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Looming tax threat could boost savings

In the most important speech of his life, the Chancellor has ignited significant political debate on the UK economy.

While introducing an immediate fiscal stimulus by cutting taxes in the current financial year, he has nevertheless also announced very substantial tax increases for the future. However, it is uncertain whether a reduction of about 2 per cent in high-street prices will have the desired effect of increasing consumer spending. When conjoined with other economic developments, it is unclear whether instead it will, in fact, encourage medium to long-term savings as clients bolster their financial security as a defence against future personal financial difficulties.

Alistair Darling has also continued his predecessor’s approach to the UK tax system by adding significantly to its complexity.

He has announced the future creation of two new income tax rates of 37.5 per cent and 45 per cent for dividend and other income. In yet another attack on trusts, these rates will also apply to accumulated trust income. He has also announced the future introduction of the highest marginal tax/NIC rates seen for 20 years of as much as 61.5 per cent. These high marginal rates are created by the partial or complete withdrawal of personal allowances for those whose income exceeds 100,000 a year.

This increased complexity in the market for retail financial services will undoubtedly continue to drive consumers’ need for advice. This will in turn be good news for financial advisers. Financial advisers have a crucial role to play in helping their clients make the most of the opportunities that arise from a changing tax regime.

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