Newsletter – January 2018

* If earnings exceed £100,000 the Personal Allowance is reduced by £1 for every £2 earned over £100,000.

Last month saw another Budget – for Scotland, this time.    

April 2018 will see the next step down in mortgage interest relief for investors in buy-to-let (BTL) residential properties. The amount of interest that can be offset against rental income drops from 75% to 50%, with a corresponding increase to 50% in the element that qualifies for a 20% tax credit.

The Scottish Budget in the middle of December contained potential omens for the whole of the UK with its proposed changes to income tax bands and thresholds. In the foreword to the main Budget document, Derek Mackay, the Scottish Cabinet Secretary for Finance and the Constitution said he believed his income tax measures would make the system in Scotland, “fairer and more progressive”.

Whether or not that is true, Mr Mackay has certainly made it more complicated, as the table of proposed tax rates and bands for 2018/19 shows:

The proposed structure will result in 70% of all Scottish income tax payers paying less than they do for the current financial year, according to Mr Mackay, although some of this achievement is down to the Westminster Chancellor raising the UK-wide personal allowance by £350. Nevertheless, the other 30% will pay enough extra tax to mean a boost of £164m to the Scottish government’s income in 2018/19. The difference in bands and rates may look modest enough, but Scottish residents earning £50,000 a year will end up paying £9,015 of income tax in 2018/19 against £8,360 for their English, Welsh and Northern Irish counterparts.

Mr Mackay said that increasing the top rate of tax to 50% had been considered, but the Council of Economic Advisers suggested that this would be “unlikely to raise any substantial funds for the Scottish budget, and may in fact reduce revenues”. There are only 20,000 top rate taxpayers in Scotland and the Council was doubtless considering the likelihood, and impact, of some of them crossing the border to England to pay 45%.

The changes proposed in Scotland – which still need parliamentary approval – will be watched with interest in the rest of the UK. John McDonnell, Labour’s Shadow Chancellor, has made his own proposals for raising income tax rates, including a new top rate of 50%. He will doubtless be waiting to see how the Scottish public reacts to Mr Mackey’s “fairer and more progressive” system.

In the meantime, the plans of Mackay and McDonnell both serve as reminders that you should be starting to think about your year end 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.

The government has published a review on automatic enrolment in workplace pensions which makes important proposals for employers.

Automatic enrolment of employees in workplace pensions has been a greater success than many predicted when it was introduced in October 2012. To date over nine million employees have been automatically enrolled into a workplace pension and more than 900,000 employers have complied with their auto enrolment responsibilities. Total annual contributions into workplace pensions reached a ten-year high of £87 billion in 2016.

With the framework now firmly in place, the government has turned its attention to the next developments for workplace pensions. Its main ideas are:

• The minimum age at which automatic enrolment begins should be reduced from 22 to 18. This would bring another 900,000 young people into auto enrolment.
• The contribution structure would change so that once the earnings trigger (£10,000 for 2017/18 and 2018/19) is reached, the contribution percentage paid by employers and employees would be based upon all earnings, not earnings exceeding the lower earnings limit (£5,876 in 2017/18 and £6,032 in 2018/19). The upper earnings limit (£45,000 in 2017/18 and £46,350 in 2018/19) would still apply to cap contributions. In current terms, the effect would be to increase contributions for an individual earning £26,000 by nearly one third.
• The government will test “targeted interventions … to identify the most effective options to increase pension saving among self-employed people”. Only 16% of the self-employed were contributing to a pension in 2015/16, a large gap in pension coverage given they now number 4.8 million (15% of the workforce).

The age and contribution reforms are pencilled in for the mid-2020s. This delay, which has attracted some adverse comment, may reflect the fact that the current contribution rate of 2% (of which the employer must pay at least 1%) will rise to 5% (2% from the employer) in April 2018 and to 8% (3% from the employer) a year later. However, in a foreword to the paper, the government acknowledges that “contributions of 8% are unlikely to give all individuals the retirement to which they aspire”. In other words, for all the government’s efforts to push automatic enrolment, you still need to assess the effectiveness of your own retirement plans.

For further information on Auto Enrolment please contact one of our advisers on 01793 881602
or download our free Key Guide:

Workplace pensions and auto-enrolment

Our full range of Key Guides can be found here

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

The US central bank increased interest rates again in December.

While the Bank of England managed just one interest rate rise in 2017, to end the year at 0.5%, its counterpart in the US notched up three increases, finishing at 1.25%-1.50%. The trio of Federal Reserve increases were all well telegraphed, so much so that by the time each arrived, the focus was on when the next 0.25% addition would occur.

That was the case with December’s increase, the last overseen by Janet Yellen as Chair of the Federal Reserve before Jay Powell, the Trump nominee, takes over. The conclusion from the analysts who delve into the Fed’s reports is that three rate increases are expected in 2018. However, the composition of the Federal Open Market Committee, which makes the interest rate decision, will be changing significantly in 2018, so this number is by no means set in stone.

On this side of the Atlantic, the year ended with the news that November’s CPI inflation had reached 3.1%. That is just (by 0.1%) enough to force the Governor, Mark Carney, to write an open letter to the Chancellor explaining why inflation is above its target range. Even so, the Bank of England looks unlikely to match the Fed’s rate-raising zeal in 2018. In December, the Bank repeated its familiar mantra that “Any future increases in Bank Rate are expected to be at a gradual pace and to a limited extent.”

A backdrop in which rates in the US are pulling away from those in the UK and Europe (which are still at 0% within the Eurozone) could create some tension in investment markets in 2018. If you have not undertaken a New Year review of your portfolio, now is the time to talk to 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. 

The world’s share markets were a profitable place to be in 2017.

2017 had its fair share of dramas. There was the unending reality show of Donald Trump and his tweets. On this side of the Atlantic the ongoing saga was Brexit and the “strong and stable” government that was promised, but somehow never materialised. North Korean rockets were a regular headline feature, as was the growing assertiveness of China under Xi Jinping. Europe had a crop of elections to worry about, ending with Germany being without a government since September and Catalonia seemingly back at square one.

And yet world stock markets had a very good year. In sterling terms, the MSCI World Index was up 20.11%. This was not just the impact of the strong performance of the USA, which accounts for just over half of the World Index: strip out Uncle Sam’s influence and the rest of the world returned 21.03%.

Why markets were so buoyant will keep the commentariat in debate for some while. Continued low interest rates (despite US and UK rises) and more quantitative easing (QE) from the Eurozone and Japan certainly helped. The global economy also began to display synchronised rising growth, with the obvious exception of the Brexit-braked UK.

At first sight, the outlook for 2018 looks similar. There is the ongoing saga of the US administration, the next European election to worry about, in Italy, and Germany will have another attempt at creating a coalition government. Interest rates in the US and probably the UK will rise, while Europe is set to cut back and possibly end its QE.

Most pundits predict investment markets will be more volatile in 2018 – hardly a major insight given their near serene progress in 2017. If you have benefited from last year’s solid returns, do not assume you can leave your investments unchanged for 2018. Now is the time to talk to us about any rebalancing that may be necessary for the year ahead.

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. 

Being aware of a few key financial facts can help ensure we all make the best use of our money and tax allowances.

How much you can save into your ISA

The ISA allowance for 2017–18 is £20,000. Don’t pass up this important opportunity to save or invest tax-efficiently. We can help you choose the right ISA for your needs.

Your pension contribution limits

For the tax year 2017–18 you can get tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower. (However, if in this tax year you start to take money from your defined contribution pension, then the annual allowance may reduce to £10,000 The allowance may also taper from £40,000 down to £10,000 if your ‘adjusted income’ exceeds £150,000). The pension lifetime allowance is now £1m.

How much your valuables are worth

Soaring gold and diamond prices could mean that your jewellery is worth a lot more than it was. If it’s been a while since it was valued, you may need to get a new valuation done for insurance purposes. Don’t risk being under-insured.

What your inheritance tax allowances are

Each financial year you can make gifts of up to £3,000 (in total, not per recipient) and gifts of £250 per other recipient. Each parent of a bride or groom can give up to £5,000; grandparents or other relatives can give up to £2,500 and any well-wisher can give £1,000. Gifts can also be made from your surplus income, although conditions apply.

Where all your pensions are

If you’ve moved jobs a few times, the chances are you may have paid into several pensions. It’s important to know what your entitlements are; we can advise you whether you’d be better off transferring them into one scheme to cut down on administration and charges.