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Are tax bills set to rise?

Archive for February, 2017

Are tax bills set to rise?

Wednesday, February 15th, 2017

A recent report from the Institute for Fiscal Studies (IFS) suggests that the amount of tax paid in the UK is set to rise to levels not seen for thirty years. Plans by the Chancellor, Philip Hammond, to increase tax rates and reduce public spending in order to fill the £34 billion hole in the budget, will mean that over 37% of the UK’s national income will come from tax receipts, a figure not seen since 1987.

According to the IFS, the Chancellor’s decision to scrap the plans of his predecessor, George Osborne, to balance the country’s books by 2020 means that austerity measures are likely to continue beyond Hammond’s self-imposed new target of the end of the next parliament. Whilst the report estimates that the UK economy will see growth of 1.6% this year, this will slow to 1.3% in 2018.

The weaker pound following the Brexit result last year will help performance in the export and manufacturing sectors, but this will be counteracted by higher costs for consumers. The report also forecasts that the UK economy will be 3% smaller in 2030 than it would have been had Britain remained in the EU.

The report also looks at the impact upon public services, with real spending on this area having fallen by 10% since the 2009-10 financial year. The NHS has been hit particularly hard in recent years: in the five year period between 2009-10 and 2014-15, health spending has seen the slowest rate of growth since the 1950s.

Despite cuts in these and other areas, the Chancellor is relying most heavily on revenues from income tax to reduce the deficit. An increase of 24% in income tax receipts is being sought by the government from now until 2021-22. Half of these will come from an additional 140,000 people paying the top rate of tax on their earnings, despite the government’s promise to raise the threshold for the higher rate to £50,000 by 2020.

Which is best? Save or invest?

Wednesday, February 15th, 2017

Whilst you might expect an increase in the cash and investment ISA limit to be welcomed, at least one dissenting voice has come from Steve Webb, former Pensions Minister and current policy director at Royal London. Webb has warned that the rise in April from the current annual limit of £15,240 up to £20,000 could encourage poor long-term investment choices.

The criticism is aimed at the cash element in particular. Webb has described cash ISAs as useful as a ‘rainy day fund’ but unsuitable as a way to help invested money grow. As such, he’s advised that a more appropriate investment limit for cash ISAs would be £5,000, just a quarter of the proposed new limit.

A report from Royal London backs up this view. Whilst cash ISAs continue to grow in popularity, the returns they offer often pale in comparison to many investment opportunities. Had all the money put into cash ISAs over the past decade been invested instead, the report estimates that savers would now collectively have £360 billion, significantly more than the actual figure of £250 billion. Inflation has also taken its toll on the value offered, with £26 billion worth of savings wiped out in the same period, thanks to cash ISAs failing to keep pace with inflation rates.

Most of us manage our finances in numbers a lot smaller than billions, however, so what does all of this mean? The latest figures show that £1,000 paid into a cash ISA a decade ago would be worth under £900 in today’s money. In contrast, had that money been invested in a typical multi-asset fund where money is spread across property, bonds and shares, it would be worth over £1,500 today.

Whilst this suggests that those looking to grow their money should opt for investments, it doesn’t take into account the safety of cash in the short term and the convenience of having money readily available in an ISA. The most important factor in making decisions around your finances is to think proactively. Think about your individual circumstances before you opt to tie your money up in an investment but, equally, don’t simply place it all in a cash ISA if you can afford not to touch your savings and allow them to grow. If you have any questions around this topic, please feel free to get in touch with us directly.

The danger of New Year predictions

Wednesday, February 1st, 2017

“It’s difficult to make predictions, especially about the future”. A quote which is usually attributed to either baseball player Yogi Berra or author Mark Twain – which in reality was most likely never actually said by either man – but nonetheless pithily sums up the problem with trying to work out what is going to happen in the weeks, months and years ahead.

It’s especially worthwhile to keep that quote in mind at the start of the year, as it’s a time when people like to have a go at predicting what the next twelve months will hold for the financial world in general. It’s a precarious business: get it right and you can earn yourself some serious (but perhaps unwarranted) kudos as an insightful soothsayer of the economy; get it wrong and you might just end up in the spotlight for very different reasons.

Take the RBS economist who made headline news in January 2016 by predicting that last year would be another 2008, offering a second cataclysmic banking crisis. The warning he gave to investors contained the phrases, “Be afraid”, “Sell mostly everything” and the unsettlingly poetic, “In a crowded room, exit doors are small”. If he’d got it right, he would almost certainly be hailed as the man who saw what was coming, perhaps setting himself up to be played by a Hollywood A-lister in a sequel to The Big Short a few years down the line. But, as we now know, his forecast proved to be extremely wide of the mark, leaving his predictions to be laughed at before they slip into oblivion.

All of which leads us to the latest crop of predictions for 2017 which have been appearing since late December. Whilst these predictions will undoubtedly use the events of 2016 and what we know will almost certainly happen in 2017 – including the beginning of the Brexit process and the inauguration of President Trump – to advise you on what you should do to get ahead of the game, changing your plans just because of what someone thinks might happen is almost always not a sound approach to take.

If your overall financial goal hasn’t changed, then it’s likely that your plans don’t need to change until you know with certainty that they need to. It might be difficult to make predictions about the future, but it’s much easier to decide what you want from the future and do everything you can to make it happen.