With Christmas and the New Year over, it is time to turn your thoughts to planning for the tax year end.

While many parts of the tax landscape have been frozen, such as the personal allowance and most income tax thresholds, that does not mean you should ignore tax year-end planning as we approach 5 April. Among the areas to consider are:

·    Pension contributions: The tax limits for pension contributions were eased at the start of the current tax year. You may now be able to make contributions for the first time in some years. But take care ­– just to complicate matters further, the rules will be changing yet again from 6 April 2024.

·    Capital gains tax (CGT): Now is the time to review your investments and consider whether to realise gains up to your annual exemption. This is particularly important in 2023/24 as the exemption of £6,000 will fall to £3,000 in the next tax year.

·    Individual savings account (ISA) contributions: Your annual ISA allowance is £20,000 (£9,000 for Junior ISAs), which cannot be carried forward. With the personal savings allowance frozen and the dividend allowance and CGT exemption both halving in 2024/25, the case for maximising ISAs has arguably never been stronger.

·    Inheritance tax: Use your annual exemption (£3,000 per tax year) for 2023/24. If you have unused exemption from 2022/23 you can also gift this, but only after you have used the current year’s exemption.

·    Marriage allowances: If you or your spouse/civil partner had income of less than the personal allowance in 2018/19 (£11,850), then you have until 5 April 2024 to claim the marriage allowance for that year (£1,190). A claim can only be made if the other partner was a basic rate taxpayer in that tax year. The same principle applies for 2019/20 onwards.

·    Income planning: Frozen allowances and tax thresholds mean you could move from being a basic rate taxpayer now to a higher rate taxpayer in 2024/25. Similarly, from April you might be caught for the first time by the High Income Child Benefit Charge or personal allowance taper. Actions to limit the larger tax bill include bringing forward income into 2023/24 or transferring income-generating investments to your spouse/civil partner by 5 April.

As ever when it comes to tax, it is best to seek advice before taking any action.

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.

From 6 April 2024, individual savings account (ISA) rules will be changing, mostly for the better.

In April, ISAs will celebrate their 25th birthday. However, the ISA was hardly a new-born back in 1999, as it was effectively a reworking of two previous tax-favoured savings plans – the personal equity plan (PEP) and tax exempt special savings account (TESSA).

Over the years, successive governments have tweaked the ISA rules and added new variants so now there are arguably five types of ISA:

·    Cash ISA;

·    Stocks and shares ISA;

·    Innovative Finance ISA;

·    Lifetime ISA; and

·    Junior ISA.

In addition, there are Help to Buy ISAs that can no longer be opened, although contributions can be made to existing accounts until November 2029.

Ahead of last November’s Autumn Statement, there were plenty of rumours about how the Chancellor would reform and revitalise ISAs, including an increase to the £20,000 overall subscription limit, frozen since April 2017. In the event, Mr Hunt left subscription limits untouched, but made some useful administrative changes, due to take effect from 6 April 2024:

·    It will be possible to make multiple subscriptions to the same type of ISA in a tax year. Currently the rule is one ISA of each type, each tax year.

·    Partial transfers of current tax year ISAs will be possible. At present, the entire subscription must be transferred.

·    You will no longer need to complete a new ISA application for an existing ISA that received no subscription in the previous tax year.

·    The range of investments for the Innovative Finance ISA will be extended.

There will also be discussions with ISA managers about allowing fractional shares within ISAs, a hot topic for some ISA investors who want to hold US technology company shares. Such companies often have a ‘lumpy’ share price – Apple shares cost over £150 each.

A downside change from 6 April is that 16- and 17-year-olds will no longer be able to invest up to £20,000 in a Cash ISA, as well as being eligible for a £9,000 Junior ISA.

The single and possibly most significant ISA incentive that the Chancellor did not mention is that from April both the dividend allowance and the capital gains tax (CGT) annual exemption will halve (to £500 and £3,000 respectively). ISAs remain free of UK income tax and CGT.

The value of your investment and any 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.

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.

Stocks and Shares ISAs invest in corporate bonds; stocks and shares and other assets that fluctuate in value.

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.

The Financial Conduct Authority (FCA) has announced new rules to ensure a green label on a fund is more than just marketing puff.

It was perhaps no coincidence that the FCA published a new set of rules on sustainable funds just as COP28, the UN global conference on climate change, got underway in late November. Interest in all forms of sustainable investing has surged in recent years, with an estimated $18,400 billion of assets currently managed globally under the environmental, social and governance (ESG) banner. By 2026, that figure is expected to reach $34,000 billion.

The ESG boom has encouraged the launch of many new green, ESG, and sustainable investment products. That surge has prompted what the FCA noted last year as “…growing concerns that firms may be making exaggerated, misleading or unsubstantiated sustainability-related claims about their products; claims that don’t stand up to closer scrutiny (so-called ‘greenwashing’).”

That potential gap between marketing claim and investment reality has seen regulators around the world take action. The rules issued by the FCA in late November are but the latest weighty example aimed at consigning greenwashing to history.

One interesting aspect of the FCA’s approach is that it has created a quartet of product labels to help investors understand how their money is being used:

·    Sustainability Focus: A fund using this label must aim to invest in assets that are environmentally and/or socially sustainable. The FCA requires the manager to use “a robust, evidence-based standard” to gauge sustainability – mere words and aspirations will not be enough.

·    Sustainability Improvers: For this label, a fund’s objective must be to invest in assets that have the potential to improve environmental and/or social sustainability over time. Again, the measure of environmental and/or social sustainability must be solid and evidence-based.

·    Sustainability Impact: In this category, the fund must aim to achieve a pre-defined positive measurable impact in relation to an environmental and/or social outcome.

·    Sustainability Mixed Goals: This label covers funds that blend the three approaches outlined above. Such mixed funds must meet the specific label requirements of each category in which the fund is invested.

These labels will not roll out until the end of July 2024. Even when they do appear, advice on fund selection will still be necessary as the labels give no clue about the manager’s investment expertise and record.

The value of your investment and any 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.

For employees, the national insurance cut announced in the Autumn Statement took effect on 6 January.

For many years, successive governments have been happy for the public to vaguely believe that national insurance contributions (NICs) are building up in some national benefit fund, rather than representing just another tax on income. While something called the National Insurance Fund does exist, as a House of Commons Library briefing noted back in 2019, “The Fund operates on a ‘pay as you go’ basis; broadly speaking, this year’s contributions pay for this year’s benefits.”

For politicians, the perceived difference between NICs and income tax made it possible to grab the headlines by reducing the basic rate of tax while receiving much less attention for maintaining or even increasing revenue by raising NICs. Last November, the Chancellor appeared to have finally given up on the distinction-without-a-difference approach by proclaiming that his cuts to NICs for employees and the self-employed were tax cuts.

If you are an employee (but not a director, to whom special rules apply), the cut means your main NIC rate (on annual earnings between £12,570 and £50,270) fell from 12% to 10% from 6 January 2024. The extra amount in your pay packet is broadly the same as if a 2p cut had been made to basic rate tax (which covers the same £37,700 band of income). However, from the Chancellor’s viewpoint, the NICs cut was cheaper, as there was no ‘tax cut’ on pension or investment income, both of which are NIC-free.

The employer’s NIC rate did not change, remaining at 13.8% on all earnings above £9,100. If your earnings are below £50,270, the theoretical advantage of using salary sacrifice to pay pension contributions has been marginally reduced but remains attractive, as shown in the table below, based on a £1,000 sacrifice. If you are among the growing band of higher or additional rate taxpayers, the financial advantage of salary sacrifice is unaltered. Either way, if you are not using salary sacrifice to pay pension contributions, it is still worth taking advice about the option. It is beneficial in most circumstances, but there are drawbacks to be aware of.

The value of your investment and any 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.

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.

The gap between two government set income levels is the widest it has ever been.

Source: HMRC, DWP.

The National Living Wage (NLW) and the new State pension both started life in April 2016 during George Osborne’s tenure as Chancellor. In his March 2013 Budget, he announced that the new State pension would begin a year earlier than had originally been planned. Just over two years and an election later (and still Chancellor – they were different times), in July 2015, Mr Osborne produced another surprise in the form of the NLW.

When the NLW began, it was pitched at the rate of £7.20 an hour, or £252.00 a week, based on a 35-hour week. The new State pension, back then often called the single tier pension to avoid confusion with its predecessors, was set at £155.65 a week. Following this November’s Autumn Statement, the NLW is set to rise to £11.44 an hour in April, equivalent to £400.40 for a 35-hour week. The new State pension will benefit from the Triple Lock and rise to £221.20 a week.

Viewed another way, over the eight years to April 2024:

·    The NLW will have risen by 58.9%; and

·    The new State pension will have risen by 42.1%.

As an approximation to inflation over the period, we can say that between September 2015 and September 2023, prices as measured by the CPI rose by 31.7%, so the NLW and new State pension have both outpaced the most widely used yardstick. Using the same timescale, average weekly earnings are up by 39.3%, so again the NLW and new State pension are ahead.

The gap in growth between the two is primarily down to the target that was given to the Low Pay Commission when setting the NLW. Since March 2020, the Commission has had to balance affordability with a goal of the NLW reaching two thirds of median earnings by 2024. That has necessitated a fast growth rate – hence the 9.8% NLW rise from April. From 2025 onwards, NLW increases should stay in line with overall earnings growth… for which many employers will be grateful.

Meanwhile, there is an interesting question that has not been addressed by the government: why is the new State pension level now only 55% of the NLW?

The Chancellor has announced that he will issue an Autumn Statement on 22 November.

Perhaps it was just coincidence, but a year to the day after Liz Truss was elected Prime Minister, the current Chancellor (and her second) announced that there would be an Autumn Statement on 22 November 2023. In autumn 2022, Ms Truss’s first chancellor, Kwasi Kwarteng, presented The Growth Plan, which was widely labelled a mini-Budget, but strictly speaking was no such thing. Budgets need to be accompanied by an Economic and Fiscal Outlook, produced by the Office for Budget Responsibility (OBR), something Mr Kwarteng studiously avoided.

Mr Kwarteng’s non-mini-Budget was rapidly overtaken by events, and an Autumn Statement 2022, with accompanying OBR report, was presented by Jeremy Hunt in mid-November.  Surprisingly 2022 ended as a year with plenty of “fiscal events”, but no formal Budget. By the time Mr Hunt delivered the spring 2023 Budget, over 16 months (and three Chancellors) had passed since the last Budget in October 2021.

If you find yourself wondering whether Budgets are autumn or spring affairs, you are not alone. Back in November 2016, the then Chancellor (Philip Hammond) announced that he would return to an earlier practice and have a single Budget each autumn. The move was welcomed by many independent observers, such as the Institute for Government, which saw it as a way of preventing what had become a pattern of an alternating pattern of Budgets and quasi-budgets every six months or so.

The goal of one big Treasury event every autumn soon fell victim to election timings (2019), Covid-19 (2020, 2021) and then the Ukraine war (2022). The choice to make an Autumn Statement in 2023 is probably also down to election scheduling, as the spring Budget 2024 is widely seen as setting the backdrop to the next general election.

Mr Hunt is not expected to produce much in the way of surprises on 22 November. Attention is likely to be on the OBR’s forecasts, which will indicate how much wiggle room there is for tax cuts next March. Whether or not they emerge, there is one other Budget tradition that is set to repeat soon – the first Budget after an election is the one in which the bitter tax increase medicine is generally administered.

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.

National Savings & Investments has launched two top of the savings league table one-year bonds, but the headline rates may not be your net return.

The primary role of National Savings & Investments (NS&I) is “cost-effective financing for the government.” In the current financial year, NS&I has been charged with raising between £4.5 billion and £10.5 billion for the Treasury coffers, a relatively modest sum compared with a projected £237.8 billion of government bond sales. However, NS&I saw net outflows in June and July totalling £0.3 billion according to the Bank of England.

In response to those outflows and the continued upward pressure on interest rates, in August NS&I went on the offensive and raised the returns on many of its offerings, from the Direct ISAs to the Green Savings Bond. The change that attracted most attention was the new rates for the one-year Guaranteed Growth Bond (GGB) and Guaranteed Income Bond (GIB).

Both of these one-year bonds now offer a 6.2% annual equivalent rate (6.03% payable monthly on the Guaranteed Income Bond). Their previous rates had been 5.0% and 5.12% AER. The 1%+ increases took both bonds to the top of the one-year league tables, where they remain at the time of writing. It is unusual to find an NS&I product sitting in a number one position in any savings league table, not least because it calls into question the product’s cost effectiveness. NS&I has traditionally relied upon its 100% Treasury guarantee to allow it to pay below the best the internet can offer.

Arguably, 6.2% is a good rate, but unless you are a non-taxpayer (once the NS&I interest is added), you will need to factor in tax to assess your net return. This is complicated by the personal savings allowance (PSA), which is £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and nil for the newly expanded band of additional rate taxpayers. Crunch the numbers on a £20,000 GGB and the net returns depend on how much unused allowance you have:

As is often the case, the lesson is to ignore the headline number and focus on the net figure. You could find a cash ISA with a lower headline rate that offers a better net return.

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.

State pension increases could be outpacing inflation next April, and there’s no guarantee of the Triple Lock surviving the next election.

Source: IFS

In mid-September, the Office for National Statistics (ONS) published the latest earnings data, covering the period May to July 2023. Earnings data has been the focus of much attention recently because a fall in the pace of pay growth is seen as a pre-condition for the Bank of England to consider a pause – and eventually cuts – in interest rates. However, the data that emerged in September was doubly important as, in theory, it sets the level of increase for the old and new state pension from April 2024.

Both the old and new state pensions are subject to the Triple Lock, which means they are due to increase by the greater of:

·    Annual earnings growth (including bonuses) for the May to July period;

·    Annual CPI inflation to September; or

·    2.5%.

Given the publicity it receives, you may be surprised to learn that the Triple Lock is nowhere to be found in pensions legislation. The Triple Lock is a discretionary feature that the government can ignore, although with an election almost certain in 2024, it would be difficult to imagine that it would depart much from its requirement this year.

May to July earnings total earnings growth this year was 8.5%, 0.3% higher than expected, a surprise that the ONS attributed to NHS and civil service one-off payments in June and July. That means from next April the old state pension will rise by £13.30 to £169.50 a week and the new state pension (applying to those who reach state pension age after 5 April 2016) will increase by £17.35 to £221.20 a week, unless the government decides to suspend the Triple Lock. It did so in 2022/23, when Covid-19 distorted earnings data and for 2024/25 it could tweak the earnings definition to exclude those one-off payments.

Whether the Triple Lock will survive beyond the next election is unclear. Shortly before the earnings data was published, the Prime Minister refused to commit to the Triple Lock being in the Conservative manifesto. At about the same time, the Institute for Fiscal Studies published a critical report saying that the Triple Lock created uncertainty both for the government and for individuals planning their retirement.

If you find yourself thinking you could retire on £221 a week, think again. It represents less than two thirds of this year’s 35-hour week National Minimum Wage.

The value of your investment and any 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.

A new think tank report highlights the need to increase pension contributions.

Over time, good ideas start to age. Take, for example, automatic enrolment into workplace pensions, which is now eleven years old. In some respects, it has been highly successful – about 80% of employees are now benefiting from pension contributions compared with 46% in 2011. However, other aspects of the legislation have started to look outdated after more than a decade.

Since April 2019, the mandatory minimum level of contributions has been 8% of band earnings (those between £6,240 and £50,270 in 2023/24). Of that 8%, the employer must pay at least 3%, with the employee picking up the balance. Those percentages were legislated for in 2008, almost another era in financial terms. Were automatic enrolment being designed today, the minimum contribution rate would be considerably higher.

A report in September from the capital markets focused think tank New Financial neatly summarises the problem with 8%. It says, “… contributions are not high enough to ensure a comfortable retirement for the majority of people in the UK.” The report finds that in many other countries, minimum contribution rates are higher. Both Denmark and Sweden have a minimum of 15%, while Australia and Ireland are moving their contribution rates to 12%. As well as higher contributions, an international comparison reveals that in all other markets, employers pay more than employees (and in Australia employers pay the entire minimum contribution).

In the short term, the chances of the UK modernising its mandatory pension structure are limited. At the time of writing, there is a private member’s bill – not a government bill – going through parliament that opens the way to higher contributions by making the 8% apply to all earnings up to £50,270. The backdrop of a cost of living crisis and an impending general election do not provide the conditions in which the government – or opposition – would want to call for higher pension contributions.

Nevertheless, the issue will not disappear. As the report says, “The biggest single lever that can be pulled to increase the value of a future pension is the contributions paid into it over time.”

And you do not have to wait for the government, of whichever variety, to pull that lever. 

The value of your investment and any 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.

“Get a will and keep it up to date” is advice that often appears in the personal finance pages and elsewhere. A recent lapse in concentration from the Ministry of Justice illustrates how important that advice can be.

The lapse from the Ministry of Justice involved a key intestacy limit that was due to increase in December 2022. Instead, the timing was overlooked… until July 2023, potentially leaving beneficiaries worse off.

To cover the legal background, in 2014, an amendment to the Administration of Estates Act 1925 was added stating that “the Lord Chancellor must, before the end of a period of 21 days” increase the fixed monetary amount if the consumer price index (CPI) measure of inflation had risen by more than 15% since the figure was last set.

The aim of the amendment was to ensure that the fixed monetary amount for intestacy legacies did not suffer the fate of, for example, the inheritance tax nil rate band, and have its value seriously eroded by inflation over time.

In November 2022, the CPI triggered the increase clause, but the Ministry of Justice failed to notice. In fact, it was not until 26 July 2023 that the overdue increase took effect. By then inflation was enough to mean the increase applied was 19.3% ­– a £52,000 rise from £270,000 to £322,000. An embarrassed Ministry did not issue any accompanying press release and made no reference to the seven-month delay in the explanatory note to the regulation introducing the higher limit.

The House of Lords Secondary Legislation Scrutiny Committee was unimpressed, saying that the Ministry had made an “inexcusable error in timing” and “breached the law”. The Committee also noted that “some estate beneficiaries may have lost out because they have received amounts that are significantly lower than they would have been entitled to…”.

The intestacy rules for England and Wales state that where there is no will, if on first death the deceased leaves children, grandchildren or great grandchildren, the surviving spouse or civil partner is entitled to the deceased’s personal chattels plus the lesser of:

·    the value of the deceased’s residual estate; and

·    a fixed monetary amount plus half the remaining estate.

Intestacy rules differ throughout the UK and there are no automatic increase triggers in Scottish or Northern Irish legislation, where fixed cash amounts applying in similar circumstances have not been revised since February 2012 and January 2008 respectively.

The significant lapse by the Ministry of Justice is just one more reason why having a current will is such an important recommendation. So what are you waiting for?

The Financial Conduct Authority does not regulate tax, wills or estate planning advice. 

You do not have to take your state pension at state pension age.

The current state pension age (SPA) – the earliest age at which you can draw your state pension – is 66. It will be gradually increased to 67 between April 2026 and April 2028. A further rise to 68 is due, probably between 2037 and 2039, but the confirmation of that timing has (conveniently) been delayed until after the next general election.

Most people draw their state pension as soon as it becomes available, which requires a claim to be made. If you do not make that claim, your state pension is automatically deferred until you choose to claim it. Up until then your deferred pension will increase every week you defer, provided you defer for at least nine weeks. The rate of increase is the equivalent of 1% for every nine weeks, which works out at just under 5.8% a year.

For example, if you defer the current state pension of £203.85 a week for 52 weeks you would receive an extra £11.82 a week once it started before adding the normal inflation related uplift. The increase is not compounded, so for two years’ deferral the extra would be £23.64, and so on.

5.8% a year does not sound bad, but don’t forget, your higher pension will be paid for a shorter period, as it started later. It can take a long time for the extra payments to overtake the loss of the full pension in the deferred period. For example, for a one-year deferral you will need to wait until you are about 81 before the total pension payments you have received are higher because of deferral, assuming 2.5% CPI inflation. 

Nevertheless, there can be good reasons to defer. For example, if you are still working, your state pension would attract tax at your highest rate(s) which could be lower once you fully retire. There are other tax planning situations where being able to minimise income in a tax year can be useful, for example when cashing in an investment bond. Before you claim your state pension, make sure you take all your circumstances into consideration..

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.

Investment funds come in a variety of formats and acronyms – the differences are worth knowing.

The days of individuals largely owning UK shares have long passed. The latest National Statistics data shows that in 2020, only 12% of shares were held by individuals. One reason behind that level has been the growth of investment funds – sometimes called collective funds – which pool capital from a range of investors. This approach offers a much greater diversification of holdings than most individual investors could achieve. 

In the UK there are now three main types of collective funds vying for the private investor’s attention: unit trusts, open-ended investment companies (OEICs) and exchange traded funds (ETFs).

Unit trusts have been around since 1930s and were once the dominant type of investment fund. As the name suggests, their structure is based around a trust, with investors owning ‘units’ in the trust in proportion to their investment. The trust is open-ended, allowing it to create more units as new investors arrive or cancel units as investors cash in and leave.

OEICs are in some ways the successors to unit trusts, although many unit trusts still exist. Instead of a trust-based structure with unitholders, the OEIC is a company-based structure with shareholders. Many EU-based funds and US mutual funds have a very similar structure to OEICs, which first appeared in the UK in 1997. For the individual investor, OEICs look virtually identical to unit trusts, with the same tax treatment and regulatory framework. As with the unit prices of unit trusts, OEIC share prices are calculated by the fund, based on the value of the underlying investments, with sales and purchases via the manager usually occurring at a fixed time each day.

ETFs are the (relatively) new kids on the block. They have a corporate structure like OEICs, but their shares are traded on the stock exchange, so can be bought and sold at any time the exchange is open. An ETF’s share price is not calculated by the manager but decided by the market. In practice the market price of an ETF share normally very closely matches the value of the underlying investments.  

The similarities between this trio of structures hide some subtle differences, making it best always to take advice before choosing an investment fund.

The value of pensions and investments and the income they produce can fall as well as rise and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.  

The value of your investment and any 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.

As interest rates continue to rise, we need to consider why.

Source: Bank of England, National Statistics

Cast your mind back to July 2020. Covid-19 was creating massive social and economic disruption, reflected in a Bank of England interest rate of just 0.1% and instant access savings rates were little more than 1%. Three years later, the Bank of England rate had increased to 5% and some savings accounts were offering about 4.4%. Which was the better time to have cash on deposit?

The obvious answer would be July 2023, but there is a case for saying that July 2020 was in fact better for savers. The reason is simple: inflation. In July 2020, CPI inflation was running at 1.0%, whereas in July 2023, it was 6.8%. One way investment professionals look at interest rates is to take the nominal headline figure and subtract the going rate of inflation to arrive at a ‘real’ interest rate. Do that, and July 2020 delivered a very small positive real interest rate (1.1% - 1.0% = 0.1%), while July 2023 had a negative ‘real’ rate of over 2% (4.4% - 6.8% = -2.4%). When real rates are below zero, the message is that inflation is eroding your cash quicker than accumulating interest is growing it.

Tax has been ignored here to keep things simple, but tax too has become much more relevant to savings interest. The £1,000 personal savings allowance for basic rate taxpayers covered interest from a £100,000 deposit when rates were at 1%: now at, say, 4%, the corresponding figure is £25,000 and for higher rate taxpayers those cash figures halve. As the graph shows, since the start of 2010, the Bank of England’s base rate has rarely been higher than inflation. Although easy access rates do not precisely match the Bank’s rate, generally the two do not move far apart. So, since 2010, instant access accounts have lost their savers buying power, even with all interest reinvested. While interest rates are higher now than in the 2010s – and gaining plenty of attention – inflation is higher still.

The unhappy mathematics of real interest rates do not mean you should avoid cash deposits at all costs. Beyond the obvious need for rainy day money there are plenty of other reasons to retain some readily available funds earning interest. However, the more of your wealth that you hold on deposit, the more you must have good reasons for doing so.

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.

For specialist tax advice, please refer to an accountant or tax specialist.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. 

Is Downing Street really planning to abolish inheritance tax?

Source: HMRC

Shortly before the so-called ‘silly season’ (Parliament’s summer recess) got underway, several newspapers carried stories that Downing Street was considering the abolition of inheritance tax (IHT) in an attempt to appeal to certain voters. The speculation did not last for long before the Uxbridge by-election result shifted the debate towards environmental concerns instead. However, it seems likely that the question of culling IHT will re-emerge as we head towards the next general election.

As the graph shows, receipts from IHT have more than doubled in the last ten years to over £7 billion. That growth has been aided by a combination of a nil rate band frozen at £325,000 since 2009 and, in recent times, rampant inflation. Even the introduction of the residence nil rate band in 2017/18 (now frozen at £175,000 until April 2028) made little impression on the upward march of IHT revenue.

Inheritance tax is nothing new: it has existed in some form in the UK since 1780, the three most recent versions being estate duty (1894-1975), capital transfer tax (1975-1986) and inheritance tax (1986 to date). From the Treasury’s viewpoint, IHT, like its predecessors, is a particularly efficient tax. The number of estates that paid IHT in 2020/21 (HMRC’s latest statistics) is 27,000, with the average tax liability being £214,000. 

This relatively small number of taxpaying estates and the large sums involved mean that HMRC can justify paying close attention to estate returns. A Freedom of Information response from HMRC in January 2023 underlined the impact of that scrutiny: in 2020/21 £326 million was “recovered” following over 4,000 “investigations”.

Given the current state of government finances, were IHT to be axed, then compensating for the lost income would entail adding about 1p extra on the basic rate of income tax or 4p on the higher rate. Alternatively, the standard VAT rate would need to go up to about 21%. If you compare how many people would be affected by such changes against the number who would benefit from the end of inheritance tax, the politics would seem to point towards continuing that 300-year plus tradition of estate taxes.

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice or inheritance tax planning.

Capital gains tax raised £16.7 billion in 2021/22, according to HMRC – a 15% increase over the previous year. But what lies behind these statistics? 

Source: HMRC

In early August media outlets reported that the government had raised a record amount of capital gains tax (CGT) last year. There was no doubting the numbers, as they came from the body collecting the tax – HMRC. However, the detail behind the statistics is in some ways more interesting than the headlines.

·    In 2021/22, there were 370,000 individuals liable to CGT and 24,000 trusts. As HMRC notes, this is about 1% of the number of people who pay income tax.

·    45% of all CGT came from an elite group of taxpayers – in fact, less than 1% of all CGT payers – and members of this group all made gains of £5 million or more.

·    Some of those realising capital gains in 2021/22 may have been trying to pre-empt an increase in CGT rates: up until the end of November 2021, there was a question mark hanging over the future levels of the tax. Rishi Sunak, Chancellor at the time, had commissioned and received two reports on CGT from the (now defunct) Office of Tax Simplification, but had been sitting on both, keeping taxpayers and their advisers in suspense.

·    There was 56% jump in the taxable sales (and other disposals) of residential property in 2021/22 over the previous tax year, with a corresponding rise in tax liabilities. HMRC data shows that sales remained at virtually the same high level in 2022/23.  This could well be confirmation of anecdotal evidence that smaller buy-to-let investors have been selling up in response to tax increases, additional legislative requirements and rising mortgage interest rates.

If your reaction to these figures is that you never pay CGT and never will, you may need to think again. In 2021/22, the annual exempt amount – the net amount of gains a person could make free of CGT in a tax year – was £12,300. In the current tax year, the exempt amount is £6,000 and from 6 April 2024 it will halve to just £3,000. When these changes were announced last November, HMRC estimated that in this tax year around half a million individuals and trusts could be affected. You too might become part of the CGT statistics.

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.

For specialist tax advice, please refer to an accountant or tax specialist.

With a general election less than 18 months away, thoughts are turning towards the potential policies of a new occupant of 11 Downing Street.

With most opinion polls showing a lead for the Labour Party of around 20%, what the Shadow Chancellor, Rachel Reeves, says about her approach to public finances is gaining ever more attention. Her stance so far has been to talk only of three specific tax changes:

·    Removing the current exemption from VAT for private school fees;

·    Scrapping the rules that favour wealthy UK residents who are non-domiciled; and

·    Ending the generous (28%) capital gains tax treatment of carried interest for private equity managers and replacing it with an income tax charge.

Like most politicians hoping to win power at the next election, Ms Reeves has studiously avoided proposing tax increases that could affect the broad electorate. However, given the level of government borrowing (about £130 billion in this financial year) and the pressures on public services, many economists see tax rises – beyond those already baked in – as inevitable.

One possible clue to what future tax changes might look like emerged in a recent report from the Resolution Foundation. The chief executive of the think tank, Torsten Bell, was formerly Ed Miliband's head of policy and a Treasury civil servant who became special adviser to the last Labour Chancellor, Alistair Darling. The Foundation’s report listed a set of tax reforms which, as a complete package, did not raise any additional revenue but did reshape some tax structures.

For example, the report recommended that the phasing out of the personal allowance above £100,000 be scrapped because of the “regressive” 60% marginal rate of tax it created. For the same tax-rate-distorting reason, the report proposed scrapping the High Income Child Benefit Charge, triggered at £50,000. But, before you raise a cheer, the report’s quid pro quos included lowering the starting point of the additional rate (45% outside Scotland and 47% in Scotland) to £100,000 (from its recently lowered £125,140) and raising the basic rate tax levied on dividends from 8.75% to 20%.

History suggests that Chancellors – of all hues – are more prone to co-opt sensible tax-raising ideas than those that cut Treasury income, so whoever wins the next election, the need for a regular review of your tax planning should remain a priority.

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.

For specialist tax advice, please refer to an accountant or tax specialist.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. 

The Chancellor has announced a new initiative to stimulate higher risk pension investment, shifting focus to UK private companies.

“British pensioners should benefit from British business success. By unlocking investment, we will boost retirement income by over £1,000 a year for a typical earner over the course of their career.”

Those are the words of the Chancellor, quoted in a recent press release from the Treasury launching the Mansion House Reforms on pension fund investment. The statement is a bold one that would probably attract criticism from the Financial Conduct Authority about unjustified performance claims, had it not been made by the regulator’s ultimate boss. Suggesting that any particular investment action “will boost income” ignores the familiar caveat that the value of investments can fall as well as rise.

In the case of the Chancellor’s proposed reforms, that warning is particularly relevant because of the investments being targeted. For example, a key part of the package was the announcement that by 2030, nine of the UK’s largest Defined Contribution (DC) pension providers aim to place 5% of their default funds into UK private companies, that is companies whose shares are not listed on the London Stock Exchange. Such companies are generally small and often young. While they offer potential for high growth – think start-up technology businesses – they are often also high risk and not all of them succeed.

That risk means that such businesses can find raising capital difficult and governments have often stepped in with tax incentive schemes, such as Venture Capital Trusts, to encourage investors to commit funds. The Chancellor is adopting a less tax-costly approach by encouraging workplace pension funds to allocate part of their members’ existing contributions to unlisted companies. If other DC pension providers follow suit, the government thinks “up to £50 billion of investment in high-growth companies” could be unlocked by the end of the decade.

The allocation will only apply to default funds, which are the funds where employer and employee pension contributions are directed if no fund choice is made. Most of the 18 million active members of DC workplace pension schemes end up invested in default funds. However, if you are in such a scheme, you will almost always have a choice of other funds. For example, for some, looking at sustainability and climate-related issues may be an important factor.

The Chancellor’s latest move is another reminder that default may not be the best option and that, as with any investment, personally tailored advice should be your starting point.

The value of pensions and investments and the income they produce can fall as well as rise and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.  

Rising mortgage rates are posing some difficult questions for one of the major providers of housing finance.

You would think that a group estimated to have provided £8.8 billion of residential property finance to 170,000 first-time buyers in 2022 would be well known, with a high street presence and careful oversight from the Financial Conduct Authority (FCA) and the Bank of England. However, you would be wrong.

The group in question has its own acronym, BOMAD – the Bank of Mum and Dad – and has been a consistent supplier of gifts and/or loans to nearly half of first-time buyers for the last decade. While the BOMAD generally does not charge interest, the increase in interest rates that has occurred over the last 18 months could see it facing some difficult questions. With very few exceptions, the first-time buyers that the BOMAD financed will also have borrowed from mainstream lenders and thus be facing increased mortgage costs at some point, typically when their two-year or five-year fixed rate mortgage deal ends.

The FCA has already told mortgage providers that they should consider offering borrowers:

·    A switch to interest-only payments for six months, or

·    An extension to their mortgage term to reduce their monthly payments, with the option to switch back within six months.

If you are a member of the BOMAD group, what should you do when you are asked for mortgage assistance by your children or grandchildren? The answer will depend upon many factors including:

·    What other actions your ‘customer’ has already taken to reduce their mortgage outlay;

·    How long any support is likely to be required;

·    How much capital, if any, you are willing and able to gift or lend; and

·    Whether you have surplus income, for example, as the result of higher interest rates, that you can give away or lend.

Inevitably, inheritance tax is also a consideration, although other taxes might be relevant. For example, this tax year’s lowered annual exemption means capital gains tax may be a problem if you are realising an investment to provide liquid funds.

The various options and their tax consequences make advice essential. Mainstream banks undertake due diligence before acting and so should the BOMAD.

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.

For specialist tax advice, please refer to an accountant or tax specialist.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

New research reveals that one in three people could face hardship in retirement.

The “cost of living crisis” is a phrase that is hard to avoid in any media. High inflation, stealthily increasing taxation and constrained earnings growth are an unwelcome combination that leaves few of us unaffected. In time, the crisis should pass. It is easy to forget now that a little over two years ago, in July 2021, inflation was bang on the Bank of England’s target, at 2.0%.

The understandable focus on today’s living costs does not mean that future cost of living issues have disappeared. To examine this point, one of the UK’s major insurance companies has launched a National Retirement Forecast (NRF) designed to capture a snapshot of the UK’s future retirement landscape.

The forecast uses the Pension and Lifetime Savings Association’s (PLSA) ‘Retirement Living Standards’ levels to estimate the lifestyle that people are set to achieve when they stop working. These standards, covering minimum, moderate and comfortable retirement lifestyles, are updated each year to take account of price increases and changes in retirement spending patterns. The latest set, published in January 2023, show that in 2022 the yearly cost of a minimum retirement lifestyle increased from £10,900 to £12,800 (18%) for a single person and from £16,700 to £19,900 (19%) for a couple.

The new forecast starts with projections based on the current savings and behaviours of individuals and takes a comprehensive view of sources of retirement income, including pensions, other long-term savings, inheritance, and accounts for any housing costs. Those projections are then compared to the PLSA’s standards to show the distribution of lifestyles in the future retired population. All the calculations are made in today’s money terms.

The main conclusion is that over a third of the population are not on target to achieve even the minimum lifestyle standard when they reach retirement. However, an almost identical proportion are currently set for a comfortable retirement. 

It makes sense to find out which retirement outcome you are on track to achieve, as the sooner you know, the more time you have to adjust your plans accordingly.

The value of pensions and investments and the income they produce can fall as well as rise and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

New income tax statistics from HMRC appear to be good news, but the numbers are not what they seem.

This table, recently released by HMRC, shows the average income tax rate for the three main categories of taxpayer. For example, in 2020/21, on average, basic rate taxpayers paid 9.5% of their income in tax and in the current tax year are expected to pay a slightly larger share, 9.9%. At first sight, higher rate and additional rate taxpayers seem to be doing better, as their average income tax rate drops.

HMRC offers no real explanation for the difference, other than a statement that says, “Average rates of income tax vary over time depending on the number of overall income tax payers and the number in each marginal rate band, as well as growth in incomes and changes to income tax thresholds and allowances.”

The story behind the changing numbers may be why HMRC is less than comprehensive in setting out what has happened:

·    For basic rate taxpayers, the average rate has increased because the personal allowance has only risen by £70 (0.56%) since 2020/21, whereas average weekly earnings increased by 23% between April 2020 and April 2023. So a greater share of income is taxable in 2023/24 than in 2020/21 and the proportionate tax rate rises.

·    The backdrop for higher rate taxpayers is the same, so why the falling average rate? What HMRC forgot to mention is that in 2020/21, the higher rate tax band ended at £150,000, whereas in 2023/24 it stops at £125,140. Many higher rate taxpayers towards the top of the band three years ago have now migrated into the additional rate band. The overall result is the lower average rate for higher rate taxpayers.

·    The picture for additional rate taxpayers is almost a mirror image of the higher rate scenario. The near £25,000 lower starting point for additional rate in 2023/24 than 2020/21 means there are just about double the number of additional rate taxpayers in 2023/24 than in 2020/21. That extra, lower income population in the additional rate band drags down the average rate.

All of which should make you check what tax band you fall into for 2023/24 and seek professional advice if you have questions or concerns about how the changing rates might affect you.

Tax treatment varies according to individual circumstances and is subject to change.

The Financial Conduct Authority does not regulate tax advice.

For specialist tax advice, please refer to an accountant or tax specialist.