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July 2015 Budget preview

Archive for June, 2015

July 2015 Budget preview

Thursday, June 25th, 2015

George Osborne will deliver the second Budget of 2015 on Wednesday, July 8th. So, what can we expect?

The Economic Background

The outlook for the UK economy is reasonably good. The CBI have downgraded their growth forecasts for the year slightly, but are still forecasting growth of 2.4% for this year and 2.5% for next year. Unemployment continues to fall and welfare spending is at a 25 year low. Inflation turned negative in April, but Bank of England Governor, Mark Carney, is not worried about deflation, expecting inflation to start moving towards the 2% target level by the end of the year.

In Europe, Greece continues to teeter on the brink and there there are still problems in many European economies and we can’t expect the German taxpayer to pick up the bill indefinitely.

The US economy added 280,000 jobs in May which was well ahead of expectations and whilst the Chinese economy shows worrying signs of a slowdown, the Government there seems ready to take whatever action is needed to continue stimulating the economy.

What can we expect from the Chancellor?

In the Queen’s Speech we have already seen a commitment to introduce a law preventing rises in tax, VAT and national insurance during the life of this parliament.

We can expect the Chancellor to confirm that the Government will raise £1.5bn by selling its remaining share of Royal Mail. There will also be a further £3bn of savings from another raid on Whitehall departments: the Budget speech should then see confirmation of where the Government will further cut welfare spending.

There is likely to be a further commitment to continue raising the personal allowance. We may also see a commitment to raise the starting point for 40% tax to £50,000, probably by the end of this parliament.

We will certainly have further details of how he plans to raise the Inheritance Tax threshold on family homes to £1m for married couples/civil partners. The commitment is to do this by 2017, so he needs to act soon.

One unwelcome action on pensions may be to close the ‘salary sacrifice loophole.’ This is where employers allow staff to take a ‘pay cut,’ with the money instead being put towards pension contributions or other benefits like childcare, thus removing the amount sacrificed from National Insurance and this is  estimated to cost £5bn a year in National Insurance payments.

Other matters may include a veto for English and Welsh MPs over English/Welsh-only matters with Parliamentary procedures changed so that the details of any legislation, e.g. income tax, affecting England and Wales will be considered by a Committee drawn in proportion to party strength in England and Wales. We might also see the movement towards the replacement of the Human Rights Act with a British Bill of Rights.

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

Will you outlive your pension?

Tuesday, June 16th, 2015

An adviser often has to ask you personal questions to get a full picture to help you arrange your finances to your best advantage.

It’s no different when it comes to planning for your retirement. However, when we’re talking about your retirement options, there is one very difficult question we have to ask you: “How long do you expect to live?”

On occasion, that can be a sensitive subject. Who amongst us likes to think about when we might die? And, often, it’s a question our clients feel is impossible to answer. But your life expectancy plays a big part in retirement planning.

To help you plan effectively, we need to have a realistic idea of how many years your pension pot may have to cover.  This video helps to explain the importance of life expectancy in retirement planning in a refreshingly simple, jargon free way. You might find it useful to spend a minute watching it. Why is your life expectancy important? Quite simply, your life expectancy is important to your retirement planning because underestimating it could have a major impact on your quality of life as you get older. There’s a possibility you may outlive your pension pot and that could leave you facing significant financial hardship in your later years.

The value of your investment can go down as well as up and you may not get back the full amount you invested. The value of tax reliefs depends on your individual circumstances. Tax laws can change.

Interest rates: now it’s 2016

Tuesday, June 16th, 2015

The latest Quarterly Inflation Report from the Bank of England suggests there will no base rate rise this year.    

“Free beer tomorrow” is a sign that used to be spotted in some pubs before they were closed down or became eateries rather than drinking establishments. Of course, tomorrow was always one day away, so free beer was an illusion. It feels the same with increases to the Bank of England’s (BoE) base rate, which has been stuck at 0.5% since March 2009.

“Interest rate rises next year” has become a variant on “free beer tomorrow”, with learned predictions from pundits, experts and even the Bank of England’s Governor, Mark Carney, proving to be mere shibboleths. In presenting the Bank’s latest Quarterly Inflation Report, Mr Carney deliberately avoided making himself a hostage to fortune, saying that the Bank “… has long expected that these (economic) headwinds will likely merit not only a more gradual rate of increase in Bank Rate than in previous cycles, but also require levels of Bank Rate to remain below average historical levels for some time to come”.

Look inside the Report itself and there is a graph showing how the money market (not the Bank) expects official interest rates to move over the next three years. At the same time, the BoE avoids confirming that the market’s figures are built into the Bank’s economic forecasts. As of May 2015 the market reading was that  “…Bank Rate is expected to rise from early 2016, but to only 1.4% in three years’ time”.

That is a much slower pace of increase than in previous interest rate raising cycles, but it ties in with the Governor’s remarks. It could also be wrong: as Mr Carney wryly remarked six days after the general election, “Last week, we were reminded of the difficulties in forecasting the outcomes of complex, interacting systems”.

Fortunately there are plenty of ways of generating income that do not rely on base rates and some which, in recent weeks, have seen an increase in yields. For more information on your options, please talk to us. And do it today, not tomorrow!

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.

Millions snared by tax traps

Thursday, June 11th, 2015

The UK tax code keeps getting more complicated, says the Financial Times, which is why millions of people get caught in tax traps that cost them hundreds or thousands of pounds.

The FT’s analysis focused on three big anomalies: For households where one parent earns over £50,000, the loss of child benefit results in an effective rate much higher than the 40% official rate of income tax. The same applies to those earning over £100,000 who lose their personal income tax allowance and pay an effective rate of 60%. The transfer of up to £1,060 of the personal allowance from a low-earning to a high-earning spouse is complicated and unfair. All three require taxpayers to engage in equally complicated strategies if they want to avoid penal tax rates.

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

Mary Poppins pension

Thursday, June 11th, 2015

Auto enrolment is getting closer to home

The roll out of automatic enrolment of employees into pension schemes started back in October 2012 with the largest employers. The logic was that these big organisations would have the necessary resources to start the process quickly and efficiently. Since those early days, the size of employers required to introduce automatic enrolment has been shrinking. As of this month, the threshold fell to fewer than 30 employees.

This is the minimum threshold and embraces nearly 800,000 small and micro employers. In this group, the precise timing (“staging date”) for when automatic enrolment must be offered is driven by PAYE coding letters, which can have unusual effects. For example, two employers working from the same premises might have staging dates two years apart.

The first sub-30 group (with the last two letters of PAYE reference numbers 92, A1-A9, B1 – B9, AA-AZ, BA-BW, M1-M9, MA-MZ, Z1-Z9, ZA-ZZ, 0A-Z, 1A-1Z or 2A-2Z) have now reached their staging date of 1 June 2015. That has prompted some press coverage about the employment of nannies. Parents who employ nannies directly fall within the automatic enrolment rules, even if the recruitment of the nanny was originally via an agency. The initial pension cost will be modest – generally 1% of earnings above £5,824 – but the rate will rise to 2% in October 2017 and 3% a year later. For a nanny in London that could mean employer pension contributions of more than £1,000 a year from autumn 2018.

The pensioning of Mary Poppins is a reminder of the way auto-enrolment is working its way through to all employers. If you are an employer – of any sort – make sure you know your staging date and understand your responsibilities. Failure to do so could lead to escalating fines from the Pensions Regulator

The value of your investment can go down as well as up and you may not get back the full amount you invested. The value of tax reliefs depends on your individual circumstances. Tax laws can change.


Get ready for the second Budget of 2015

Tuesday, June 9th, 2015

BudgetLast month’s unexpected election result has been followed by the anticipated announcement of a second 2015 Budget.

Quite what it will be about is unclear for now – the Treasury’s press release gave little more than the date. In terms of what was in the Conservative manifesto on tax, there are two measures that could be fleshed out next month that were not mentioned in the March Budget:

  • More changes were proposed to the pension annual allowance, following the Budget statement that the lifetime allowance would be further reduced to £1 million from 2016/17. The manifesto suggested that for those with income of over £150,000, the allowance would be reduced by £1 for each £2 of excess income, subject to a minimum of £10,000 if income exceeds £210,000.
  • The cut in the annual allowance was intended to fund a new main residence inheritance tax allowance of £175,000 transferable between spouses and civil partners on gifts to children or grandchildren. The allowance would be phased out for estates above £2M, again at the rate of £1 for each £2 excess. It would be much easier just to increase the nil rate band to £500,000. This may yet happen, as the manifesto proposals met with some criticism on various grounds, e.g. discouragement of trading down.

Either of these ideas could disrupt your existing financial planning, so do make sure you keep in contact with us for post-Budget news.

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