Looking ahead to 2024, AJ Bell experts preview some of the key personal finance changes to look out for next year:
- State pension rises 8.5%
- The Lifetime Allowance is abolished
- ISA reforms introduced
- Divided and CGT allowances cut again
- National Insurance cuts kick in
- Rail fares rise
- New childcare support for parents comes in
- Minimum wage increases
- Fuel bills increase
- Council tax bills go up
- Final cost of living payments
Pensioners to receive bumper 8.5% state pension hike in April – Tom Selby, director of public policy:
“Retirees will receive an inflation-busting 8.5% boost to their state pension from April 2024 after chancellor Jeremy Hunt used his November Autumn Statement to confirm the government would stick to its ‘triple-lock’ pledge.
“The triple-lock promises to increase the state pension by the highest of average earnings growth, inflation or 2.5%. With CPI inflation now down to 3.9% and anticipated to continue falling into 2024, this should provide a real terms boost to the living standards of millions of pensioners.
“For those in receipt of the full new state pension, their weekly income will surge from £203.85 per week to £221.20 per week, or over £11,500 per year.
“The triple-lock is clearly a popular policy, particularly among older generations who directly benefit from it, but it cannot continue forever. If it did, the state pension would eventually be worth more than average earnings and become unsustainable to maintain.
“As things stand, the triple-lock is a policy without a stated goal. In fact, by keeping the triple-lock in place, the government is effectively admitting the state pension is too low. The key question ahead of the general election is whether or not the major political parties will continue to blindly commit to the policy in their respective manifestos.
“The Institute for Fiscal Studies (IFS) recently argued the government should explicitly set a target for the value of the state pension as a proportion of average earnings. This would be a far more coherent approach and could provide at least some certainty over what people can expect to receive in retirement from the state over the long-term.”
Lifetime Allowance removed but lump sum death benefit allowance comes in – Tom Selby, director of public policy:
“The government will fulfil its pledge to abolish the pensions lifetime allowance from April next year, removing what always felt like an unfair punishment on those who do the right thing and save for their financial future. The decision to ditch the lifetime allowance was primarily driven by the challenges it posed to the National Health Service, with tens of thousands doctors and senior clinicians retiring because of the tax penalty if they continued working and building up generous ‘defined benefit’ pension entitlement.
“However, savers in all types of pension scheme stand to benefit, with those accessing a defined contribution retirement pot only having to pay income tax on withdrawals.
“The end of the lifetime allowance does not, unfortunately, mean the end of complexity, because two new lifetime limits will be introduced in its place. These new allowances are designed to limit the pension tax-free lump sums people can receive in life and the tax-free lump sums they can pass onto beneficiaries when they die.
“For most people, the ‘lump sum allowance’, limiting the tax-free cash you can receive over your lifetime, will be £268,275 – a quarter of the £1,073,100 lifetime allowance that exists today. The ‘lump sum and death benefit allowance’, which includes both tax-free cash entitlements paid whilst alive and any tax-free lump sums paid from pensions left over at death, will be set at £1,073,100.
“Labour shadow chancellor Rachel Reeves has previously said her party will reintroduce the lifetime allowance, with a carve-out potentially created for the NHS scheme. This would be a hugely complicated and unnecessary intervention, when policymakers should really be focusing on making the rules simpler and encouraging people to save more for retirement.”
How pensions will be taxed on death from April 2024:
ISA tweaks kick in from April…but complexity remains – Tom Selby, director of public policy:
“While it was disappointing the Treasury didn’t grasp the nettle on ISA simplification, various tweaks to the rules will be introduced from April 2024.
“The most significant change will see the rule preventing people paying into more than one of each type of ISA per tax year abolished. This will enable cash ISA savers to open multiple new ISAs as better deals become available, while investors will be able to try out different stocks and shares ISA providers.
“In addition, allowing partial transfers of ISA funds in-year could prove useful for those considering switching provider. Both of these moves feel like sensible, if fairly modest, improvements to the regime.
“Similarly, increasing the opening age for an adult ISA to 18 removes the loophole which allowed 16 and 17-year-olds to benefit from both the £9,000 Junior ISA allowance and the £20,000 ISA allowance available to adults. That means there’s a short window in the first few months of 2024 for anyone who is aged 16 or 17 to take advantage of this loophole before it is closed.
“Allowing fractional shares to be held within ISAs also feels like a logical step as it will potentially enable those with smaller funds to invest directly in a wider range of listed companies. Although we still await clarity as to how this will operate, what will be permissible and when.
“Illiquid long-term asset funds, or ‘LTAFs’, will also be made available via ISAs from April, although only through Innovative Finance ISAs. This is a fairly niche product and it is unlikely large swathes of investors will flock to them as a result of this change. Anyone considering investing in illiquid assets such as LTAFs through their ISA needs to fully understand what they are getting into and the associated risks.”
Dividend and Capital Gains Tax allowances cut (again) in April – Laura Suter, director of personal finance:
“Many investors and company directors will be hit with higher tax bills once again from April, as the government slashes the tax-free dividend and capital gains tax allowance for the second year in a row. It means the amount of dividend income you can receive before paying tax will be cut from £1,000 to £500, while the tax-free amount for capital gains will be chopped from £6,000 to £3,000.
“The move means that a higher-rate taxpayer taking home more than £1,000 in dividends each year will pay £168.75 a year more in tax. It will also drag more people into the taxman’s reach, with many of those receiving between £500 and £1,000 a year in dividends paying the tax for the first time.
“A higher-rate taxpayer banking a capital gain at the current limit of £6,000 will pay £600 a year more in tax thanks to the cut in the CGT allowance. This rises to £840 for a higher rate taxpayer locking in gains on a second home, thanks to the additional rate of CGT on property.
“Anyone with capital gains allowance remaining this tax year should consider banking gains up to their allowance and potentially using a Bed and ISA service to move that investment into their ISA where it is sheltered from tax. Alternatively, they could transfer the assets to their spouse to make use of any of their unused allowance.”
National Insurance rates to be cut in January and April – Laura Suter, director of personal finance:
“The National Insurance rate for employed people will be cut from 6 January, from 12% to 10%, in a move that is estimated to cut taxes for 27 million working people. The cut will save someone on a £30,000 salary around £350 a year, while anyone earning more than the £50,270 threshold will save the maximum of £754 a year.
“The government will also cut rates for self-employed workers, but that won’t come into effect until 6 April next year. At that point the Class 2 band of National Insurance will be abolished, saving workers £179.40 a year at current rates. And the rate for Class 4 contributions will be cut from the current 9% to 8%.”
Rail fares increase in March – Laura Suter, director of personal finance:
“Usually rail fares rise in January, bringing misery to commuters in a cash-strapped month. But for the past few years the government has delayed the fare increases until March – and it will do the same in 2024.
“However, it hasn’t revealed yet what price increase will be dished out. Typically, the July measure of the Retail Prices Index of inflation was used to set the increase in rail fares, which would see tickets go up 9% next year. The government has said it won’t rise by this much – but hasn’t said what they will base the fare increase on.
“The government faces the difficult balancing act of hiking prices sufficiently, without putting off passengers by increasing fares so much they turn to their car instead. government regulation only covers around half of all tickets, including season tickets, so rail passengers using other tickets could still see inflationary-level increases.”
New childcare support phased in from April – Laura Suter, director of personal finance:
“Parents of children born in April 2022 or before will be eligible for 15 hours of free childcare from April, as the government rolls out its expanded childcare scheme. Parents who are eligible can start applying from 2 January for the free hours. The scheme is open to working parents who earn less than £100,000 a year – and is an expansion of the current system, which means that parents of 3 and 4 year olds are entitled to free hours.
“From September 2024 the scheme will be expanded further, meaning that working parents of children as young as nine months old will be eligible for 15 hours – before that’s extended to 30 hours from September 2025.”
Minimum wage rises in April – Laura Suter, director of personal finance:
“The minimum wage will rise by more than £1 an hour from April, from £10.42 to £11.44 an hour. It’s a pay rise of £1,856 a year for someone working full time on the minimum wage and will take their annual salary to £20,820 a year*.
“Younger earners will benefit even more, as those aged 21 and over will now be eligible for the full rate of minimum wage – currently they get a reduced rate until they reach the age of 23. It means that a 21-year-old will see the minimum wage rise from £10.18 now to £11.44 from April.
“While the government sets the rate for minimum wage, it’s businesses around the country that deliver it. While the pay boost is welcomed by workers, some companies have already said the extra cost will squeeze their already stretched finances.”
*Adult age over 23 working a 35 hour week
Average fuel bill rises to (almost) £2,000 in January – Laura Suter, director of personal finance:
“Everyone faces higher energy bills from 1 January, as the energy price cap will increase again. The move will take the average bill to £1,928 – although in reality lots of people will pay far more if their energy use is above average.
“The rise from the current £1,834 a year works out as an extra £94 a year, or £7.83 a month.
“While average energy costs are lower than last winter, many households will be paying higher bills as they are no longer getting the universal £400 government handout they received last winter. Some people will be eligible for Cost of Living payments that will help with those cost increases, but these are ending soon (see below).”
Most council tax bills to rise by 5% in April – Laura Suter, director of personal finance:
“Council tax rates will rise in April and the increase will vary depending on the local authority – but many are expected to hike bills by a large amount. Lots of councils are struggling with funding, and seven have effectively declared themselves bankrupt. It means that more will be looking to chunky increases in council tax as a key way to raise money. If rates increase by 5% it means the average Band D property in the UK will go from paying £2,065 to £2,168 a year for council tax.”
Last cost-of-living payments arrive in February – Laura Suter, director of personal finance:
“The final cost of living payments will be made in February, with those on certain benefits getting a £299 payout. The payment will be made to those who were eligible for Universal Credit, tax credits, pension credit and some other income support in a period during November and December 2023. The payments will then be made in February, marking the end of the government’s handouts.
“The government hasn’t floated the idea of issuing more payments, and with inflation figures easing and energy prices dropping, it’s unlikely the package of support will be repeated next winter.”