22nd August 2019

New prime minister, new tax policies

July ended with a new prime minister in Boris Johnson and a new chancellor in Sajid Javid, both with different ideas from their immediate predecessors.

There is already speculation about what Mr Javid might produce in his first Budget and more importantly, what some much publicised tax proposals could cost.

At the start of his campaign, Boris Johnson’s main tax proposal emerged as raising the higher rate threshold to £80,000 from its current £50,000 level and applying the same increase to the ceiling for full rate National Insurance Contributions (NICs). The combination was potentially unwelcome news for high earners north of the border, as Scotland currently sets their own higher rate threshold (£43,430 in 2019/20), but not the NICs limit.  

In the rest of the UK, the proposed reform would boost income for about 3.6 million people, according to calculations made by the Institute for Fiscal Studies (IFS). The biggest winners would be pensioners with income of over £80,000, who would save up to £6,000 of income tax, but not suffer the extra NICs of up to £3,000.

The IFS calculated that three quarters of the fall in tax liabilities would go to those in the top tenth of the income distribution. It also assessed the cost of the changes at a net £9 billion, the financing of which Mr Johnson did not address. 

Later in his campaign, the prime minister appeared to backtrack on his tax proposals which became ‘an ambition’ and up for ‘debate’. He then switched to focus on reform of stamp duty land tax, including cuts to the higher rates and considering the switch of the tax liability from the property purchaser to the seller. A range of other spending priorities has emerged since Mr Johnson took office, not least of which is increased spending against a no deal Brexit.

We may have a clearer idea of Mr Johnson’s actual tax and spending plans in September – there are already suggestions of an emergency pre-Brexit Budget as ‘insurance’ against the consequences of a no-deal exit. In the meantime, the situation is as it was under Mrs May and Mr Hammond: if you wish to save tax, rely first on having the right personal planning in place. 

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

18th July 2019

When it comes to funds, the best advice is personal

The recent problems with the suspension of dealings in a heavily promoted UK equity income fund have exposed the blurred line between advice and guidance.

According to the Investment Association (IA), there are around 3,500 funds on sale in the UK. The IA sorts these into over 30 individual investment sectors, although about 10% are listed as being in the unclassified sector. Faced with such a large choice, understandably many private investors want some help in making their fund selections. The assistance they receive has come under the spotlight following the recent suspension of trading in the Woodford Equity Income Fund (WEIF).

WEIF’s manager, Neil Woodford, established a strong track record with Invesco Perpetual before leaving the group in 2014 to set up his own fund management business. Unsurprisingly, a large amount of money followed him to his new company. He was helped by a common feature of today’s fund marketplace: favoured fund lists. These typically consist of 50 –100 funds, spread across those 30+ IA sectors, chosen by firms whose main business is marketing funds to the public. The criteria for selection are not always specified, but there is often a heavy reliance on past performance. However, there is one aspect that is clear: if you pick a fund from the list, then it is you who are making the choice.

Favoured fund lists do not constitute personal financial advice, even if may investors think that is what they are receiving. At best they are a form of general guidance, attempting to sort some of the wheat from a large volume of chaff. A select list only supplies the selector’s opinion at the time. It does not offer you a recommendation based on your personal circumstances, including consideration of the other investments you hold, whether held directly or indirectly, e.g. via pensions. Nor does the provider of the list offer any ongoing support, an important factor in current market conditions.

There is a role for recommended fund lists, but there is no substitute for personal, regularly reviewed advice on your investments. 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 June 2019

Dividends wobble with 40% cuts

Recent dividend announcements have been an unwelcome reminder for some investors that peaks also have downsides.

Dividends matter to investors in UK shares. The UK stock market has historically been one of the higher yielding of the world’s major share markets. For example, on 24 May the average dividend yield in the UK, based on the FTSE All-Share Index, was 4.26% against just 1.94% across the Atlantic, as measured by the  S&P 500 Index.

The high level of dividends has made UK equity income funds a popular sector, a factor helped by over ten years of sub-1% base rates. As many investors, both individual and institutional, rely on dividend income, UK listed companies are extremely reluctant to cut their dividend payments, even when declining profits suggest they should do so.

While the UK market as a whole has a high dividend yield in terms of payments made, a handful of companies dominate. The latest survey from Link Asset Management (LAM) showed that in the first quarter of 2019 just over half of the total £19.7bn dividends paid out originated from only five companies. Number five in the top payers table was Vodafone, the telecoms company.

In May Vodafone announced that it would be making a 40% cut in its dividend. It was followed later in the month by Royal Mail also revealing a cut in its dividend of 40%. On the same day as Royal Mail wielded the dividend axe, Marks and Spencer confirmed the 40% reduction in its dividend it had revealed earlier this year. All three companies have had a strong following amongst private investors thanks to their (previous) high dividend yield and household name recognition. The trio have also each had their own structural problems, but they are not alone. For instance, many experts think Centrica, the owner of British Gas, will soon be forced to cut its generous dividend.

The lesson from May’s dividend cuts and LAM’s dividend concentration figures is that dividend data are not always what they seem. If you are looking for an income investment from UK (or overseas) shares, you need to understand the facts behind the numbers. Please get in touch  if you may be affected by dividend reductions.

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.

10th June 2019

Pension flexibility: too taxing for many

Recent HMRC statistics highlight the over-taxation of some pension benefits.

More than one million people have received flexible pension payments thanks to  therules introduced just over four years ago. HMRC’s most recent statistics, to the end of March 2019, show that 1,113,000 people have withdrawn over £25,600m from their pensions, across 6,136,000 payments. The amounts withdrawn and the number of payments have both increased each tax year – in 2018/19 there were over 2,400,000 payments totalling £8,180m.

However, the system is causing some problems for HMRC. In the first quarter of 2019 HMRC refunded £31.1m of overpaid tax to over 12,500 people who had used pension flexibility. The over-collection is a result of HMRC’s insistence on using emergency tax codes where a pension provider does not have a current tax code for the individual, which is usually the case on a first withdrawal. More often than not, emergency tax codes create too high a tax deduction, as the example shows.

Emergency, Emergency!

Graham expects to have an income of about £28,000 in 2019/20. He decided to draw £24,000 from his pension plan as an uncrystallised funds pension lump sum (UFPLS). He knew that a quarter of this would be tax free, with the £18,000 balance taxable. As that would still leave him comfortably below the £50,000 higher rate threshold, he expected to receive £20,400 as a net lump sum (£24,000 – £18,000 @20%). 

In fact, he received £17,619 because an emergency tax code was applied to the taxable element of his UFPLS.

The excess tax can be reclaimed and HMRC has created dedicated forms to speed up the repayment process. In theory if no reclaim is made, the tax should eventually be refunded once HMRC undertakes its end of year reconciliation – but that could mean waiting over 12 months if the payment is taken early in the tax year. 

If you are thinking about using pension flexibility, it pays to take advice before asking for the payment. In some circumstances the emergency code issue can be sidestepped, but if it cannot, then you need to be aware of what you will receive initially and the process of tax reclaim.

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.

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

16th May 2019

Doctors tapering off as pension tax rules bite

Measures designed to limit the cost of pensions tax relief to the Treasury are having some unwelcome consequences, as some senior doctors have found their incomes disappearing.

Some members of the medical profession have found changes to legislation mean their earnings are getting swallowed up by the tax system. According to a recent Financial Times report some NHS consultants are being landed with tax bills of up to £87,000, prompting them to reduce working hours or even take early retirement.

The doctors’ problems primarily stem from the implementation of the pension annual allowance tapering rules. These have two key trigger points:

  • ‘Threshold income’ (broadly speaking total income from all sources, less personal pension contributions) exceeding £110,000; and
  • ‘Adjusted income’ (broadly total income from all sources plus employer pension contributions) exceeding £150,000.

If both levels are crossed, then the standard annual allowance for pension contributions of £40,000 is reduced by £1 for each £2 by which ‘adjusted income’ exceeds £150,000, subject to a minimum annual allowance of £10,000. The all-or-nothing nature of the triggers can mean that just an extra £1 of earnings brings the taper rules into play. That additional £1 could therefore result in an additional tax bill of much more than £1.

To complicate matters further, £110,000 sits almost in the middle of the band of income between £100,000 and £125,000 at which the personal allowance is tapered away, creating an effective marginal tax rate of up to 60% (61.5% in Scotland). Added to that will usually be 2% national insurance contributions.

The Financial Times article said that many doctors had been ‘surprised’ by their pension tax bills. This implies they had not sought personal financial advice on how the pension taper rules, introduced from April 2016, would affect them.

There are ongoing discussions between the Treasury and the Department for Health and Social Care about the issue, but it seems highly unlikely the former will forgo the revenue generated by the annual allowance rules (over £560m in 2016/17).  In the meantime, the episode serves as a reminder of the importance of regular financial reviews to avoid – or at least be aware of – the growing range of tax traps in the UK’s labyrinthine tax legislation.

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

15th April 2019

Living longer, but…

A recent report shows that life expectancy is still improving, but not as quickly as was once expected.

“British life expectancy falls by SIX MONTHS for men and women”

That was one recent headline in response to the latest report of the Continuous Mortality Investigation (CMI) of the Institute and Faculty of Actuaries. While it was not inaccurate, like many such headlines it was open to misinterpretation.

The CMI research suggested that mortality improvements had slowed down from over 2% a year between 2000 and 2011, to about 0.5% now. The CMI was not the first to notice the trend. The Office for National Statistics, some large insurance companies and pension providers have all made similar observations.  Various possible reasons have been put forward, including a fading benefit from the reduction in smoking, the impact of austerity and the spread of obesity and diabetes.

The life expectancy for a pension scheme member aged 65 is now 21.9 years for man and 24.2 years for women, according to the CMI.  These are effectively averaged numbers, so there is roughly a 50/50 chance that today’s 65 year old pensioner will live longer, even if the CMI’s current calculations prove to be perfectly accurate in 20+ years’ time.

Whether or not the CMI turns out to be 100% correct, there is little doubt that the timescales involved mean anyone retiring at 65 today needs to think in terms of drawing their pension for at least a couple of decades. If you are approaching retirement, that should serve as a reminder of the importance of establishing the right long term structure for drawing your future income. Make the wrong decision and it could be hanging over you for the next 20–30 years.

Footnote: While the CMI uses age 65 as a benchmark, the relevance of that specific age is fading. State Pension Age is no longer 65 but is now about 65¼, on a path of phased increases that will reach 66 by 6 October next year.

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.  

10th April 2019

An overshadowed Spring Statement

The Chancellor’s Spring Statement was almost obscured by other events in mid-March.

Ever since he announced a move to an Autumn Budget in 2016, Mr Hammond has made it clear that he wanted to avoid the Spring Statement counterpart becoming a mini-Budget. His vision was that in March he would be presenting a brief response to the latest forecasts from the Office for Budget Responsibility (OBR). As the Treasury website stressed, “there will now only be one major fiscal event each year”.

Nevertheless, it is unlikely that either the Treasury or the Chancellor wanted the Spring Statement to be an event that was completely overshadowed by other parliamentary business occurring on the same day, as it was by the votes on whether to rule out a no-deal Brexit. Ironically, the Chancellor made his statement on the assumption of “a smooth and orderly exit from the EU”.

There were virtually no new tax initiatives in the Statement, although there were hints that a ‘Deal Dividend’ would help in “keeping taxes low” as well as allow increased public expenditure. In the background papers published alongside the Statement, there were reminders that the tax screw continues to be tightened in some areas. For example, Mr Hammond promised a consultation paper putting flesh on two measures announced in the October Budget, designed to restrict two long-standing capital gains tax reliefs on residential property.

The OBR’s calculations explain why Mr Hammond did not mention fresh tax cuts, as opposed to maintaining low tax levels. In this new 2019/20 financial year, government borrowing is projected to increase by £6.5bn and to still be £13.5bn by 2023/24. Income tax and national insurance contribution receipts have been rising faster than expected and are the main reason why the OBR’s overall finance figures looked rosier in March than last October.

As has been the case for some years now, if you want to see your tax bill reduce, the starting point is not to wait for government action, but to review your personal opportunities for improved tax planning

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

11th March 2019

Check your April pay slip

Your April pay may look much the same as March’s, but it is worth giving your pay slip a close look.

If you are an employee, your April pay slip is always worth checking, even if you pay little attention to the other eleven you receive over a year. The items to check include:

Salary Many employers change pay rates from 1 April, often coinciding with the start of their new financial year. If you were notified of a pay increase in March, it is worth making sure the number on the April pay check agrees with what you were promised.

Tax code. Your April pay check will be the first for the 2019/20 tax year and your PAYE tax code will have almost certainly changed from what was on your March pay slip. If you are entitled to a full personal allowance and have no deductions, your code number should increase by 65, reflecting the £650 increase in the personal allowance.

If you have a company car, then it is likely to move your code in the opposite direction. For most cars (other than those with the highest emissions), the percentage of list price that is taxable rises by 3% – £300 per £10,000 of list price. A £22,000 car will therefore more than counter the rise in the personal allowance. The higher scale percentage also means a similar increase in taxable value of employer supplied fuel. In practice you might be better off paying your own fuel bills, even if your employer pays you nothing in compensation.

National insurance contributions (NICs) The primary threshold (that is, the starting point) for NICs rises by £4 a week while the upper earnings limit (the top level of earnings on which you pay full 12% NICs) jumps by £70 a week. As a result, if your annual earnings are more than £46,600 a year, you will be paying more NICs from April. If you earn over £50,000 a year, your extra NICs will be just over £28 a month.

Pension contributions These are generally linked to salary, although not necessarily your full pay, so should increase if you have an April pay increase. If you are in an automatic enrolment pension scheme, your contributions are usually based on “band earnings”, which were £6,032–£46,350 in 2018/19 and are £6,136–£50,000 in 2019/20. The contribution rate will rise, too. How much will depend upon your employer’s contributions: you might see the rate increase by two thirds to 5% of band earnings (4% after basic rate tax relief). If your pay in April is lower than in March, the auto enrolment change could be the culprit.

For more insight on the tax, NICs and pension deductions from your pay and options to limit their impact, please talk to us.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice. 

12th February 2019

Inheritance tax reductions ahead of potential reform

Inheritance tax (IHT) will be slightly reduced for some from 6 April 2019, but greater reforms may arrive soon.

The IHT residence nil rate band (RNRB) increases by £25,000, bringing it to £150,000 for the 2019/20 tax year. In theory that means a married couple can pass on up to £950,000 (2 x nil rate band of £325,000 + 2 x RNRB of £150,000) to their heirs free of tax.

In practice matters are much more complicated, as eligibility for the RNRB comes with a variety of conditions primarily designed to limit the cost to HM Treasury.  

A final £25,000 increase in the RNRB happens in April 2020, increasing the available band to £175,000 and the theoretical IHT-exempt estate up to £1 million. There is some doubt, however, whether this will happen, at least as legislation currently envisages. The reason for that uncertainty is a review of IHT, which the Chancellor requested from the Office of Tax Simplification (OTS) in January 2018.

The OTS review of inheritance tax

The first part of the OTS review was published last November. It detailed over 3,000 responses to their consultation and made a range of proposals for simplifying IHT administration.

The second part of the review, which examines the “key technical and design issues” is due in spring. It would not be surprising if the OTS suggested some reform of the RNRB, which it said, “attracted a lot of comments … due to its complexity and because those who do not have children, or their own home, may not be covered by it”.

One obvious possibility would be to enlarge the nil rate band and scrap the RNRB, but as the OTS noted “any changes would of course involve an Exchequer cost”. Mr Hammond’s predecessor turned down such a suggestion, despite heavy criticism of the RNRB’s legislative complexity.

In the meantime, as the end of the tax year approaches the regular IHT exemptions need to be considered. These are currently:

  • £3,000 annual exemption for gifts;
  • £250 per person small gifts exemption; and
  • The normal expenditure exemption, which broadly speaking exempts any gifts that are:
    • made regularly;
    • made out of income; and
    • do not reduce the standard of living of the person making the gift.

For more information on the exemptions and how they can be used, please talk to us. As with much else in IHT, the exemptions contain their own traps for the unwary.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.  

7th February 2019

Happy birthday to tax-free savings

The arrival of the new tax year on 6 April means it is time to consider your Individual Savings Accounts (ISA) investments, which will celebrate their 20th birthday in April.

Over the last 20 years, the maximum annual contribution has risen from £7,000 per tax year to £20,000 for 2019/20. If you managed to set aside the maximum each tax year since 1999/2000, you would now have placed over £205,000 into ISAs and largely out of HMRC’s reach.

The relatively simple single investment option has also morphed into a range of plans covering everything from retirement planning (the Lifetime ISA) to children’s saving (the Junior ISA).

However, one aspect has been common throughout the ISA’s lifetime: new investment is concentrated at the end of the tax year. For example, in the 2017 calendar year Investment Association data shows that net ISA investment in the second quarter was £1,421 million against a net total of £1,068 million for the entire year (the first and fourth quarter showed net outflows).

This means, if you are in that ‘leave-it-until-the-last-moment’ majority, now is the time to start thinking about your 2018/19 ISA investment.

The benefits of ISAs

Whilst the valueof ISAs has changed over 20 years, as successive Chancellors have altered the tax treatment of interest, dividends and capital gains, the main tax advantages are largely unchanged:

  • There is no UK income tax to pay on interest, whether from cash or fixed interest securities. With low interest rates and the personal savings allowance of up to £1,000, this benefit is less valuable than it once was.
  • There is no UK tax to pay on dividends – This is a more valuable benefit now the dividend allowance is £2,000 and even basic rate taxpayers can face 7.5% dividend tax.
  • There is no capital gains tax on profits.
  • There is no personal reporting to HMRC.

One extra feature added in recent years is the ability to allow ISAs to be effectively transferred to a surviving spouse or civil partner on first death. However, ISAs ultimately remain liable to inheritance tax unless appropriate AIM-listed investments are chosen.

For year end ISA investments and a review of your existing holdings, please contact us.

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.