Newsletter – July 2018

HMRC’s latest statistics provide an insight into the income tax paying population.  

The figures reveal changes in the distribution of tax revenue over the last decade, with a growing share now coming from higher earners.

The pie chart shows the proportion of 2018/19 tax expected to be paid by taxpayers in various bands of income. For example, the smallest wedge shows that the bottom 50% of income tax payers (those with annual income of up to £25,500) will provide 9.5% of all income tax receipts.

At the opposite end of the scale, the largest wedge is the top 1% (with incomes of at least £177,000) who will supply 27.9% of the £185 billion of income tax the Treasury hopes to receive for the current tax year. In other words, over a quarter of income tax comes from ‘the 1%’.

The Exchequer’s dependence on a small group of wealthy taxpayers is nothing new. However, the concentration has grown since the start of the decade. For example, in 2010/11 – when additional rate tax first appeared at the 50% rate – the contribution from the top 1% was 25.0%. For the top 10% of taxpayers (with income of at least £57,500 in 2018/19), the tax share has risen from 53.5% in 2010/11 to 59.7% this tax year. Over the same period the bottom 50% have seen their share drop from 11.3% to 9.5%.

There are many reasons for the squeeze on high income groups. For example, the political imperative of above-inflation rises in the personal allowance has kept taxpayer numbers flat, which means more revenue must be extracted from a static taxpaying population suffering low earnings growth. Keeping a tight rein on the higher rate threshold and freezing the additional rate threshold at £150,000 have both added to the concentration on higher earners.

With the Chancellor dependent on high income taxpayers, he cannot afford to cut their taxes – hence the freezing of both the additional rate threshold and the £100,000 starting point for the taper of the personal allowance.

If you want to reduce your tax bill, the answer is not to wait for the next Budget – when taxes may rise to pay for the NHS funding boost – but to check with your financial adviser that you are making the most of the current tax rules.

The value of tax reliefs depends on your individual circumstances. 

Tax laws can change. 

The Financial Conduct Authority does not regulate tax advice.

Planning for retirement and the need for laterlife care are becoming the decade’s most talked-about areas of social policy. In the UK we are seeing a major shift in emphasis; financial provision for our retirement years is moving from being the responsibility of the state, to being the responsibility of the individual.

Increased life expectancy means that people retiring at 65 today can reasonably expect to live on into their 80s if not longer, and some can expect to live to 100. However, when it comes to planning for retirement people can underestimate the odds of reaching a great age, and may not be adequately prepared financially for the years ahead. This may be one of the reasons behind the recent increase in the number of those working beyond state retirement age.

Making the most of your pension savings

Unless you’re in a pension scheme that pays you an income based on your salary when you retire, you’re most likely to be saving into a scheme that provides you with a sum of money, your pension pot. How you turn your pension pot into income is one of the biggest financial decisions you have to take at retirement, and there are many pitfalls to avoid. Getting advice will give you the comfort of knowing that you’re doing the right thing with your money, and means that you will have in place a detailed plan that takes a holistic view of your finances.

What a good retirement plan looks like

There’s a lot to think about when making plans for a comfortable retirement. A good retirement plan needs to take account of factors such as inflation, investment risk and the potential need for funds for long-term care. With the increase in life expectancy, more of us can expect to need help and support at some time in our lives. Residential and nursing care costs can often be around £1,000¹ a week.

Take the right steps

Taking professional advice about your pension has never been as important as it is today. Many of us struggle to find the time to plan our retirement finances properly, and it can be hard on your own to make informed decisions. Taking advice can give you peace of mind and help ensure you don’t run out of funds in later years.

1 LaingBuisson, 2017

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

The financial planning journey

Our full range of Key Guides can be found here

If you’re making plans for your retirement and would like some professional advice, then please get in touch.

The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.

Important interest rate announcements were made in June, both in the UK and the US. 

The US Federal Reserve announced its seventh 0.25% increase in interest rates since December 2015, taking the level to 1.75%-2.00%. The rise had already been incorporated in market prices by the time it arrived, so of more interest were the press release and other papers which accompanied the announcement. These pointed to two more rate rises in 2018, and possibly three more in 2019. They also dropped a long-standing reference to interest rates remaining, “below levels that are expected to prevail in the longer run”.

The following day the European Central Bank (ECB) decided to leave rates unchanged, again a widely anticipated move – the ECB has kept its main interest rate at zero since March 2016.

The market again focused on the background papers, which revealed the ECB’s tapering of its quantitative easing (QE – so-called money printing) programme, will come to an end in December and that interest rates were expected to be unchanged, “at least through the summer of 2019”. The first part was no surprise, but the statement on interest rates was not expected. The markets reacted accordingly, pushing the Euro down against the US dollar.

Controlling market shocks

The relationship between central banks and investment markets is a curious one these days as the banks go out of their way to make sure markets are kept informed. As a result, the markets are now more interested in the next-but one action. The market responses to these recent rate announcements are two good examples.

The need for the banks to flag their intentions was underlined by the ‘taper tantrum’ of 2013, which happened when the Chairman of the US Federal Reserve first suggested that QE could be scaled back. Nobody thought QE would continue forever, but the mere hint that it might end gave global markets a shock, causing sharp movements in share prices, bond yields and currency rates.

Ultimately, the message from both the US and the Eurozone is the same: interest rates are set to rise, albeit at different paces, and QE will no longer be a prop to markets.

For insight into what this might mean for your investments and whether any changes are necessary, please 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

National Savings & Investments (NS&I) has introduced limits on its offerings for wealthier savers. 

In mid-June NS&I announced a revision to the terms of its popular Guaranteed Growth and Guaranteed Income Bonds. The interest rates were left unchanged, but the maximum investment per person, per issue was cut by 99%, from £1 million to £10,000.

NS&I ostensibly exists to help small savers, but in recent years it has raised investment limits – for example to £50,000 on premiums bonds – to meet the funding levels set by the government. In the past NS&I has also emphasised tax-free savings certificates, which were of most appeal to top rate taxpayers.

Fortunately for existing investors, their former investment limits will continue to apply if they reinvest. The dramatic reduction means that NS&I will no longer offer an easy solution for anyone seeking fixed rates on large sums of capital without having to worry about the £85,000 FSCS deposit protection ceiling.

National Savings and Investments has long been something of oddity in the world of government finance. For example:

• As a means of raising money for the Treasury, it makes little sense. NS&I collects small sums from retail investors, usually for terms of no more than five years. In contrast, the Debt Management Office (DMO) is well practiced at raising billions for the government from institutional investors, some of it borrowed for terms of over 50 years, and pays lower interest rates for its gilts.
• NS&I has a value-for-money target for the cost of its capital raising, but the Treasury can override this. The classic example was the 65+ bond promising 4% return, issued shortly before the 2015 election.

It could be argued NS&I is right to discourage large fixed terms deposits that, even before tax, pay less than the going rate of inflation (2.4% CPI, 3.3% RPI in May). There are plenty of alternatives available, many of which offer a higher income. If you would like to discuss these options with us, please get in touch.

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 latest quarterly review of the FTSE 100 revealed common misunderstandings about how the index is drawn up. 

Every quarter FTSE Russell, which operates all the FTSE indices, decides which companies are promoted or demoted from the FTSE 100 index.

There had been speculation that the June review would see Marks & Spencer (M&S) replaced by Ocado. The high street chain has been a member of the Footsie since the index first appeared in 1984, so for the bricks and mortar shopping experience to be supplanted by an online-only retailer that did not arrive on the stock market until 2010 made for a good headline.

However, M&S did not check out of the FTSE100 and survives until the next quarterly review. What the journalists missed is that a company listed in the FTSE 100 is only ejected if its ranking drops below 110. Similarly, promotion into the FTSE100 requires a ranking of 90 or higher.

These rules are designed to avoid a large quarterly churn at the bottom tier of the index, and it works – only one other company, GVC Holdings, entered the index in June.

GVC is gaming company, based in the Isle of Man and listed in London. The main reason it entered the FTSE100 was that it took over a more familiar betting name, Ladbrokes Coral. To do so, GVC issued more shares and thus increased its all-important market capitalisation.

June’s changes to the FTSE100 remind us that the construction and operation of stock market indices are not as simple as might be imagined. Whether you are considering investing in an index tracker fund or comparing fund performance against an index, it is a point to remember.

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 June 2018 review of constituents for the main Emerging Markets Index has produced a few surprises.    

The MSCI Emerging Markets Index is one of the most important global stock market indices. JP Morgan, the US investment bank, estimates that nearly $1,500 billion is either benchmarked against the index or directly tracks it, so there can be considerable implications for stock markets if the constituent countries of the Index change.

Last year’s MSCI review saw Chinese mainland shares promoted to the Index, with that process now starting to take effect.

The 2018 review heralds two potential new arrivals in the MSCI Emerging Markets from May 2019:

• Saudi Arabia should join the Index in a two-stage process (as is now happening with China). The first stage follows the May 2019 half-yearly index review, and the second as part of the August 2019 quarterly review.
  Saudi Arabia will initially account for 2.6% of the Index, but it could become more important when Saudi Aramco, the state oil company, is partially floated, probably next year.
• Argentina is set to return to the Index, having been demoted to ‘Frontier Market’ status in 2009. Ironically, the MSCI announcement almost exactly coincided with confirmation that that IMF had agreed $50 billion of stand-by credit for the country.

At present Argentina represents almost a fifth of MSCI’s Frontier Markets Index, so if it does move across, there will be a significant rebalancing of that index.

Emerging markets have attracted considerable investor attention of late, partly because of China’s ascendancy, but also because they appear to offer better value than developed markets.

If you wish to consider the regularly evolving emerging markets investment options, please 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.

Action Fraud sees 12,372 cyber crime reports in six months. Hacking of social media and email accounts at the forefront of cyber crime impact. Protect yourself – use strong, separate passwords to avoid falling victim to hackers. 

The City of London Police, the national lead force for fraud which runs Action Fraud, the national fraud and cyber crime reporting centre, has revealed that cyber crime victims lost £28 million between October 2017 and March 2018.

The cyber statistics are based on the 12,372 cyber crime reports that were made in the same six month period to Action Fraud. The City of London Police, which is a founding member of the Global Cyber Alliance, also runs Cyber Protect, its team dedicated to protecting the public and businesses from fraud and cyber crime.

The report also shows that with 4,796 reports, hacking of social media and email accounts was the primary reason for people reporting cyber crime to Action Fraud. These victims are believed to have lost a total of £11 million.

Unlike most other crimes, cyber crime is often committed by criminals who never come into contact with their victim, and around half of all fraud and cyber crime comes from abroad. A national reporting service means the UK can better identify investigate and detect fraud and cyber crime.

Protect yourself

The key to protecting yourself from cyber crime is to always install the latest software and app updates on your phone and computers as they contain vital security updates which help protect your device from viruses and hackers. You should also ensure that you use a strong, separate password for your email account, as hackers can use your email to access many of your other personal accounts. Consider also enabling two factor authentication (also known as two step authentication or two step login) where services support it.

Always be suspicious of unsolicited requests for your personal or financial information and never call numbers or follow links provided in unsolicited texts or emails; contact the company directly using a verified and trusted email or phone number. If you or someone you know believes they have fallen victim to cyber crime, please report it to Action Fraud.

For protection advice based on the expertise of the National Cyber Security Centre and specifically targeted at protecting small businesses and individuals from cyber criminals, please visit Cyber Aware.

If you have been affected by this, or any other scam, report it to Action Fraud by calling
0300 123 2040, or by using the online reporting tool at www.actionfraud.police.uk

By clicking on one of these links you are departing from the regulatory site of Polestar. Neither Polestar nor Positive Solutions is responsible for the accuracy of the information contained within the linked site.

ISAs are a great way to save, and there are now several types, each designed to help young and old, home buyers and children save for their future. But while ISAs are tax-efficient during your lifetime, they may have disadvantages when it comes to Inheritance Tax (IHT). 

It’s easy to think that ISAs are tax-free, full stop. After all, when the then Chancellor, George Osborne, announced that from 2015 they could be passed on without incurring tax, the move was widely welcomed. It meant that a widow or widower wouldn’t face a tax bill if they inherited an ISA from their spouse. This is achieved by what’s called an “additional permitted subscription” allowance (APS), which is equivalent to the amount the deceased held in ISAs at the date of their death, and is in additional to the normal ISA allowance. What’s more, the surviving spouse is still entitled to the APS even if their spouse or civil partner leaves the funds in their ISAs to someone else. 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.

Passing ISAs on

However, ISAs are still included in calculating the value of a deceased’s estate. While funds left to a spouse are free of IHT, those passed directly to children or other beneficiaries are not. IHT is payable at a rate of 40% on the value of your estate over the current individual allowance of £325,000.

This means that it may be preferable for IHT planning purposes to think about passing on your pension to future generations and living off the tax-free income from your ISAs. However, everyone’s circumstances differ, so it’s important to get financial advice that’s tailored to your particular circumstances.

Tax treatment depends on individual circumstances.

Tax treatment, rates and allowance are subject to change.