Headley Winter Newsletter 2023
It has been another busy year and we now look forward to spending some peaceful time with our friends and families. Much has changed economically and politically, but our advice continues to centre around your longer term goals and helping you achieve them. Some of the articles below, such as the changes in the recent Autumn Statement, may mean some adjustment is needed within your plans and if so, we will take them into account with our ongoing advice.
We wish you and your families all the best over the holiday period and look forward to continuing to help and advise you into 2024 and beyond.
The Chancellor’s Autumn Statement
The Chancellor, Jeremy Hunt, presented his 2023 Autumn Statement to Parliament on Wednesday 22 November. Although there were no showstopping measures, the cuts to National Insurance introduced were a clear change from the previous rhetoric that high inflation meant it was no time to release more money into the economy via tax cuts. What a difference a small amount of time makes.
Key measures announced for England (national variations for Scotland, Wales and Northern Ireland may apply):
- Main rate of employee National Insurance to be cut from 12% to 10% from 6 January
- Class 2 National Insurance – paid by self-employed people earning more than £12,570 – to be abolished entirely from April
- Class 4 National Insurance – paid by self-employed people earning between £12,570 and £50,270 – to be cut from 9% to 8% from April
- ‘Full expensing’, allowing companies to deduct business investment from profits for taxation purposes, to be made permanent
- 75% business rates discount for retail, hospitality and leisure firms extended for another year
- Alcohol duties frozen until 1 August
Wages and benefits
- The National Living Wage will rise from £10.42 to £11.44 an hour from next April, an increase of 9.8%
- The state pension will rise by 8.5% from April, matching September’s rate of average earnings growth
- Means-tested and disability benefits, will each rise by 6.7%, matching September’s rate of inflation
- Reforms are to be instituted to the Work Capability Assessment for those looking to claim sickness-related out-of-work benefits, reflecting the increased availability of working from home since the pandemic
Despite speculation before the Autumn Statement, there were no changes to inheritance tax. For income tax, the personal allowance and basic rate bands for income tax will remain at £12,570 and £37,700 respectively. The threshold for additional rate tax will remain at £125,140.
For capital gains tax, the CGT annual exemption will reduce from £6,000 to £3,000 from April 2024. The rates will remain at 10% for gains falling in the basic rate band, and 20% for everything over (for residential property, these rates are 18% and 28% respectively).
The dividend allowance will reduce from £1,000 to £500 for 2024/25. The dividend tax rates for basic rate, higher rate and additional rate taxpayers will remain unchanged at 8.75%, 33.75% and 39.35%.
For corporation tax, the main rate will remain at 25% and the rate for small companies with profits below £50,000 continues at 19%. There is tapering relief for businesses with profits between £50,000 and £250,000 so that they pay less than the main rate.
Changes to ISA rules
Although there were no changes to the ISA subscription limits which will remain at £20,000 for adult ISAs and £9,000 for Junior ISAs, the Autumn Statement removed the ‘one ISA of each type per tax year’ restriction from April 2024. This simplification means investors will be able to subscribe to multiple cash or stocks and shares ISAs in a year without invalidating their subscriptions leading to a loss of tax free status on their savings.
Partial ISA transfers will also be possible from April 2024. Presently there are separate rules for the transfer of current and previous years subscriptions. While it is possible to transfer part of previous years’ subscriptions, transfers of the current year’s subscription must be for the whole amount including the attributable investment growth. This changes from April 2024 allowing partial transfers to apply to all ISA subscriptions whenever they were made.
Finally, the age at which an adult ISA can be opened will be fixed at 18 across all ISA types from April. This will mean it will no longer be possible to open an adult Cash ISA at age 16, removing the ability for 16 and 17 year olds to pay £29,000 into ISAs by combining contributions into both a Cash ISA and Junior ISA.
Pension Lifetime Allowance update
HMRC has published some further details regarding the new pension regime for 2024/25, where the lifetime allowance (LTA) will be completely abolished and two new allowances come into play – the lump sum allowance and the lump sum & death benefit allowance.
Full details have not yet been provided but we are monitoring these changes as they could have significant impact for some of our clients.
One significant point from the update though, is that pension funds used by beneficiaries to go into drawdown or to buy an annuity will continue to be tax free for the beneficiary where the member died before age 75. This was a change to previous policy documents which mentioned following the death of the member such benefits would become taxable.
We will detail further updates in due course and work with you to see if you are impacted by the pension changes.
Pension pot for life consultation launched
A call for evidence will be launched on a lifetime provider model which would allow individuals to choose which pension scheme contributions are paid to, rather than the scheme chosen by their employer – to reduce the number of small pots created when employees change jobs and a move towards having one pension pot for life.
Following a recent consultation, the Government’s response confirms it will introduce a multiple default consolidator model to enable a small number of authorised schemes to act as a consolidator for eligible pension pots under £1,000.
A return to happier times for lower risk clients?
This article is an update to the summer 2023 article we wrote when inflation and interest rates were rising sharply, as their trajectory has now changed.
Over the last year, clients with lower risk portfolios have often experienced more volatility than those with higher risk investments. It is important to remember that lower risk strategies generally fall less than higher risk funds, but there is no guarantee of this.
The explanation for the fall in these lower risk portfolios can be traced back to the rapid rise in interest rates. With interest rates at record lows for the last 15 years or so, investors have looked at the rates offered by government securities and large companies to invest into for lower risk strategies, as the risk of them collapsing are small. When interest rates have been around 0.5% in the UK for over 10 years and government securities are offering 2.5%, say, investments have been fairly safe in government securities.
For over a year now though, interest rates in the UK (and around the world) have shot up to help combat inflation. Investors saw those government securities at 2.5% and also saw bank interest rates at much higher than 2.5%. So the money moved away from the government securities and into the banks. The ‘price’ therefore of the government securities fell as demand lessened and hence clients with these investments in their portfolios saw their plan values fall. This explains a lot of the fall over the last year in the lower risk portfolios.
However, it appears the interest rate medicine to combat inflation has largely worked as inflation has fallen around the world in the second half of 2023 and the future expectation is for further falls. Central banks around the world are now discussing interest rate cuts, although have been cautious to avoid putting precise dates in place. Interest rates are unlikely to fall to the levels they have been at, but they are expected to be lower than they are now and that is the key issue for investments – the expected direction of travel for interest rates. When the interest rates come down in savings accounts, investors should begin moving back into large companies and government securities with their money. As the demand for those increases again, the price should also increase, re-inflating the value of the portfolios, especially in lower risk portfolios where there is a higher weighting. Many lower risk funds are already seeing rises as the money has started flowing back into them from individual investors and demand from large fund managers.
For those lower risk investors who have held steady over the last year, rather than removing their investments, the future expected fall in interest rates should hopefully reward them for their patience and not panicing. The general rule of “time in” the markets rather than “timing” the markets is likely to come true again.
As with all investments though, there is no guarantee of future performance.
Capital Gains tax changes
With the capital gains tax halving for the second year in a row from April 2024, it’s sensible to use your capital gains allowance where you are able to. A year ago, the allowance was at £12,300 for the 2022/23 tax year – ie you could “bank” £12,300 of profit within an investment without paying any tax. That allowance is now £6,000 and from April 2024 it will fall to £3,000, less than a third of the level it was at.
Where there are gains to be taken, we’d generally recommend doing this before the change to £3,000 in April. If you haven’t used your ISA allowance of £20,000 for this tax year, money can be ringfenced into the tax free ISA dovetailed with using the capital gains allowance, allowing future gains to grow tax free. A useful trick with the forthcoming lower £3,000 for gains outside of ISA.
If this is of interest to you and we haven’t yet discussed this with you, please let us know.
Before we go, we wish you good health and happiness over the festive period and thank you for you for choosing Headley.
Our offices will be closing at 4pm on Friday 22nd December, and will reopen on Tuesday 2nd January 2024, ready to assist you with your financial needs.
We look forward to continuing to work with you in 2024 and help you enjoy life enriched
Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax relief depends upon individual circumstances and tax rules may change. This newsletter is provided strictly for general consideration only and is based on our understanding of current law and HM Revenue & Customs practice. No action must be taken, or refrained from, based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.
The Financial Conduct Authority does not regulate taxation advice, estate planning, inheritance tax planning, wills or trusts.
Sources for articles within this newsletter – Threesixty, The Bank of England, Money Helper, Gov.uk, Abrdn, Asset Intelligence