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The rise and rise of UK dividends

Dividend payments from UK companies in 2018 once again outpaced annual inflation.  

Your income could have increased by more than double the rate of CPI inflation in 2018.

Link Asset Services, a leading share registrar, reported a 5.1% growth in total dividend payments of UK companies last year. Their January dividend monitor showed that in 2018 UK companies paid out £99.8bn in dividends, £4.8bn more than in 2017.

As the graph shows, since 2012, total dividend payments have comfortably outpaced inflation. The dividend line is not as smooth as the inflation line for two reasons:

  • To a degree, what companies will pay in dividends depends upon financial conditions. The graph’s dip in 2009 and 2010 calendar years reflects the fallout from the great recession of 2007/08 when some major companies, e.g. clearing banks, suspended dividend payments completely.
  • Total dividend payments represent the addition of regular dividends – what companies pay each year – and special dividends, which are one-off payments. From year to year, the ‘specials’ vary much more than regular dividends. A good example is 2014, when Vodafone sold out its US business interests and made a one-off dividend payment of nearly £16bn.

In its latest monitor, Link notes that rising dividends and falling share prices in 2018 meant that the yield on UK shares in December 2018 hit the highest level since March 2009. The 4.8% yield recorded by Link compares with an average over the last 30 years of 3.5%. In Link’s view, that level of dividend seems ‘’overly pessimistic” and is more likely to represent an undervaluation of UK stocks due to Brexit uncertainty as well as difficulties in the global market. It is hard to disagree.

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.

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.

Preparing for the new tax year

One of the few certainties about 2019 is that the new tax rates and thresholds will take effect from the start of the 2019/20 tax year on 6 April.

Whilst the focus tends to be on year end tax planning at this time of year, it is important to look forward to the new tax year and the changes that it will bring.

From 2019/20 changes will come into effect for key income tax rates and thresholds, as well as pensions.

There are two inflation-busting income tax changes:

  • The personal allowance will rise by £650 (5.5%) to £12,500; and
  • The higher rate threshold will rise by £3,650 (7.9%) to a neat £50,000. However, in Scotland the higher rate threshold (for non-savings, non-dividend income) will be frozen at £43,430.

The personal allowance and higher rate threshold will remain unchanged in 2020/21, so the impact of the above-inflation increase will be soon eroded.

A corollary of the increased higher rate threshold, outside Scotland, is that the upper limit of earnings on which full rate employee/self-employed National Insurance Contributions (NICs) are payable will also rise to £50,000.

The net effect is to claw back a significant slice of the income tax saving and, in Scotland, leave earnings in a band between £43,430 and £50,000 suffering a combined income tax (41%) and NICs rate (12% for employees) of up to 53%.

The ceiling for automatic enrolment pension contributions will also increase to £50,000. This, combined with the increase in the minimum overall contribution rate from 5% to 8% means, in many instances, a jump in employee net contributions of about two thirds from the current level. So if the new higher rate threshold takes you out of higher rate tax, your net contributions could more than double.

The other change affecting pensions is a small increase in the lifetime allowance of £25,000 – this sets the maximum tax-efficient value of pension benefits at £1.055 million.

For more information on how these changes will affect you and how you might counter some of the unwelcome side effects, please talk to us, before the end of the current tax year.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

Money pouring in to VCTs, despite the risks

Investment in venture capital trusts (VCTs) is continuing to rise as we head in to 2019/20.


VCTs have been growing in popularity in recent years, as the graph shows. Nearly £750 million was invested in VCTs in 2017/18, the highest figure since 2005/06, when the rate of income tax relief was temporarily boosted to 40% (against the current 30%).

There were two main reasons for the surge in popularity in the past couple of years:

  • The restrictions on the pension lifetime allowance and the annual allowance have meant that an increasing number of high earners have been seeking alternatives to pension contributions. With HMRC taking an ever-stronger stance towards tax avoidance schemes, VCTs are one of the few areas outside pensions where tax relief is available with a government stamp of approval.
  • Last summer the Treasury published a consultation paper on ‘patient capital’ that indicated new investment restrictions for all venture capital schemes. These details were confirmed in the 2018 Budget, but by then many VCTs had raised substantial funds helped by a buy-now-while-stocks-last message.

New restrictions on investment

The revised investment rules need to be borne in mind if you are thinking about investing in VCTs to reduce your 2018/19 tax bill, because they have made investment in VCTs more risky.

The Finance Act 2018 says that when a VCT invests in a company there must be “a significant risk that there will be a loss of capital of an amount greater than the net investment return”. It is therefore all the more important to choose your VCT provider(s) with care. An existing track record may have been based on an investment approach which would not satisfy the Finance Act 2018 rules.

For information on the VCTs currently available, please talk to us. Despite the risks, the tax advantages mean that the more attractive issues can disappear within days.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax or trust advice.

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

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 value of 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.

Understanding the Child Benefit Charge


7 January marked the fifth anniversary of the tax on child benefits, an imposition that is still not widely understood.

The High Income Child Benefit Charge (HICBC), to give child benefit tax its correct name, was introduced in a rush by George Osborne – so much so that it began three months before the start of the 2013/14 tax year. It was, and remains, a classic example of the type of tax system tweaking beloved of Chancellors and disliked by those who have to deal with the consequences.

The HICBC represented an attempt to use the income tax system to withdraw child benefit from parent(s) (married or not) where one had income exceeding £50,000. Its introduction was poorly publicised, leaving many people – particularly PAYE earners – unaware of their potential liability.

Caught by ‘failure to notify’?

If proof were needed of the flaws in HICBC, it arrived in November 2018. That was when HMRC announced it would be reviewing ‘Failure to Notify” penalties for 2013/14, 2014/15 and 2015/16 “to customers [sic] who did not register for the High Income Child Benefit Charge” and therefore did not pay the HICBC tax. Unusually for HMRC, it is not looking for the taxpayer to provide a “reasonable excuse” before considering a refund. It may be hoping to avoid a flood of letters from those affected.

The income trigger for the HICBC remains at £50,000. That means that for 2019/20 the trigger matches the UK higher rate threshold. When it began, the charge started at over £7,500 above the then threshold.

The tax is levied in a unique way: for each £100 of income above the threshold, tax is payable equal to 1% of the child benefit received. For example, an income of £56,000 would mean an HICBC of 60% of total child benefit – 60% of £1,789 (=£1,073) for a two child family.

Failure to claim child benefit can mean a loss of national insurance credits, so it’s important to avoid this pitfall. If you or your partner are, or may be, caught by HICBC, there are several planning options to consider, which we would be happy to discuss.

 

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

Filling the pensions hole for the self-employed

The Department for Work and Pensions (DWP) is aiming to expand pension coverage among the self-employed.

 Pension automatic enrolment has become a major success since it was launched nearly seven years ago, with almost 10 million people joining a workplace pension arrangement. Take-up rates have been much higher than some pundits had forecast – the latest calculation from the DWP showed that in 2016/17 the overall opt out rate was just 9%.

However, there is one group of people that the automatic enrolment regime completely misses: the self-employed. According to the DWP, the self-employed account for about 15% of the UK workforce – 4.7 5 million people. Private pension coverage in this sector is low, despite the tax benefits on offer. The DWP has calculated that in 2016/17, only about 1 in 7 of the self-employed were saving into a pension.

Encouraging pension saving

In December the DWP announced that it would be running a programme of trials aimed at encouraging the self-employed to start saving. These trials will involve a range of trade bodies and financial services organisations, including the main government initiated auto-enrolment scheme, NEST, which now has over seven million members.

If you are self-employed and one of the 6 in 7 who is not yet saving for your retirement, you should not wait for the DWP to find ways to nudge you into action. The hard fact is that with no private pension provision, your retirement pension will simply be the new state pension – £168.60 a week (£8,767 a year) from April. Remember too that the state pension is only payable from state pension age, which is now in the process of rising to 66 by October 2020 and 67 by April 2028.

If you want a higher pension, and/or you do not want to wait until the state decides it is time for you to retire, then the sooner you begin to consider your retirement planning, the better. Talk to us about your options now – these could well include routes other than pure pension arrangements.

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.

Shake up your New Year’s resolutions

The time to resolve has returned.

Have your New Year resolutions fallen by the wayside yet? You know, the ones about eating better, drinking less and exercising more. The problem is they all require you to make a change to your lifestyle, which is never easy, particularly in the dark days of mid-winter.

Some people prefer to talk about intentions rather than resolutions. And to try to look beyond the short-term goals to longer term outcomes to boost the likelihood of sticking to them.

Here are four simple financial New Year’s resolutions. They need only one-off actions, so they should be easier to stick to. And they could provide long term benefits:

  1. Make a will. If you don’t have a will, you have no say in how your estate is distributed. That may not matter if the laws of intestacy match your wishes, but often the two diverge considerably, leaving difficult issues for your dependants. If you have made a will, you are not completely off the hook: resolve to look at it and make sure it is still the right will for your current circumstances.
  2. Set up lasting powers of attorney. Who would make decisions about your finances and medical treatment if you were unable to do so? Just as with a will, a lasting power of attorney lets you decide the answer rather than falling back on what the state determines or leaving your family without the ability to really help you.
  3. Check what you are earning on your deposits. Many banks and building societies continue to pay negligible rates on accounts that are “no longer available” to new savers. Just because an account has ‘gold’ in its title is no guarantee that it won’t be paying a mere 0.1%.
  4. Check your state pension entitlement. This is easy to do online (https://www.gov.uk/check-state-pension) and shows both what you should receive based on current rates and when you should start to receive it. The projection will also indicate any scope you have for increasing your state pension.

For help with any of these resolutions (not the food, drink and exercise ones), 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 or trust advice.

The 2018 investment year

The world’s share markets mostly saw falls in 2018.

Index 2018 Change
FTSE 100 -12.5%
FTSE All-Share -13.0%
Dow Jones Industrial -5.6%
Standard & Poor’s 500 -6.2%
Nikkei 225 -12.1%
Euro Stoxx 50 (€) -14.3%
Shanghai Composite -24.6%
MSCI Emerging Markets (£) -11.5%

2018 was a very different year for investors from 2017. During that year, the share markets generally produced positive returns with very little volatility. Both years had their fair share of dramas, with Brexit and Donald Trump sources of concern across the 24 months. However, whereas in 2017 stock markets seemed relatively unphased by events, the opposite was true in 2018.

In sterling terms, the MSCI World Index was down 4.9%, much less than the main UK indices. However, this hides two factors:

  1. The US stock market, which forms about half of the World Index, was relatively strong. Strip that out and the MSCI World Index ex-USA was down 11.2% in sterling terms, only marginally less than the main UK indices.
  2. The Brexit-battered pound was weak during 2018, which flattered overseas returns.

In the UK, the main indices produced their worst annual return since the financial crisis year of 2008. As a result, the UK stock market now has an average dividend yield of nearly 4.5%, the highest level since 2009.

If you are investing for income that yield is undoubtedly attractive. We’re always here to discuss your portfolio and options – and 2019 is going to be an interesting 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. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Index-linked savings certificates

The popular National Savings & Investments (NS&I) savings certificates will be indexed to CPI instead of RPI from next year.

The certificates have not been on sale since 2011, but NS&I allow existing certificate holders to reinvest in new series of certificates when their old ones mature. The terms have gradually worsened over the years and at present reinvestment promises a return of RPI inflation +0.01% a year. For certificates maturing from 1 May 2019, the basis of indexation will change from RPI to CPI.

The change was not picked up by newspapers at the time because they were released the Friday before the 2018 Budget, held on the Monday. Government departments are often accused of burying bad news, and the downgrading of the NS&I index-linked savings certificates is certainly bad news for affected investors.

RPI or CPI?

The government now generally only uses RPI where it benefits, for example as the basis for interest levied on student loans or for annual rail fare increases. CPI is used to index many – but not all – income tax bands and allowances.

NS&I said, ‘This change recognises the reduced use of RPI by successive governments and is in line with NS&I’s need to balance the interests of its savers, the cost to the taxpayer, and the stability of the broader financial services sector.’

As the graph shows, the move from RPI to CPI will cut returns by about 0.8% a year based on data since 2010. In their widely-missed press release, NS&I note that, ‘The cost to the taxpayer is forecast to reduce by £610 million over the next five years’. That ‘cost to the taxpayer’ could also be read as, ‘return to the investors’.

If you hold any issues of index-linked certificates, think about whether you definitely want to reinvest when they next mature, rather than letting inertia (and automatic reinvestment) take its course.

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.