21st May 2020

All the zeros: five-fold government borrowing expectations

The government could end up borrowing five times as much as it expected on Budget day.

In the Budget on 11 March, the Office for Budget Responsibility (OBR) estimated that in 2020/21, the government would have to borrow about £55bn to make up the difference between what it spent and what would be raised in taxes and other revenue.

A little over one month later, the OBR issued another, vastly different set of numbers, quoting potential borrowing of £273bn or 14% of GDP. This time the OBR was at pains to emphasise that its figures were not a formal forecast but rather “a scenario … based on the illustrative assumption that people’s movements (and thus economic activity) would be heavily restricted for three months and would get back to normal over the subsequent three months”. The second part of the OBR’s scenario of a V-shaped recovery – a sharp fall followed by an even sharper bounce back – was met with some scepticism from other forecasters. Other letters of the alphabet common to economists have been suggested:

  • U-shape – gently picking up before rising sharply;
  • W-shape – a partial rise followed by another dip from a second wave of infections before a final sharp recovery; and
  • L-shape – the economy stops falling, but then flatlines at its new low level.

Whichever proves correct – and none may do so – one near certainty is that in a year’s time the government’s total debt will be close to equaling the size of the UK economy. The corollary is that the Chancellor is going to be in no position to make tax cuts. It is quite conceivable that the Conservative’s manifesto pledge not to increase the rates of income tax, VAT and national insurance contributions (NICs) will have to be dropped.

Rishi Sunak hinted as much in terms of NICs when he launched the Self-employed Income Support Scheme in late March. He said, “I must be honest and point out that in devising this scheme – in response to many calls for support – it is now much harder to justify the inconsistent contributions between people of different employment statuses. If we all want to benefit equally from state support, we must all pay in equally in future.”

The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

17th April 2020

A change to the annual allowance taper

One of the more controversial pension tax rules was slightly reformed in the Budget.

The annual allowance effectively sets your tax efficient limit for the total amount of pension contributions that you and your employer can make in a tax year. If the limit is exceeded, then you essentially receive no tax relief on the excess. That can result in a large employer contribution landing the employee with a tax bill.

The annual allowance was originally introduced at the level of £215,000 in 2006, then rose to £255,000 in 2010/11, before being cut to £50,000 in 2011/12. The reductions were meant to limit the cost of tax relief, but in 2014/15 a further reduction was made to £40,000 and tapering was introduced for high earners from 2016/17. The taper process meant that for the highest earners, the annual allowance was reduced to a minimum of £10,000.

As time has passed, the net cast by tapering rules has captured a growing number of people. Among those have been NHS consultants and GPs, whose NHS pension scheme has generous benefits and thus high (but notional) contributions. As a consequence, some senior NHS staff have turned down additional work, refused promotion or even opted for early retirement.

The Chancellor addressed the issue in his Budget by increasing both the thresholds relevant to taper by £90,000. In 2020/21, nobody with total income of up to £200,000 (after deducting personally made pension contributions) will be subject to the tapering rules. However, there are some losers from the Budget changes, as the minimum annual allowance has been cut to just £4,000 for the highest earners.

There had been rumours of more radical changes to pension taxation, such as limiting tax relief on contributions to basic rate only. These might still appear in the Budget due in Autumn. In the interim, if you have been affected previously by taper relief, you may now be able to increase your pension contributions.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

17th April 2020

Quarter of the unexpected – the markets’ story

The first quarter of 2020 was a traumatic one for investors.

Index 2020 Q1 Change
FTSE 100 -24.8%
FTSE All-Share -26.0%
Dow Jones Industrial -23.2%
Standard & Poor’s 500  -20.0%
Nikkei 225 -20.0%
Euro Stoxx 50 (€) -25.6%
Shanghai Composite -9.83%
MSCI Emerging Markets (£) -18.7%

Data calculated from https://uk.investing.com/indices/major-indices

2020 started off well enough. Until the middle of February, most global share markets were flatlining as the year got under way. Then the coronavirus (Covid-19) outbreak suddenly expanded from a localised epidemic in Wuhan into a global issue. The reaction of most major stock markets was reminiscent of a certain Looney Tunes scene where Wile E Coyote races past the Road Runner only to find he has run off the edge of a cliff and his frantically spinning legs are taking him nowhere but straight down.

The quarterly performance of both the UK FTSE 100 and US Dow Jones Index was the worst since the final quarter of 1987 (when the UK experienced the Great Storm). No major markets escaped the impact of the virus, with most entering what the pundits label as bear market territory – a fall of 20% or more. Ironically, one of the best performing markets was China, where the Shanghai Composite fell less than 10%.

In response to the threat to global growth, central banks cut interest rates (where they could), returned to quantitative easing (QE) and promised variations on “whatever it takes”, the famous words of a former European Central Bank boss, Mario Draghi. Governments also took action, with many introducing employment support programmes (such as the UK’s Coronavirus Job Retention Scheme) and offering cheap finance and cash grants to businesses hit by the widespread lockdown.

It is wise to treat with scepticism any statements which claim to be able to predict what happens next. The form of the recovery – and there will be one at some indeterminate point – will determine how long the effects last.This uncertainty means that any changes to investment portfolios need to be approached with caution and only after taking expert advice.

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested.

 Past performance is not a reliable indicator of future performance.  

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

18th March 2020

The regulator identifies potential ‘areas of harm’ for investors

With individual investors now exposed to direct marketing of some products, the UK financial regulator has spelled out which parts of the personal investment market it is most worried about.

“Sustained low interest rates have suppressed returns in safer asset classes, resulting in many consumers deciding to take on more risk in the search for yield. It has led to some being tempted by promised returns from high risk, and sometimes fraudulent, investments.”

So says the Financial Conduct Authority (FCA) in its document ‘Sector Views: Key areas of harm identified’, published mid-February. What the FCA is describing in formal terms is how private investors looking for an income from their capital are being forced to look beyond deposit accounts and opening themselves up to more risk in doing so. The extent of that additional risk is not always evident to investors who haven’t sought professional advice, as has been evident in the fall out from London Capital & Finance (LC&F).

LC&F promoted ‘mini-bonds’, which themselves are not directly regulated by the FCA. In the wake of LC&F’s demise in December 2018 amid investor losses, the FCA introduced new rules to prevent the mass-marketing of such products to the general public. However, the ban did not come into effect until the start of 2020 and is only for 12 months while the FCA consults on permanent rules. According to the FCA, by the end of 2018, “1.2% of British adults held retail or mini-bonds – many with little regulatory protection.”

The regulator recognises that “…risky investments have been directly targeted at consumers, leaving them more directly exposed to risk”. The direct approach means that the ‘consumer’ is not offered any regulated advice and will not receive any unless they talk to a financial adviser. Without advice, the adage that ‘if it looks too good to be true, it probably is’ does not seem as be as effective as it once was. That is probably another consequence of ultra-low interest rates.

If you find yourself considering an investment that offers higher returns than normal, especially if it is being directly promoted, remember that adage. Then, if you are still tempted, make sure to take independent advice before acting (not the other way around).

11th February 2020

Last call for 2016/17 on your annual allowance…

The clock is ticking on using up your pension annual allowance

The allowance effectively sets the maximum pension contributions from all sources (including your employer) on which you may be able to claim income tax relief. In recent times it has been the subject of much controversy because of the way the allowance is tapered from the ‘standard’ £40,000 to as little as £10,000 for high earners.

One reason why the taper rules have come to the fore is another aspect of the annual allowance which has received far less press coverage: the carry forward rules. These allow you to mop up unused annual allowance from up to three tax years ago – i.e. from 2016/17 onwards during the 2019/20 tax year. In theory this could mean that, before 6 April 2020, tax-relievable pension contributions of up to £160,000 could be made (£40,000 a year for 2016/17 – 2019/20 inclusive).

As you might expect, there is some complex legislation setting out how carry forward operates. For example:

  • You must have been a member of a registered pension scheme in the tax year from which any unused annual allowance is carried forward. However, you (or your employer) do not have to have paid any contributions or accrued any benefit during those years, nor do any carried forward contributions have to be made to that scheme.
  • You must have covered an effective ‘entry fee’ of contributions equalling your annual allowance for the current year, i.e. £40,000, if you are not caught by the taper regime.
  • The carry back goes to the oldest tax year first and then works forward.
  • All tax relief is given in the current tax year, not the year to which the unused allowance relates.
  • Carry forward is not available if, at any time, you have taken advantage of the 2015 pension flexibilities to draw from any pension arrangement.

Calculating how much can be carried forward is sometimes a difficult exercise, requiring detailed contribution records, so if you want to beat the deadline for using up your remaining allowance from 2016/17, start seeking advice now.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

20th January 2020

New government, new tax targets?

How will the new government affect your financial planning?   

December’s general election delivered a Conservative government with the sort of majority which consigns the knife-edge parliamentary battles of recent years to the past. So what will the new government do, apart from “get Brexit done”?

A look at the Conservative manifesto, easily the shortest of the three main parties, gives some limited clues.

Income tax There was a promise of no increases to income tax rates – although it is worth remembering that this does not extend to Scotland and Wales, which can both set their own rates. While Boris Johnson had talked about an £80,000 higher rate threshold during his campaign to become party leader, this idea did not reach the manifesto.

National Insurance Contributions (NICs) A no rate increase promise also applies to NICs, however, this may prove difficult to square with the abolition of class 2 self-employed contributions, which has been regularly deferred. The manifesto also promised an increase in the national insurance threshold to £9,500 in 2020/21 from the 2019/20 level of £8,632. That is worth a theoretical maximum saving of £104 a year for an employee (and £78 for the self-employed). The true saving is smaller, as the threshold would have risen to £8,788 through normal inflation linking. The manifesto expressed an ‘ultimate ambition’ – with no date specified – to raise the threshold to £12,500 (matching the current personal income tax allowance).

Social care After the problems Boris Johnson’s predecessor encountered on this topic during her election campaign, the manifesto (and Queen’s Speech) gave few clues beyond a commitment to build a cross-party consensus to solve the problem of funding social care. One condition of that solution would be that nobody needing care should be forced to sell their home to pay for it.

Corporation tax The rate cut from 19% to 17%, which was legislated to take effect from April 2020, will no longer happen.

The change in the NICs threshold represents over two-thirds of the tax cuts promised in the manifesto over the next four tax years. The financial picture should be made clearer in March, when the long-overdue Autumn Budget will now be delivered. In the meantime, if you want to see your tax bill fall, the solution looks to be in your own hands, not the Chancellor’s.

Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

14th November 2019

What price our tax reliefs?

When you look at your annual tax statement, have you ever wondered about the overall cost of the tax reliefs you enjoy? HMRC has published its latest annual assessment of the cost of various tax reliefs, and there are some eye-opening numbers. 

If you were the Chancellor of the Exchequer, looking for a way to squeeze some extra money out of taxpayers, you might well start by examining what the Treasury ‘loses’ as a result of the many different tax reliefs granted. In October HMRC published just the information you need in a new set of cost estimates for the main reliefs.

The reliefs are split into two categories:

  • Structural, which as the name suggests are largely integral parts of the tax system, such as the personal allowance and inheritance tax nil rate band.
  • Non-structural, which are reliefs HMRC says are designed “to help or encourage particular types of individuals, activities or products in order to achieve economic or social objectives”. Examples include the tax reliefs for ISAs and the capital gains tax main residence exemption.  

By far the most expensive relief is the personal allowance, which carries a price tag of £113bn in 2019/20. To put that into context, cutting basic rate tax by 1p in the pound would cost the Treasury about £5.6bn. The £100bn+ cost has already prompted one think tank to suggest that the personal allowance should be scrapped, with the savings redistributed so that less benefit goes to higher rate taxpayers.

After the personal allowance, the combined income tax and national insurance contribution (NIC) reliefs given to pensions is the second most costly ‘giveaway’. Income tax reliefs are worth £21.2bn in the current tax year, with the NIC exemption for employer pension contributions adding another £18.7bn. A total cost of almost £40bn explains why cuts to pension reliefs are so often on the list of Budget rumours.

HMRC’s latest tally includes no less than 362 non-structural reliefs, although only just under a third of that total are costed. It is little wonder that tax saving opportunities are overlooked, given that large number. When we do get to the post-election Budget, a new government may need to balance generosity with revenue-raising even more carefully. All the more reason to take professional advice …

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

25th October 2019

Interest rates back on the slopes

In September the US and European central banks cut interest rates, again.

When the US central bank, the Federal Reserve, cut its main interest rate by 0.25% at the end of July, it was the first reduction in over 10 years. Less than two months later, the Fed announced a second cut by another 0.25%.

The Fed’s move followed on from a rate change at the European Central Bank (ECB). Here, the main rate was left unchanged (at 0.0%), but the negative rate applied to deposits made by commercial banks was moved from -0.4% to -0.5%. A bank leaving €1m with the ECB for a year will have to pay €5,000 for the privilege.

The Bank of England kept its interest rate unchanged at 0.75% in September, not least because, like the rest of the UK, it is waiting to see what happens on the Brexit front. Investors in government bonds appear to be expecting further rate cuts as the return available on gilts maturing in six months to 12 years’ time is less than the current base rate.

The central banks are worried about a slowing global economy and the risk of a recession. They are less concerned about their nations’ savers. This stance was highlighted in a headline in Bild, Germany’s best -selling newspaper, which took aim at Mario Draghi, the head of the ECB: “’Count Draghila is sucking our accounts dry’.

Depositors in the UK are not yet facing negative interest rates, although there are plenty of bank and building accounts (including ISAs) closed to new business which pay next to nothing (e.g. 0.1% for the Halifax Bonus Gold account). At the time of writing, the best rate available for instant access was 1.61% from a sharia account, compared with the latest published CPI inflation rate (for August) of 1.7%.

There are still income yields of 4% and more available – for example the average UK share dividend yield at the time of writing was 4.23%. However, the higher income comes with greater risk to capital, making independent investment advice essential. There has been evidence enough just this year, in the problems at London Capital and Finance, that chasing the highest yields without advice can be a dangerous strategy.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

20th October 2019

Annuity rates hit 25-year record low

Annuity rates hit their lowest level since 1994 in September, with implications for those making retirement decisions.

Since the introduction of pensions flexibility in 2015, annuities have become much less popular as a way of converting a pension fund into income. The most recent figures from the Financial Conduct Authority show that over five times as much money is placed in income drawdown now as goes towards annuity purchase.

Now annuity rates have been back in the news, with several press reports citing calculations from the Moneyfacts comparison website that rates had hit their lowest level in 25 years. According to the data, a 65-year-old purchasing an ordinary pension annuity, with no increases in payment and no minimum payment period, could expect to receive just 4.1% – £410 a year per £10,000 of investment. That was a significant drop from the start of 2019, when an extra £58 a year was on offer.

In the short term, the cause of the annuity rate decline has been the drop in long-term interest rates since January. For example, the yield on a 15-year UK government bond fell from 1.56% at the start of the year to 0.86% by mid-September. This fall in long-term rates has been a global phenomenon, resulting in negative interest rates spreading to many international bond markets.

The longer term fall in annuity rates also reflects declining interest rates, which have been on a multi-decade downward path. In addition, increased life expectancy has put downward pressure on annuity rates, although this effect has receded latterly as recent statistics have suggested life expectancy improvements are flatlining.

The preference for drawdown, however, comes with investment and mortality risks – investment returns may be below expectations and/or you may outlive your pension pot. If nothing else, the annuity rate can provide a benchmark against which to consider the rate of income withdrawals.

If you are approaching retirement, make sure you take advice before dismissing annuities completely, especially if you are risk averse or will have few other sources of retirement income.

If you are some way from retirement, remember that 4.1% figure when you think about how much you want to contribute to your pension. After all, at 4.1% a £25,000 pension annuity – with no inflation protection or spouse’s benefits – will cost about £610,000…

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  The value of tax reliefs depends on your individual circumstances.

18th September 2019

Who are the top 1% of income tax payers?

A recent report looking at who pays the most income tax reveals some interesting findings.

The Institute for Fiscal Studies (IFS) published a briefing note in early August with a detailed answer to the question of what it takes to enter the 1% club. Around 310,000 people make up this cohort, with some predictable and not so predictable traits:

  • They have taxable income of at least £160,000 in 2014/15. The historic nature of the data reflects both HMRC’s systems and the fact that the 2015/16 numbers were distorted by the introduction of new dividend tax rules in the following year.
  • Typically, they are male aged 45–54 based in London, with an additional £550,000 of income. To quote the IFS, the 1% club is “disproportionately male, middle-aged and London-based”.
  • They live in 10% of the 650 parliamentary constituencies, which contain half of the top 1% population. In 2000/01, 78 constituencies were needed to reach the halfway mark.
  • They have over a quarter of their income made up from partnership and dividends, as the pie chart shows. This reflects the fact that many are business owners.
  • They manage fluctuating income levels. The top 1% is not a stable group, which may be some solace if you do not currently have the necessary membership credentials. The IFS found that roughly a quarter drop out each year and only half remain for five consecutive years. The corollary is that there is a much higher chance of being in the top 1% at some point in your life than in any given year. The IFS calculated that 3.4% of all people (and 5.5% of men) born in 1963 were in the top 1% at some time between 2000/01 and 2015/16.

However, being a member of the 1% taxpayers club also means accounting for 27% of all income tax collected by HMRC. So failing to qualify may reflect some careful and expert financial planning…

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.