Protect your wealth from fiscal drag

The government has a policy of increasing certain tax thresholds each year in line with inflation, a process generally known as 'uprating.' But since April 2022, many tax thresholds have been frozen and are expected to remain so until April 2028, resulting in a huge increase in the amount of tax paid to the Treasury.

This effect is known as fiscal drag, as it drags more people into the tax net. The government is expected to collect around £35 billion a year extra by the 2028/29 tax year due to the impact of fiscal drag from income tax alone as millions of workers are dragged into the higher (40%) tax bracket.

It's not just income tax brackets that have been frozen. The nil rate inheritance tax bracket has also been frozen  –  potentially dragging as many as 40,000 to 50,000 more families into the net*- while the nil rate brackets for capital gains tax and dividend tax have been lowered. The tax brackets for savings have also been frozen despite the jump in interest rates  –  a development that's also set to net billions more in tax for the treasury.

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These changes mean capitalising on the tax reliefs and benefits available to reduce your tax obligations is more important than ever. Bringing a wealth manager on board to help you make the most of these benefits could be a sensible decision.

Rising tax burden

Wealth managers, like the Investec Wealth and Investment (UK) team, are full-time money managers. They spend every day researching the best opportunities and keeping up-to-date with the latest tax and regulatory developments. This means they're well-placed to help you capitalise on strategies to keep more of your wealth.

The government has made it particularly hard for higher earners with its new fiscal regime. There's a double whammy for taxpayers earning more than £100,000 as you begin to lose your personal allowance for anything earned over this level.

Once your annual income exceeds £100,000, you lose £1 of your personal allowance for every £2 of income above £100,000. You not only lose your personal allowance but the income is taxed at 40%, resulting in a marginal tax rate of 60% between earnings of £100,000 and £125,140. Earnings above this level are taxed at 45%.

According to the Office for Budget Responsibility (OBR), 400,000 taxpayers will be pushed into paying the 45% rate of tax over the next five years due to fiscal drag, meaning they'll also be dragged through the 60% marginal tax rate on the way.

The right moves 

Investec Wealth & Investment (UK) managers can help their clients reduce their tax burdens through pension contributions and making the most of other products, such as ISAs and venture capital investments, which are higher risk, not usually available to and may not be suitable for the average investor. The managers can also help you navigate the investment environment to help you mitigate the impact of inflation on your wealth, utilising equities which have historically outperformed inflation in the long term.

Over the last 119 years, UK stocks have made annualised returns of +4.9% £1 invested in the UK stock market for 20 years would be worth over £2.20 today, but if the same £1 were held in a savings account, its purchasing power would have been eroded to 86p. However, it is important to remember, past performance is not a reliable indicator of future returns and should not be relied upon. 

During the current environment, it's never been more important to consider the benefits a wealth manager might be able to bring to your financial situation and investment portfolio in general.

To find out more, call Investec Wealth & Investment (UK) for an initial no-obligation chat on 0808 164 1234, or visit investecwin.co.uk.

* Office for Budget Responsibility

Tax treatment depends on the individual circumstances of each client and may be subject to change in future. All statements concerning tax treatment are based upon our understanding of current tax law and HMRC practise and can be subject to change. This article does not offer advice and the content and information about potential investments and services are designed for general use, and so cannot be considered personal to your circumstances or your financial position. The value of investments and the income derived from them can go down as well as up and you could get back less than you originally invested. Your capital is at risk.