISA. If they're then told that you can't invest in one of the lowest risk type of funds that's out there. And at the moment, most money market funds, they're offering a yield of around 4%. That yield's not guaranteed.
Kyle Caldwell:That just reflects the amount of income that's being generated by the full manager running that fund. But as mentioned, they are very low risk type of funds, and they are the sort of they are the investment version of like a cash park, a place to put your money before you decide then what to do with it. They're not long term investments to hold for ten, fifteen years. But at the moment, you know, money market funds offering a yield of 4%. It's quite a good place for some investors to put some of their cash as part of their overall stocks and shares ISO allowance.
Kyle Caldwell:I also wonder how this would be administered. You know, who's gonna police this? Who's gonna Yeah. You know, is it is the owners gonna be on providers, or is it gonna be on individuals? I just think it could get quite messy if they're then gonna restrict a a particular fund type from stocks and shares.
Kyle Caldwell:I say, when that fund type is already in that tax wrapper.
Craig Rickman:Absolutely. I think messy is is the word. And that's something that, you know, not just us at Interactive Investor, but other companies, other financial firms have been campaigning for to remove some of the mess within the ISO landscape and make things more sort of simpler for investors and savers to understand and try and put their money in the right places. And it just, yeah, makes could make a a bit of a pig's ear of things. I mean, there are good reasons to hold money market funds in a stocks and shares.
Craig Rickman:ISA, like you say, it doesn't have to be for long periods, but especially as from April 27, you won't be able to transfer won't it'll be no longer be able to transfer from a stock and shares to a cash ISA. So if you need to keep the money in something which is sort of more capital secure and less volatile for a short period because you've got a purpose for the money soon, you know, I'm thinking perhaps those who were investing in a stock and shares ISA for several years but now will want to use the money to buy a house, then then they're gonna want to sort of park the money in somewhere, say, a short term home, and it would seem sort of unfortunate and perhaps unfair if they then were potentially subjected to tax on that money even for a short period of time. So, yeah, it will be be interesting to see how that develops, and yeah. And we'll we'll we'll hopefully get some more info.
Kyle Caldwell:And as we've spoken about on the podcast before, the gap between a saver then becoming an investor, it needs to be plugged by better education. We produce lots of educational contents on Interactive Investor in different formats, in written formats, video formats. And with money market funds, the message really is the it's a defensive asset to consider as part of a well diversified portfolio. You know, it it it you know, it should not be viewed as a as a as a type of fund that you put everything into. It's a type of funds that, as I said, it sits in your sort of defensive bucket, and it goes alongside other investments that are more growth producing, such as funds that invest in global shares.
Craig Rickman:Yeah. Yeah. Absolutely.
Kyle Caldwell:And as you mentioned earlier, Craig, we'll hopefully get greater clarity regarding what is meant by cash like investments potentially not being included in stock and shares ISAs from April 2027 onwards. And if it is the case that money market funds are excluded, at least ISA savers and investors, they have plenty of time to plan accordingly and to potentially consider all the types of defensive funds that could fit into that defensive buffer in a portfolio. In terms of other changes cropping up in 2027, another big one is changes to inheritance tax related to pensions. So in short, from April 2027, you can no longer pass on your pension inheritance tax free. This is gonna have a huge impact on tax planning and a number of individuals.
Kyle Caldwell:It's gonna impact a huge number.
Craig Rickman:Yeah. This is a a massive, massive change to the IHT system, to the pension system. As you say, yeah, from from April 2027, essentially, pensions will no longer be exempt from inheritance tax. So that's the case with with most pensions these days. So if you die, you can pass it to, whoever you like, inheritance tax free.
Craig Rickman:If you pass away after age 75, whoever receives the money could pay tax on on income tax, sorry, on any on any income that they withdraw. But So in from April 2027, like, someone dies, know, if if they're beyond the age of 75, they could pay inheritance tax and income tax as well. There's important things to to sort of flag around it. One is that it doesn't necessarily mean who inherits the pension will still pay inheritance tax. There's still your sort of lifetime tax free allowances, so it's only if it's when added to your other assets.
Craig Rickman:If it's in excess of that, it could potentially be taxed at 40%. The spousal and civil partner exemption remains as well. So if you leave the money to, yeah, your husband or wife or civil partner, then there's no inheritance tax to play pay. Sorry. Yeah.
Craig Rickman:And this is a it's enormous change. And so although that change isn't coming in for, you know, for for more than a year, people will who are potentially be affected by it will sort of inevitably start to plan ahead next year. I mean, people have already already started planning for it. So doing things like withdrawing money from their pensions sooner than perhaps they they would have done otherwise and and passing the money on to try and avoid inheritance tax, mainly to to avoid this potential sort of income tax and inheritance tax double whammy after the age of 75, which could see some incredibly sort of punishing tax rates, particularly if the person who draws them out is paying one of the higher rates of tax. You you know, we could see, you know, tax rates, effective tax rates in the sort of mid mid sixties or perhaps even higher.
Craig Rickman:So, yeah, if it's something that potentially affects you, then, yeah, to sort of think about it and start to plan ahead well ahead of the the change coming in.
Kyle Caldwell:And the final change coming into force in April 2027, which was announced in the autumn budget, is the increases in savings interest. So the so the savings interest, it's going up by two percentage points for both basic rate taxpayers and higher rate taxpayers. Craig, could you unpick the details?
Craig Rickman:Sure. Yeah. I think the first thing to say around this, I mean, it's a it's a bit of a blow to to savers, particularly considering the the cuts to cash ISAs for those 65. Not only will they not be able to put as much into a cash ISA every year, but on any interest that they earn outside of it. And there are some some allowances, tax free allowances that you can use to to set against savings interest, which is determined by which tax bracket you fall into.
Craig Rickman:I'll go into those in a second. But still, they could yeah. And outside of ICEs, they could be paying potentially higher rates of of savings tax too. So so what's changing? So the the basic rate of savings interest, which is for, you know, for the use of 20% taxpayers or or interest that falls into the 20% tax bracket will go up to 22%.
Craig Rickman:The 40% up to 42%, and the 45% rate up to 47%. So in terms of the tax free allowances that you can use to set against them, if you're a basic rate taxpayer, it's a thousand pounds. There's actually a bigger allowance. If your earnings are particularly low, you can you can potentially get £5,000 of savings interest tax free. But for most people, if you earn more than just around 17 and a half thousand, then your allowance will be savings allowance would be a thousand pounds.
Craig Rickman:For higher rate taxpayers, interestingly, it halves. So if you earn more than 50,271, your savings allowance halves to £500. If you're an additional rate taxpayer, you don't get a savings allowance. So on anything held outside the tax wrappers from after April 2027, if you're if you're an additional rate taxpayer, so we're more than a 125 or 140, you will pay 47% tax on those savings. It's a pretty high rate.
Craig Rickman:So, again, that's something for for people to think about this tax year ahead of that change coming in.
Kyle Caldwell:Craig, thank you very much for your time for talking through all the changes from a personal finance perspective in 2026 and also beyond.
Craig Rickman:Thanks as always for having me.
Kyle Caldwell:And that's it for our latest on the money podcast episodes. Thank you very much for listening. As usual, you can find plenty of insights and practical pointers on the Interactive Investor website, which is ii.co.uk. And we always love to hear from our listeners, and we will in future shortly be doing a question and answer episode. So if you have an investment or a pension related question, then do get in touch.
Kyle Caldwell:You can email ocm@ii.co.uk, and I'll hopefully see it again next week.