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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.
Another year, another chancellor, another budget. That's what we've had this week. The chancellor John Healy has unveiled a set of measures that he hopes will provide financial breathing space for individuals. That's certainly worth you checking out, some interesting measures have been set out, but of course here at On The Money we look at the issues affecting your savings, investments and pensions. And if we look at the budget through that lens, there is plenty to unpack.
Dave Baxter:So welcome back to the show, I'm Dave Baxter and today I'm joined by Craig Rickman, our personal finance editor to unpack what's happened. So Craig, congratulations on surviving Yes Another Budget. Thank you. First of all, how does it range on the spectrum of, you know, kind of big blockbuster measures versus being a bit of a damp squid? Yeah.
Craig Rickman:That's a good that's a good question. So compared to the first two budgets of this parliament, it was a calmer affair. I mean, in 2024 and 2025, we saw a collective tax hikes in the region of, I think, 66,000,000,000. So they were really big punishing budgets. The budget yesterday in terms of tax increases we're looking at around 6,000,000,000 so it was smaller but there were still some sneaky things in there that savers particularly may need to watch out for from the new tax year?
Dave Baxter:So we are gonna try and unpack that in a, I guess, relatively simple way. We're gonna focus on three, I suppose, big takeaways for people from this latest fiscal event. Let's kick off with number one then, which is to use the, I suppose, the favoured parlance of the political journalists, a big big U-turn, big reversal, something that really we wouldn't have expected even a couple of weeks ago.
Craig Rickman:No. Yeah. So the the reversal to the the proposed ISA changes, which I think would have been... That would have been a massive, massive shock, you know, a potential candidate for the sort of, you know, rabbit out of the hat moment at this budget had it not been leaked beforehand. So there are reports and it seemed very credible reports on the morning of the budget that, yeah, that John Healy had decided to reverse the cuts to to cash ices, which is due to fall from £20,000 to £12,000 for people under the age 65 from the new tax year.
Craig Rickman:The idea behind that, which was proposed by the the previous chancellor, Rachel Reeves, was to try and encourage more people to invest and to try and boost The UK economy. But obviously, the new chancellor has come in and thought he's got different ideas about how to achieve that goal and we've got to, I guess, appreciate the government still has that aim. But he's decided to, yeah, to to reverse that change and plus, I guess, the the really big thing for investors is to... There's also gonna reverse or we're gonna assume they're gonna reverse these sort of anti circumvention measures that were introduced to try and stop people gaming the new system. So gaming the the the smaller allowance so so that people, you know, without these, you know, potential measures, people could effectively still invest in cash within a stocks and shares ISA or invest in a stocks and shares ISA and then immediately transfer the money to cash.
Craig Rickman:So... Yeah. So all of that has been, you you know, has been scrapped from the next year, which was, yeah, a big a big shock.
Dave Baxter:Yeah. It's very surprising. I mean, personally, I kind of wonder what's driven the the changes, but perhaps that's a a different discussion to be who's. I guess if we look at the practicalities, that simply means that life is a bit simpler for people using ISAs. I mean, at II some of the most popular kind of funds that people buy into are cash funds and so on.
Dave Baxter:So that's a headache that's been removed. But the, you know, the eyes of the landscape seems to have been almost constantly shifting in recent years and we've had a few more kind of complications, nuances and so on arising from this latest budget.
Craig Rickman:Yes, we have. I mean, just sort of going back into the those anti circumvention measures, I think one of the one of the worries for investors was this 22% tax charge on uninvested cash held within a stocks and shares ISA And also the the rules around money market funds as well. So you potentially under the previous rules, if you'd have held a 100% of your portfolio in money market funds, they wouldn't qualify. But again, that's been scrapped as well. So I guess to your point, to to to keep the consistency there and to keep things simple so that basically people can interact with their stocks and shares and cash ices from the new taxi in exactly the same way now is is good news.
Dave Baxter:Yeah.
Craig Rickman:It's it's probably a frustration for some people that it's arrived so late before the before the changes because many had planned, many organizations had planned for this change coming in savers and investors had planned for it as well. So but I guess, you know, my view is they've arrived at the right decision however late that is. But again to your sort of other point around keeping things simple with the ISO landscape, it seems like from this budget that things in some respects are going to get a bit more complicated with potentially two more ISAs to enter the fray.
Dave Baxter:It's quite exciting isn't it? We do love a new ISA.
Craig Rickman:We do, The UK certainly does, yeah.
Dave Baxter:Can't get enough. So yeah, I'll let you choose which one but what are we getting? So the one of the one of
Craig Rickman:these ISAs is and this sort of again taps into trying to foster this investing culture in The UK because the government is concerned that too many people are putting their long term wealth into savings and cash like assets when they could be investing it. The big task now is working out how can that change happen. And so so Healy, as I guess, is looking at the sort of carrot rather than the stick approach. So rather than just squashing the the amount that you can hold in cash ices, He's looking to introduce a starter ISA, which he mentioned in the speech. He mentioned it as a starter ISA.
Craig Rickman:In the red pages, there's no mention of that specific or that specific phrase. But the idea there, and we we still need to await the the finer details on this, is to... Yeah. Trying to encourage sort of a a new wave of of of investors into the ISO landscape.
Dave Baxter:Yeah. I think there was some mention in the speech or the summary of kind of developing something with the industry, but we haven't even yet had a consultation on what this kind of start of ISR could be.
Craig Rickman:So
Dave Baxter:I guess it will be interesting to see what form it could take. I mean, whether it's some kind of tax benefit for kind of first time investors or... I don't know whether you have any ideas of what could kind of emerge.
Craig Rickman:Well, Martin Lewis has apparently Martin Lewis, the the one a consumer champion has been has apparently been campaigning for this for some time and I read something from him yesterday and and sort of one of the aspects that he thinks could work is some kind of bonus on on contributions. I think he mentioned 5% and whether that would be... I mean, I assume that would be then paid for by or funded by the government to try and give people, yeah, an extra incentive to invest their money in a a stocks in a stocks and shares style ISA instead of a cash ISA. But I think, like you say, we're still very much awaiting the the finer details on this. But I think it will it will be interesting to see what they what they come up with because I think the the idea behind it is is laudable to try and get people to invest, but as we know, this isn't this isn't an easy task.
Dave Baxter:Yes. It's tricky, isn't it? I mean, there's so much that contributes to whether or not people are kind of eager investors, there's a lot of kind of culture there, there are a lot of different measures and you'd kind of see how this combines, and it'll be interesting to see what fresh details emerge. Looking at the other developments, we, you know, by now we're very accustomed to the idea of kind of ISAs for people looking to buy their first property and again we've had some fresh news there.
Craig Rickman:We have. So another new ISA, the first time buyer ISA, which we've sort of known about for for a few months, but we got some some more detail at the budget and in the budget red pages about exactly how this is gonna work. So this is in design to replace the lifetime ISA. So probably best just to sort of, you know, go into a bit of detail about the lifetime ISA, how it works and why it's been why it's been... Why it's being scrapped.
Craig Rickman:So lifetime ISA has a dual purpose. You can either use the money to buy a first home or you can take the money out when you're aged 60 without a penalty. I'll go into a bit more about that in a second. And the big sort of carrot with the lifetime asset is that you can put in £4,000 a year and you get a 25% bonus on that. So if you put in £4,000 during the year, a thousand pounds is added in, so you get 5,000 invested.
Craig Rickman:So, you know, a good deal. But the government has decided product isn't quite working as it should. And so it announced last year that it was gonna be replaced. We found out a few months ago that the... That this was gonna be...
Craig Rickman:It's gonna be replaced by a first time buyer ISA. And now we've got some more details. So effectively, with the first time buyer ISA, as the name suggests, it's focused purely on buying a first home. That retirement element to it has been sort of kiboshed. You know, in a way that there's still a lot of similarities with the Lifetime So it's still contributions up to £4,000 that will attract a £1,000 bonus.
Craig Rickman:There's a maximum house price which has been one of the sticking points with the Lifetime ISA.
Dave Baxter:And what is that? Is that $4.50 ks in London or?
Craig Rickman:Yes, $4.50 ks which I mean to your point there which has made it very difficult for people in London and the South East to use the Lifetime ISA to buy a property because if you if you you want to use your ISA funds to buy the property but it's worth more than that figure then there's a there's a there's a withdrawal penalty which... Well there's actually some news on that as...
Dave Baxter:Yes. As well. I mean this is interesting and I think welcome because you know one... Well I suppose there are two chief criticisms of the life. So one is the kind of dual purposes which is...
Dave Baxter:Creates a bit of a conflict and two of course as you alluded to this penalty. So if you don't qualify for the bonus because of the valuation of a property, which is a very likely outcome in somewhere like London, then you can end up kind of, you know, getting less than you kind of put in because of the... This penalty.
Craig Rickman:Yeah, yeah so it's so you've get essentially a 25 boost 25% boost on the way in but paid 25% on the way out but that's based on the you know on the total value of your fund so to your point, yeah, you could have ended up in a situation where the penalty is bigger than than than the the gain or the the upfront bonus that you've had. But interestingly, from today, in fact, the the government has has reduced that penalty on the lifetime ISA. So that's reduced from 25% now down to to 20%. So that's that's a positive for people who are using the lifetime ISA to buy their first home. But this...
Craig Rickman:I mean, it's created this situation where we we, you know, it's like we were saying, it's yet another ISA. And I don't know, there's there's part of me that thinks, you know, could the the government have purely just, you know, made some adjustments or some improvements to the lifetime ISA rather than introduce this new product because I mean, there are some differences, other differences with the new product, mainly that there's no cap on the age that you can you can pay. With a lifetime ISA, you you... If you need to be... If you're 40 or over, you can't open an account.
Craig Rickman:But with this new one, there's no there's there's there's no age there's no age cap. But interestingly, that maximum property value remains. The other big difference with it is that you don't... You only get the bonus when you use the money to buy a first home, so you sort of avoid that early withdrawal charge. But I think as people can probably tell, these these things are getting a bit sort of messy in in in this area.
Craig Rickman:The new first time buyer isa will come in in 2029, so there's still a bit of lead up to it. But there's... I mean, there's some people are gonna have, you know, some questions about, you know, whether it's whether it's the right product for them to use.
Dave Baxter:Yeah, it's interesting. It seems to be almost harking back to the original Help to Buy I, so it's more more of a kind of property first time property focused products and yes you can run the risk of not actually qualifying for the bonus but if so you're not gonna lose money per se.
Craig Rickman:Yeah yeah that's right yeah.
Dave Baxter:But you did I mean before recording you made the interesting point that some people could even perhaps find themselves holding a Help to Buy ISA, lifetime ISA, and then maybe in future this fresh product.
Craig Rickman:Yeah. I mean, with the Help to Buy ISA is... It's still running. It's not it's not not longer. You can't...
Craig Rickman:It doesn't allow new subscribers, but it's but it's still running. So, yeah, just there's there's more ISAs and I think that's been one of the big things that people have been campaigning for and that would maybe help foster this retail investing culture is for things to be simpler rather than, you know, savers, you know, faced with this sort of various range of different ISO products, which they may struggle to know which one is right for the specific goal that they're saving for.
Dave Baxter:I guess it's worth pointing out that if you do already hold a lifetime ISA, and for some reason you were to also use this new product, and then you were to buy a property, you can as far as I understand it use kind of both towards the the bonus if you qualify.
Craig Rickman:Yes. As far as we know, you can you can, excuse me, you can still use the use the two. You can't transfer or when this product goes live in 2029, you won't be able to transfer from a lifetime ISA to the first time buyer ISA, but you can use both to buy your home.
Dave Baxter:Good to know. Okay, so that's takeaway number one. Lots of stuff on ISAs, lots to consider, more complication but also some good news. Let's move to takeaway two which is about savings interest. What's going on there?
Craig Rickman:Yes. So I mean this was one of one of the big surprises and could be quite a painful surprise for some savers. So if we go back to the previous budget, Rachel Reeves announced that from April 2027, rates on... Tax rates on savings income would go up by two percentage points. So it would create this sort of new system for savings rates.
Craig Rickman:And yesterday's budget, John Healy went further and said that they will rise by an extra two percentage points across all tax rates. So what does this mean? So it means on any savings that you hold outside of tax wrappers and that exceed your personal savings allowance, I'll go into a bit more detail about that in a second. Mhmm. At the basic rate, you will pay 24% tax on your savings.
Craig Rickman:At the higher rate, you'll pay 44%. And at the additional rate, you'll pay 49% on your savings. So essentially, you could be losing half of your savings in...
Dave Baxter:It's very steep. Yeah.
Craig Rickman:So heavy stuff. In terms of what you can set against savings tax, so most people get a savings allowance. I say most, not everyone. So most basic rate taxpayers, that's a thousand pounds, so first thousand pounds of interest you can earn is tax free. If you're if you earn if you are a, you know, if you are your income is particularly low, you could potentially get up and earn up to £6,000 in savings interest, but that would be that would be available for someone whose taxable income is below the the 12,570 tax free personal allowance.
Craig Rickman:But most basic rate taxpayers get a thousand pounds, high rate taxpayers get £500, but if you're an additional additional rate taxpayer, you don't get a savings allowance. So, yeah, anything outside of ISAs or other sort of tax wrapped accounts, you'll pay 49% interest on. So that was a was a big blow for for savers, and it's almost like when you look at the the reversal to the cash ISA, it's a bit like, you know, giving with one hand but taking in... Taking with the other.
Dave Baxter:Yeah. Yeah. I mean, first of all, I commend you on this command of all these numbers. It's so much complication and I guess it illustrates how confusing it can be for individuals, much stuff it is to keep an eye on. But what strikes me as quite interesting is it's it's making the On The On On The
Craig Rickman:to a point that you made just before we we came on, you know, the the On changes to... From April to pensions and inheritance tax. Again, the the sort of the value of of the ISA, especially now the rules aren't gonna change from next year, the current system's gonna remain, you know, it's just becoming it's becoming such a valuable asset in in people's portfolios.
Dave Baxter:Yeah. It's it again kind of changes maybe how people weigh things up when they're considering pensions versus ISAs and so on. Know, it used to be that idea of running down your ISA and then leaving your pension, and now it's a bit more nuanced, I guess.
Craig Rickman:Yeah, absolutely. So it requires a bit of thought. I mean, a lot of cases, a pension, if you're sort of purely looking at it from a tax perspective, will likely be the best thing to do. It can be quite difficult when it comes to, you know, pensions and inheritance tax because the future tax bills, potential tax bills are unknown. So it's it's it's a difficult thing to work out, but it is an extra consideration now for people.
Craig Rickman:Yeah. And I think, yeah, what we'll see is that, you know, you you probably see more people when they're looking to save for retirement, you know, looking to turn to the ISA with at least, you know, some of the money that they have available.
Dave Baxter:And I guess it is also good to remember to take a balanced approach if you can because this Budget and recent Budgets have illustrated that of course you can plan, you know, with a long term strategy but the goalposts can shift around.
Craig Rickman:Yeah, yeah that's that's a big bit. I mean that's been, you know, so starkly illustrated by not this budget but, you know, a lot of the previous ones. Things have are changing so quickly. We've seen, you know, the U-turn with with cash ices but there have been other U-turns during this during this parliament as well. So yeah, things can change.
Craig Rickman:Yeah, I mean it's it's I think to that point it's very, very difficult for savers and investors to keep on top of what's going on. Yeah. Well, yeah, you're doing a good job.
Dave Baxter:My best. So let's move on to the third takeaway, which again for me kind of, yeah, really highlights the importance of things like ISAs now. That's some interesting detail we've had with this pension tax allowance. Indeed, yes. So yeah, we've got or some as a sort of headline before I
Craig Rickman:go into more of the detail some low income pensioners will get an extra tax free allowance from next year. Let's talk about why this is why this is happening. Mhmm. So the main reason is that from April next year, the full state pension will exceed the tax free personal allowance. So if that was...
Craig Rickman:Is your only source of income, you would end up paying tax on it for the for the first time. The government has been wary of this or has been wary of it for some time, particularly as tax thresholds have been frozen since 2021, 2022. We have five years of frozen thresholds. Combine that with the generosity of the state pension increases under the triple lock, we're now reaching a point in the new tax year year where it's going to exceed it. Now Rachel Reeves at Budget last year made this promise to protect pensioners.
Craig Rickman:I think the exact phrase was if you're on the full state pension or the basic state pension with no increments, you won't have to pay any tax on it. Yeah. John Healy's come in, he's said he's gonna honor that pledge and this is, you know, taking us to where we are today with this pension tax allowance which is incredibly is incredibly complicated. I mean, in in the... It was only briefly mentioned during the speech and it was very limited detail.
Craig Rickman:There's limited detail in in the red pages as well but there's an explainer online which I then sort of tackled last night Yep. And found out the details and it's pretty... Not only is it pretty complicated, but it it looks like it could potentially have created a new a new tax trap as as well to add to the others in the system. So...
Dave Baxter:Yes. A a little while before recording, was quite amused to hear you muttering tax strap under your breath.
Craig Rickman:Yeah. Happens quite a lot. Yeah.
Dave Baxter:What what is this latest strap?
Craig Rickman:Right. Okay. So I'm gonna I'm gonna have
Dave Baxter:to Yeah. Let's let's bring out the notes.
Craig Rickman:I'm have to read some notes
Dave Baxter:here. Quite complicated.
Craig Rickman:So let's talk about how this this new allowance is gonna work. So so like I said earlier, with Rachel Reeves said it would only apply to those who receive the basic or full state pension. Mhmm. But the policy that we receive, that's not that's not what's happening. It's your your total total taxable income.
Craig Rickman:So so this is how it's gonna work. So if your total taxable income is between 12,570 Yeah. Which is the the personal allowance and 13,037, both in pounds of course, which is gonna be... Sorry, no £12,570 I'll correct myself and £13,036 you will... Which is the the new full state pension from April, you will get this full pension tax allowance and that's worth £94 a year.
Craig Rickman:So effectively you won't pay any tax if your income is up to 13,036, so if you have full state pension. I'm repeating myself a bit but bear with me. However, there is a taper if your income increases above that. So if your total income is above 13,037 but below 13,319 you'll get some pension tax allowance but it will sort of gradually be withdrawn so every £3 that you earn above the sort of bottom end of that your pension tax allowance will reduce by a pound. Yep.
Craig Rickman:And so yeah, what it means is that if your income is above 13,319, there's no pension tax allowance. Is that... Did you follow that?
Dave Baxter:That's crystal clear,
Craig Rickman:yes. Probably a bit muddly. So, yes, but as sort of some other people, some other analysts who are far sort of brighter than me have managed to work out fairly quickly or have apparently worked out, the combination of those two factors, the basic rate tax and the withdrawal of this pension allowance on that pocket of income can apparently create a 53% tax trap on that income which is, you know, it's it's I guess, you know, we we we wanted to get to a point where we have sort of fewer tax traps. Ideally, no tax traps in the tax system. Mhmm.
Craig Rickman:But now we've got a situation by... And it's... Yeah. You could say it's only a small pocket of income, but that could be pretty painful for the people on on on the lower incomes and you know, not to mention it's pretty complicated to get your head around and it's, you know, this is coming in in only a few months time.
Dave Baxter:Yeah, so I guess in practice then, I mean this is good news for someone who is reliant on the state pension or has an income below that full state pension. But again, I mean earlier I was talking about the environment being kind of hostile for your kind of savings investments and so on outside of tax wrappers. To me, this further just puts that puts that point home, I think.
Craig Rickman:Yeah. Yeah. Yeah. Absolutely. I think, yeah, to to your point, it's you can see why the government is doing it.
Craig Rickman:They want to protect. They want to save, you know, lower income pensions, not just from tax but the potential admin. They're probably saving themselves a bit of a job as well. Yeah. But you can see why they're doing it.
Craig Rickman:But, you know, this is... I guess this is the consequence when you keep tax thresholds frozen is that there are gonna be implications to that. Yeah. And then to try and correct those implications you can just create more mess. Mean Yeah.
Craig Rickman:In an ideal world the personal allowance would have increased at the budget that was something that was spoken about in the sort of early rumors but it doesn't seem like, you know, that was always a bit of a long shot I think but yeah, you end up with this yeah, sort of in a situation where that that, like you said, it will benefit some people but it's, yeah, it's kinda messy.
Dave Baxter:It's just bizarre though because you could, as as you were saying to me earlier, you could have a £1,000,000 ISA that is generating a load of income for you but that won't actually have to bear in on this?
Craig Rickman:No, because from what we understand it's yes taxable income so from whatever source so it could be earnings, could be state pension, private pensions, property rentals whatever it is, but it also says that any tax free exemptions you'll still be able to use those. Yeah. And so yeah, it does does beg some questions. Maybe we'll get some more clarity on this or I'll have a better look at it but that's the understanding at the moment.
Dave Baxter:Yeah, yeah, we'll wait for more details. Yeah. So let's very briefly cover off just one last bit. I have the words 'bullets dodged' written on my notes here. Here I'm referring to there are a handful of kind of things that were potentially bad news for investors and which have not come through in the latest budget.
Dave Baxter:So what have we avoided this time around?
Craig Rickman:So if we look at the the pre budget rumors, there were speculation, speculation about capital gains tax rates going up. Yep. The headline rates, that didn't happen. Actually Healy ruled that out a couple of weeks ago, so not a huge surprise, but still a relief. There were no changes, I mean, once to the to the pension tax framework.
Craig Rickman:Rumors here were light this time around, we didn't get this these wild rumors about tax free cash being cut, there was a few. But that's good news because in the previous few budgets, we've seen some really big upheaval to the pension tax framework, notably the, you know, the the IHT the IHT policy which is coming in from April. But no change to pension tax, which is something that I think a lot of investors will be relieved about. And there were no changes to the inheritance tax framework, which I guess could be seen as either a pro or a con to to sort of depending on, you know, because one way of looking at it was to say that there could be positive reform in terms of inheritance tax. There's an argument to, you know, increase the tax free threshold which had been frozen since 2009, But no change there and I think it's probably more of a relief because I think the thinking was if we are gonna get change there then it's probably gonna be more more sort of punishing than beneficial.
Dave Baxter:Yeah. Yeah. So kind of business as usual but largely in a good sense.
Craig Rickman:Yeah and I guess the final thing is relates to what we were just talking about with relation to the pension tax allowance which is this frozen tax thresholds which have been, yeah, have been kept at the same level since twenty twenty one-twenty two and will remain at those levels till '20... Until April 31, so ten years and we've seen the consequences with the state pension but there have been other consequences as well just people's incomes naturally rising over time and you know landing into higher tax brackets, landing into tax traps, and more of this is going to happen over over the sort of the course of this parliament. So, shame that nothing happened there, but again that was that was always a long shot.
Dave Baxter:Yeah. So I guess the kind of lesson there is again to use your tax wrappers and try and protect yourself from that hostile environment.
Craig Rickman:Absolutely. Yeah. I think again to the point around ISAs, when tax thresholds are frozen then the sort of tax free levers that you can pull become just more valuable. So using ISAs, using pensions where possible that can act as a... That can reduce your your taxable income below tax traps or into lower tax brackets, you know, they're they're the kind of things that that can be really, you know, really useful stuff for investors looking to sort of swerve these these, you know, extra taxes or tax traps.
Dave Baxter:Yeah. Well, I think that's it unless there's anything else you want to highlight. We've we've covered quite a lot. I think... No.
Dave Baxter:No. That's... That all sounds good to me. Yeah. I think we've...
Craig Rickman:Yeah. We have got through a lot in
Dave Baxter:that Well, thank you for your your analysis.
Craig Rickman:Thanks for thanks for having me, Dave.
Dave Baxter:And thank you for watching. Hope you enjoyed it. Hope you found it useful. As always, let us know what you think in the comments. You can, of course, reach out to us directly.
Dave Baxter:Email us please at otm@ii.co.uk. Let us know future themes we can cover and generally what you think. Thanks and take care.