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Prepare for the new tax year

Taking some time to start planning for 2021/22 now can be worthwhile. 

While there is often a focus on planning for the end of the tax year, much less attention is paid to the start of the tax year. The lack of an obvious deadline is probably one reason – deadlines tend to concentrate the mind. Nevertheless, some planning at the beginning of the year can be a rewarding exercise.

  • Estimate your total income for 2021/22 – If you have a rough estimate of what your income will be, it will give you an idea of what to watch out for and what each extra £1 of gross income will be worth. For example, if your estimate is around £50,000, that means you are on the borders of higher rate tax (or well into the 41% band if you are resident in Scotland). £50,000 is also the threshold at which the child benefit tax charge comes into play.

  • Check whether you will cover your allowances – The allowances to which you are entitled often depend upon your income, although the £2,000 dividend allowance applies universally. Couples have the opportunity to cover two sets of allowances, possibly by transferring investments between each other or changing from single ownership to joint ownership.

  • Check your PAYE code – If you have received a 2021/22 PAYE coding, check that it is correct. The wrong code could mean you pay too much tax during the year.

  • Top up your ISA – If it makes tax sense for you to invest in an ISA because of the potential income and capital gains tax savings, then the time to do so is as soon as possible, not just as the tax year end approaches.

  • Consider making pension contributions – The sooner your contribution is invested, the longer it benefits from a tax-favoured environment and the less likely it is to be ‘lost’ in other expenditure.

For more 2021/22 tax planning, talk to us now… not March 2022.

 

 

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 investments can fall as well as rise. You may get back less than you invested.

Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.

Four financial lessons from the Covid-19 pandemic

As the pandemic enters its second year, what have we learned?

The World Health Organization declared Covid-19 a pandemic on 11 March 2020, coincidentally the day that Chancellor Rishi Sunak presented his first Budget. At the time, the Chancellor announced a £12bn stimulus to counter the impact of the pandemic. By November, the Office of Budget Responsibility was estimating the cost had reached £280bn.

The last year has been a traumatic one in which much has changed, perhaps never to revert to the old ‘normal’. It has also provided some useful financial lessons:

  • Make sure you have an up-to-date will – Early on in Lockdown 1.0 the importance of having an up-to-date will (or, in some cases, any will) was highlighted to many people just as it became difficult to arrange one.  
  • Relying on a state safety net is dangerous – The pandemic saw the number of Universal Credit (UC) claimants more than double to 5.8 million in the year to November 2020. The lowly level of benefits – even after a £1,000 temporary uplift – was a shock for many of those new claimants, including people who fell between the gaps in the job support schemes.
  • Keep an adequate cash reserve – In a world of near zero interest rates, you may be reluctant to leave cash on deposit, earning next to nothing. However, cash gives you valuable flexibility and time to react to changed circumstances.  
  • Don’t panic – The UK’s FTSE 100 hit its low for 2020 on 23 March, the day that the Prime Minister launched Lockdown 1.0. It was a dark time, but any investor who panicked and sold up at that point, when the FTSE 100 was below 5,000, would have chosen the worst time to pull out. By the end of 2020, the index was 29.4% above its March nadir. That performance was also a reminder of another lesson: market timing is almost impossible.

If any of that quartet resonate with you, will you be ready for next time?

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.

UK dividends: A bad 2020, but a better 2021?

New data show how far UK dividends fell last year, but projections for 2021 suggest the declines are nearly over.  

In January 2021, Link Asset Services published its latest UK Dividend Monitor covering the final quarter of 2020 and the year as a whole. The headline figure was that total dividends fell by 44% over the year, equating to £48.7bn less dividend income received by investors in 2020 than in 2019. In fact, the level of dividend payments in 2020 was just £0.1bn higher than in 2011.

The decline in payments was spread across sectors with around two thirds of companies either cancelling or cutting their dividends between the second and fourth quarter of the year. Within that broad decline, three factors accounted for almost 75% of the lost income:

  • The financial sector cut or cancelled £16.6bn of dividends. Early in the pandemic, the Bank of England told all the major banks to suspend dividend payments. HSBC, which in 2019 was the second largest dividend payer, did not pay a cent in 2020 (it declares dividends in the US currency, not sterling).
  • The oil sector cut its dividend payments by £8bn in 2020, with two household names, BP and Shell, leading the charge. The oil price fall was a contributing factor, but there was probably also some opportunism. The pandemic gave BP and Shell, along with many other companies, cover for reducing dividend levels that had become increasingly unsustainable.
  • Special dividends – one-off payments usually associated with corporate restructurings – crashed from £12bn in 2019 to just £0.8bn in 2020.

2021 started with another lockdown in force, but in Link Asset Services’ comments on the outlook for the year, it does not envisage any further dramatic falls in dividends. For a start, the Bank of England has said the banks can resume dividend payments, albeit subject to tight constraints. Any company that wanted to ‘rebase’ its dividend has probably done so by now. Add those two factors together and Link’s best case is that dividends could rise by 10.0% this year, while its worst case is a decline of 0.6%.

Last year’s dividend performance may have been grim, but the dividend yield on the UK stock market is still around 3.25%, which in the current environment is not easy to beat.

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.

New rules on pension drawdown and investment

From February new rules apply if you choose pension drawdown but do so without taking advice. 

The Covid-19 pandemic has deferred many events of all sizes, from the Tokyo Olympics to millions of foreign holidays. One of the less prominent delays has been a change to the Financial Conduct Authority (FCA) rules on pension drawdown.

Back in June 2018, the FCA issued a consultation paper following a two-year review of the impact of the Pension flexibility reforms introduced in 2015. One aspect which particularly concerned the FCA was those pension owners who, having received various prompts to seek advice, decided to access their pensions through drawdown without taking advice. The FCA found:

  • Many of these individuals were solely focused on taking their tax-free cash and paid little or no attention to the investment of the remaining funds to be used for drawdown.
  • Around one in three were unaware of where their drawdown money was invested. Many others only had a broad idea.
  • Some pension providers were “defaulting” non-advised clients into cash or quasi-cash investments at drawdown. As a result, one third of the non-advised users of pension drawdown held their entire drawdown fund in cash.

 The FCA concluded that its findings “strongly suggest that a significant number of non-advised consumers are likely to hold their funds in investments that will not meet their objectives for how they want to use that money in retirement”. The FCA’s proposed solution to this was to mandate pension providers to provide a range of “investment pathways” for drawdown funds, based on the client’s objectives for their pension pot. The regulator also proposed that there would be specific warnings issued to those who held more than 50% of their drawdown fund in cash or cash-like investments.

The proposals were due to be put into force in August 2020, but the implementation date was put back to February 2021. With cash returns virtually zero, the delay has potentially been costly for some non-advised pension owners.

If you are unclear where your drawdown funds are invested, take note of the FCA’s concerns and then take advice – the investment pathways will be a help, but they are not an advised solution, tailored to your circumstances.

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

The triple lock marches on…

The main state pensions will rise by 2.5% in April.

The absence of an autumn Budget in 2020 meant that there was no formal announcement of the level of state pensions from April 2021. The numbers eventually emerged on 8 December  in a press release from the Department for Work and Pensions:

  • The new state pension, which applies if you reach(ed) state pension age (SPA) after 5 April 2016 rises to £179.60 a week, an increase of 2.5%. If you are nearing your SPA (now 66, do not forget) you are most unlikely to receive that figure as your state pension will be subject to transitional rules introduced in 2016, when the old state pension was replaced by the current variant.
  • The old state pension, which applies if you reached SPA before 6 April 2016, also rises by 2.5% to £137.60 a week.
  • Payments under other state pensions, such the state second pension (S2P), will increase by 0.5%.

The minimal increases outside the two main state pensions are because only the new and old state pensions benefit from the ‘triple lock’, which raises payment each year by the greater of CPI inflation (0.5% on this occasion), earnings growth (a 1% fall) and 2.5%. Where the triple lock does not apply, CPI inflation is used. As the graph shows, the triple lock has delivered above inflation increases in seven of the last ten years. Over that period the gap between a CPI-linked pension and a triple locked pension has grown to nearly 11%.

Both the cost and intergenerational fairness of providing the triple lock have regularly been called into question. Although the Conservatives’ 2019 manifesto promised to protect the lock, the pandemic expenditure and this year’s inflation-busting increase have once again brought a spotlight on the triple lock’s affordability.

Whether or not the triple lock survives, UK state pensions remain among the least generous in the developed world. The latest survey from the OECD showed the UK at the bottom of the organisation’s league table for replacement income, providing less than half the OECD average.

Thus, while the state pension has been outpacing inflation, it is still far from being sufficient to fund a comfortable retirement. For that, additional private pension provision is necessary.

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.  

The tax year end approaches as filing deadline eased

The tax year end approaches as filing deadline eased.

2020/2021 is drawing to a close, with a Budget now slated for early March. Ahead of that, HMRC is easing some of its traditional deadlines in the light of the ongoing pandemic.

If you’re struggling to prepare your self-assessment tax return due to the effects of the pandemic, you may get some relief. It has been reported that HMRC will consider being affected by Covid-19 as a reasonable excuse for anyone filing late returns or making late payments this year. Any fines may be waived if you explain how you were affected in your appeal. You must still make the return or payment as soon as you can. The Chancellor is also apparently considering extending the filing deadline for everybody, moving it from 31 January to 31 March, but this has yet to be announced.

The timing of the tax year end, however, is fixed. Immune to weekends and holidays, it always falls on 5 April, which will coincide with Easter Monday in 2021. The odd date stems from the combination of the ancient British tradition that New Year’s Day coincided with Lady Day (25 March) and the introduction of the Gregorian calendar across the British Empire in 1752.

The timing of the Budget is considerably more variable. Currently scheduled for every autumn, it is, however, subject to other forces. In 2019, the election got in the way and pushed the Budget to March 2020. A similar time lapse has occurred again, because in autumn 2020 the Chancellor chose to wait until the economic fallout from the pandemic was clearer. Shortly before Christmas he confirmed the Budget would be on 3 March.

This year’s Budget could mark the start of measures to restore the public finances, adding to the importance of sorting out your year end tax planning before the Chancellor rises to his feet. Among the areas to consider are:

  • Top up your pension contributions. For many years there have been rumours that tax relief on contributions could move to a fixed rate, disadvantaging higher and additional rate taxpayers. The pandemic might be the reason the change finally happens in 2021.
  • Use your inheritance tax exemptions. The Chancellor has a pair of reports on his desk from the Office of Tax Simplification (OTS) about inheritance tax reform.
  • Use your capital gains tax annual exemption. The Chancellor also has a paper from the OTS on capital gains tax (CGT) reform which included suggestions such as reducing the annual exemption from £12,300 to £4,000 and aligning CGT rates with income tax rates.
  • Top up your ISAs. With possible CGT increases on the way, the tax shelter offered by ISAs should not be forgotten.

For more information on any of the above and for other year end planning opportunities, please contact us as soon as possible.

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 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.

The 2020 investment year – a ride to remember

The world’s share markets had a rollercoaster ride in 2020.

Index 2020 Change
FTSE 100 -14.3%
FTSE All-Share -12.5%
Dow Jones Industrial +7.25%
Standard & Poor’s 500 +16.3%
Nikkei 225 +16.0%
Euro Stoxx 50 (€) -5.1%
Shanghai Composite +13.9%
MSCI Emerging Markets (£) +12.3%

Investors had to hold on tight as 2020 turned into a white-knuckle experience.

It began quietly enough and then in the second half of February global stock markets took on the concern at the spread of Covid-19. As infection rates increased and the economic outlook darkened, there were precipitous falls in all the major markets. A sense of panic was in the air, not helped in the UK by two base rate cuts within the space of a fortnight. Then, just about the time the UK formally went into lockdown on 23 March, around the world market sentiment turned sharply. After something of a sideways drift during the summer, November saw a further boost to confidence from the news on the Pfizer/BioNTech vaccine.

By the end of the year, the US, Japanese and Chinese stock markets were all recording overall gains – a far cry from the picture in March. As the table above shows, the UK market was a laggard in 2020. There have been many explanations for that – the FTSE 100’s heavy weighting in banks (which stopped paying dividends) and oil majors (which slashed their payouts) are obvious culprits. So too were the uncertainties of the Brexit finale and the government’s handling of the pandemic.

On the opposite side of the Atlantic, the US government Covid-19 response was hardly any more impressive, but the US markets benefited from their exposure to technology companies: we were all Zooming, Googling and buying from Amazon.

There are a few useful lessons to draw from 2020:

  • It is all but impossible to achieve perfect timing for making an investment. That March sentiment flip seemingly came from nowhere.
  • Those who cashed in at the peak of the panic chose the worse time to sell up. Once again, the advice to sit tight proved correct.
  • International diversification is important for UK-based investors. The UK may host many large multinational companies but, like Europe, it lacks exposure to technology giants.

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.

When I’m 66 – SPA’s latest milestone

The latest phasing of State Pension Age (SPA) increase is now finished.

On 6 October 2020, the SPA reached 66. Unless current legislation is changed, it will remain there until 6 April 2026, at which point the next increase, to age 67, starts to be phased in over the following two years. Thereafter the move to 68 is less certain.

Over two years ago the Department for Work and Pensions (DWP) announced that the phasing to 68 would start in April 2037 and again run for two years. However, at the time the DWP avoided introducing any legislation, saying that it would undertake a review of the latest life expectancy projections before acting. Since then the Secretary of State at the DWP has changed three times, but there has been no news of a review. Meanwhile the rise in life expectancy has slowed dramatically, suggesting that the step up to 68 may be delayed.

The arrival of an SPA of 66 prompted the Institute for Fiscal Studies (IFS) to publish a briefing note examining the impact of the SPA changes to date. These started with the controversial stepped increase in women’s SPA from 60 to 65 between April 2010 and November 2018. With the help of DWP data, the IFS showed that each year’s increase in women’s SPA produced a corresponding increase in the proportion of women remaining in work.

For example, the employment rate of 65-year-old women jumped from 21% in the third quarter of 2018 to 35% in the second quarter of 2020 as they were no longer able to claim a state pension. For 65-year-old men, there was also a sharp rise over the same period, from 34% in the third quarter of 2018 to reach 45% in the second quarter of 2020.

As the IFS says, “With the new state pension worth £175 per week, having to wait longer to claim a new state pension significantly reduces the incomes of most people affected by this reform.” Food for thought (and reason for reviewing your private pension provision) if your retirement planning still revolves around age 65…

The value of your investment and 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.  

Capital gains tax: increases on the way?

A recent report could herald changes to capital gains tax.

Last July the Chancellor asked the Office of Tax Simplification (OTS) to undertake a review of capital gains tax (CGT) “in relation to individuals and smaller companies”. The request was something of a surprise for two reasons. Firstly, there had been no suggestion that Mr Sunak wanted to reform CGT. Secondly, two earlier reports on another capital tax, inheritance tax (IHT), had been sitting in the Treasury’s in-tray for over a year, awaiting attention.

Cynics pointed out that while the Conservatives’ 2019 manifesto promised no increases to the rates of income tax, VAT and national insurance, there was no such protection for CGT. Certainly, the ideas put forward by the OTS would raise extra revenue for the Treasury’s depleted coffers, but probably not the £14bn seen in some of the November headlines.

The OTS made eleven proposals for the government to consider. The more significant were:

  • CGT rates should be more closely aligned with income tax rates, implying the maximum tax rate on most gains could rise from 20% to 45%.
  • The annual exempt amount, currently £12,300 of gains, should be reduced to a “true de minimis level” of between £2,000 and £4,000.

When IHT relief applies to an asset, there should be no automatic resetting of CGT base values at death, as currently occurs. The OTS also suggested that the government should consider whether to end all rebasing at death, meaning that the person inheriting an asset would be treated as acquiring it at the base cost of the person who has died.

The £1m Business Asset Disposal Relief, which only replaced the £10m Entrepreneurs’ Relief in March 2020, should itself be replaced with a new relief more focused on retirement.

The OTS paper underlines just how favourably capital gains are currently treated relative to income. As the tax year end approaches, the report is also a reminder to examine your use-it-or-lose-it options for the 2020/21 annual exemption and to top up your CGT-free ISA.

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 and 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.

Fireworks in November

November was an exciting month for the world’s stock markets.

Source: Investing.com

November was an exhilarating month on the world’s stock markets, as the graph above illustrates. It cannot be said that many experts – bar room or otherwise – expected it to look like this.

Cast your mind back to Halloween and, apart from trick or treat, there was plenty to be concerned about. For a start the US presidential election was imminent. While it was widely forecast that Joe Biden would win, there was much less certainty that Donald Trump would recognise he had lost. One layer down, serious worries were voiced about a gridlocked US government with a Democratic president unable to pass legislation through a Republican controlled Senate.

On a global scale, the primary concern was the second or, in some cases, third wave of the Covid-19 pandemic, prompting a new round of lockdowns with their inevitable impact on economic growth.

All that October gloom evaporated quickly in November. For example, the FTSE100 had its best month since January 1989, rising by 12.4%. It had even been on course to set a new record before a sharp fall on 30 November, possibly from profit-takers. Across on Wall Street, the Dow Jones Index had its best month since January 1987. At one point in November the Dow hit a new all-time record of over 30,000 – a “sacred number”, according to the outgoing president, who had pinned his re-election hopes on a strong economy.

So, what happened to make the world’s markets move from depression to euphoria? With hindsight two likely causes stand out:

  • The US election was not the disaster that had been feared. Mr Trump has gradually, if indirectly, indicated that he will be moving out of 1600 Pennsylvania Avenue in January, despite ongoing lawsuits and social media outbursts. At the same time, markets seem to have concluded that, Georgia Senate run-offs notwithstanding, a gridlocked administration may not be such as bad idea if it means the status quo is maintained.
  • The news of three successful vaccine trials suddenly allowed investors to see a way out of the pandemic in 2021.

November was once again a reminder of the potential danger of trying to time investing in markets: it was not a month to miss while sitting on the sidelines holding cash.

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.