What does Rachel Reeves’ first budget have in store for your finances, and what action should you take now to protect against the possible changes?

When Keir Starmer stood in the garden of Downing Street on 27 August, he spoke of ‘Fixing the Foundations’ of the country and of a ‘£22 billion black hole in public finances’.  This has led commentators to conclude that if tax rises weren’t planned in Rachel Reeves’ first budget before, they certainly will be now.

When is the Autumn Budget?

The Autumn Budget will take place on 30th October 2024.

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What is likely to be in the Autumn Budget?

When Labour ran for election, they ruled out raising taxes on ‘working people’ and specifically pledged not to increase Income Tax, National Insurance, VAT or Corporation Tax.  This potentially limits the taxes they can look at (though we would expect Income Tax thresholds to remain frozen until 2028 as announced by the previous government) and we have summarised our views on these various taxes below:

Pensions

Though this would technically be a change to income tax, one possibility for the Government would be to reduce tax relief on pension contributions for high earners.  We already have the pensions’ ‘annual allowance’; which limits pension contributions for very high earners, but there is currently the opportunity for those paying higher rates of income tax, but with overall income below the threshold required to have a tapered ‘annual allowance’, to benefit from significant tax relief and the Government could look to limit this.

Another potential change to pensions is reviewing their beneficial tax treatment upon death, where they fall outside the individual’s estate for inheritance tax purposes and can be passed to future generations at attractive rates of tax.  Though taking action in the anticipation of potential future legislation changes would be inadvisable, if changes to pension death benefits are announced in the budget, financial plans will need to be reassessed.

Finally, the 25% tax free lump sum available from pensions has been talked about as an ‘at risk’ benefit for years, but it would certainly be viewed as unfair if this was targeted now, given that people have been saving towards retirement expecting to benefit from this.  Additionally, changes to the ‘Lump Sum Allowance’ have only just come into force in the current tax year and the Government has already said it will not be reintroducing the Pensions’ Lifetime Allowance, so they may be reluctant to tamper with this area further.

Capital Gains Tax (CGT)

With capital gains above the £3,000 annual exemption taxed at just 10% for basic rate tax payers and 20% for higher rate tax payers (higher rates apply for second property sales), there are rumours that the Government will review CGT rates. 

However, HMRC’s own projections indicate equalising capital gains tax and income tax rates could actually reduce the Government’s overall tax take, given this would discourage individuals from selling assets (and crystallising gains) so they may instead decide to retain them.

Additionally, it should be noted that cost prices for capital gains tax purposes are currently rebased on death (meaning gains essentially die with the individual) and if this was changed, financial plans would need to be revisited.

Inheritance Tax (IHT)

With the UK inheritance tax rate currently 40%, it is somewhat surprising that the tax only raises c. £7bn p.a. (of a total tax take of c. £1trillion in 23/24).  The reasons for this are the various reliefs available, including:

The ability to gift unlimited amounts to individuals with, broadly speaking, no tax consequences if the donor lives seven years following the gift).

The ability for couples to pass up to £1m between them tax free to direct descendants upon death.  

The Government could look to limit some of these reliefs and with £1 trillion of wealth expected to change hands in the UK in the 2020s alone, according to the Financial Times, the Government could see this as an area to focus on.

How will the Autumn Budget affect me?

We of course do not know what changes will be announced in the Autumn Budget on 30th October and, crucially, from when they take effect. 

So, what can you do to protect your wealth? 

This means there may or may not be time to take action following the budget, and while we would discourage taking action on the basis of rumours, there are actions that can be taken before the budget to take advantage of reliefs that are available now but could be at risk post 30 October.  

To speak to an Independent Financial Adviser about how the Autumn Budget might affect you and any actions you could consider ahead of the budget, please contact us for a free initial consultation.  

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The details in this article are for information only and do not constitute individual advice.

The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.  Your pension income could also be affected by the interest rates at the time you take your benefits.

A popular question often asked by clients is whether they should contribute into a pension or invest in a property portfolio to fund their retirement.

The reality is there are pros and cons for each investment vehicle, so it’s important to look at these along with how returns compare over the last 10 years. Here we break these down so you can better understand which option may be better suited for you. Although we would always recommend speaking to a financial expert before embarking on your decision.

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Pension

  Advantages

• Personal pension contributions attract income tax relief at your marginal rate. This means for basic-rate taxpayers, a £1 contribution essentially costs you 80p, as 20% tax relief is provided by the Government under the ‘relief at source method’. Your contributions can also help you reclaim certain tax allowances, such as the personal allowance, tax-free childcare, and child benefit entitlement. If you’re a higher rate taxpayer, you can claim an additional 20% or even 25% tax relief for an additional rate taxpayer. 
• Employer pension contributions are essentially ‘free money’ as your employer is providing this as an additional benefit in your remuneration package – often if you don’t take up the contributions, they won’t provide an alternative income instead. Business owners can reduce their Corporation Tax liability by making contributions into their own name.
• Any investment growth is free of Income Tax and Capital Gains Tax.
• Usually, 25% of the value can be withdrawn tax-free in retirement.
• Ability to invest in a diversified range of asset classes (cash, fixed interest, shares, property, and other instruments). Further diversification can be achieved by diversifying assets geographically.
• Flexibility to draw an income in retirement through various methods such as a Lifetime Annuity, Fixed-Term Annuity, and Flexi-Access Drawdown.
• If structured appropriately, any remaining funds after your death can sit outside of your estate for Inheritance Tax (IHT) purposes. This can be a tax-efficient way of passing wealth on between different generations.

 Disadvantages

• You are unable to access your pension funds until age 55. This will be increased to age 57 from 6 April 2028.
• The value of your pension is subject to investment risk.
• Depending on how much you spend and how long you live for, your pension pot could be exhausted during retirement if not managed appropriately.
• Legislation can be complex, and rules are often changed.
• On-going charges will apply (pension provider/platform, investment related charges and financial adviser fees).

Property

 Advantages  

• Potential for long-term capital appreciation and an opportunity of outperforming inflation over the long-term.
• Potential for a regular rental income stream. This can provide a consistent cashflow which can be reinvested into property or other assets.
• A diversifying asset as part of an overall investment portfolio, which means that it can provide a hedge against market volatility.
• Property improvements can add to the value and/or increase rental yields.
• Physical asset and you own something tangible.
• 20% tax-credit available on mortgage interest.

 Disadvantages  

• If capital is required, it can often be a lengthy process to release equity.
• High initial costs (legal fees and stamp duty etc). A surcharge of 3% on top of normal stamp duty rates applies on purchase of an additional property.
• Potential debt if you require a mortgage to fund the purchase.
• Property management. This can be a hassle, stressful, and time consuming. Paying a professional will eat into your rental yield.
• Maintenance – any repairs will need to be carried out swiftly and the costs are funded by you.
• Potential void periods. This can be a tricky situation to find yourself in if you have a buy-to-let mortgage.
• Tax credit on mortgage interest restricted to 20%, even if you are a higher-rate or additional-rate taxpayer.
• Capital Gains Tax will be applied on any profit when sold.
• Included as part of your estate for IHT if held until you pass.

Pension vs Property Performance  

A common issue UK property investors face is that the value of their portfolio is influenced by the UK economy and sentiment.

Investing through a pension can be a much simpler way to diversify globally and across different asset classes through a basket of funds. This can help smooth out governmental decisions or country specific issues, and benefit from growth in other economies. 

Past performance is not a reliable indicator of future performance.

Figure 1: Stock market performance VS Property - Source: FE Analytics, 2024.

The chart above demonstrates the stock market has outperformed UK property over a 10-year period.  

The MSCI World Index measures the performance of equity markets across developed countries and has returned 221.85% over this period. UK property returns range between 46.88% - 66.77%.  

However, it is important to note these property returns are based on capital appreciation only and do not include any rental incomes received. According to NatWest, as of 2024, the average annual UK rental yield is between 5% and 8% gross.

Should I invest in property or a pension?  

Both investment vehicles provide different advantages and disadvantages, as detailed above, and each have a place within a diversified portfolio. As each of our personal circumstances can vary widely, is important to seek advice. An independent financial planner will be able to help you establish which solution is most suitable for your own personal needs. If you’d like to speak to one of our expert advisers, why not get in touch for a free initial consultation, to see if we can help.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

The Financial Conduct Authority (FCA) does not regulate estate planning, tax advice or most types of buy-to-let mortgages. 

Your property may be repossessed if you do not keep up repayments on your mortgage.

Investment returns are not guaranteed, and you may get back less than you originally invested. 

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.  Your pension income could also be affected by the interest rates at the time you take your benefits.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The UK government has scrapped plans for a ‘British ISA’ over concerns that it would “complicate” the investment market for individuals.

The planned British ISA would have channelled savers’ cash into London-listed stocks, in a bid to boost both savings and the economy.

Sources said that Labour had abandoned plans to push ahead with the new Individual Savings Account (ISA) product drawn up by the last Conservative government, which would have allowed an extra £5,000 tax-free allowance when investing in UK companies or equities.

Before the general election, Labour had “no plans to drop the British ISA”, but now it appears that this plan has changed.  

The planned British ISA

The previous government proposed the new product earlier this year, in the March budget, in an effort to encourage savers to invest and support UK stocks, which have seen a decline as investors have shifted towards global shares in recent years. The British ISA would have offered an extra tax-free, allowance, on top of the existing £20,000 annual limit.

Jeremy Hunt, then Tory Chancellor, said in his March Budget that it would ensure savers “benefit from the growth of the most promising UK businesses”.

Although the current government has decided to drop plans for the British ISA, Chancellor Rachel Reeves has set out a blueprint that could support UK equities by funnelling more defined contribution pension money into a wider range of UK assets, which, although positive, does nothing to take the sting away for everyday savers that would have benefited from the new ISA with its larger allowance.  

What is an ISA?

An ISA, or ‘Individual Savings Account’, is essentially a savings account that you don’t pay tax on. Cash ISAs simply allow people to save money without incurring income tax on interest, while Stocks-and-Shares ISAs shelter investors from income tax on dividends and capital gains tax when selling shares. There are several different versions, including the Lifetime ISA and the Innovative ISA.

You can save up to £20,000 each tax year into one or a combination of ISAs and receive tax-free returns, so when the value of your ISA increases, you get to keep all of it tax-free*. 

When choosing a style of investment to suit your needs, you may want to consider how long you plan to invest for and how much you would like your money to grow. It is also important to understand what movement in value you may or may not be happy with and any potential losses that may happen. That is why seeking professional advice can be crucial for understanding how to take those first steps towards a secure financial future.  

If you want to find out more, why not give us a call on 0333 323 9065 or book a free non-committal initial consultation with one of our chartered advisers to see how we can help. 

Source: Gov.uk  

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The details in this article are for information only and do not constitute individual advice.

Investment returns are not guaranteed, and you may get back less than you originally invested. 

August has started with some volatility in investment markets with a number of causes and effects which we will go into in this update, along with some forward-looking discussion. Hopefully this is informative and places the current moves into a wider context. As always, we stress that the recent activity reinforces the need for a portfolio that is diversified across geographies, economic sectors and asset classes, and that risk portfolios should be viewed as long term to reduce the impact of volatility.

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Starting with the macroeconomic context, inflation had been steadily falling through the year and there were initial signs of the economy cooling, although the speed/magnitude of the economic slowdown was not clear. Prices are set by the relative match between demand and supply, meaning falling inflation can reflect rising supply or falling demand - markets had been increasingly leaning towards falling demand as the main cause, especially as retail sales numbers began to falter and consumers increasingly found it harder to obtain credit. The labour market looked like it was becoming more balanced, with wage growth slowing and vacancies falling, but the fear was that this process would continue, leading to excessive unemployment and a rapid slowdown in economic growth.

In markets, the context was of overstretched technology valuations resulting from a small number of tech firms driving the bulk of market returns over the last couple of years, as well as very low levels of volatility. While markets frequently display momentum characteristics in which existing trends amplify themselves, in this case tech outperformance and low volatility begetting further tech outperformance and lower volatility, they also eventually correct themselves. The painful element is the rapidity of that snap-back to reality. Over the last few weeks investors started to question the ability of tech firms to drive near-term profitability from their enormous capital investment in AI models and infrastructure, bringing this correction event closer into view.

A final markets context was the extent of the Yen “carry trade”, in which investors from around the world borrowed at low rates in Japan to buy higher yielding/returning risky assets abroad. The scale of this trade is disputed, but numbers as high as $2tn or even $4tn have been proposed. When volatility is low and Japanese interest rates remain pinned to the floor this trade can pay off handsomely, however a rise in Japanese interest rates and rapid strengthening of the Japanese Yen can throw this trade off and cause investors to sell the risk assets they bought using borrowed Yen.

The crowded ‘long-technology vs short-small cap’ trade starts to unwind

A very popular trade, particularly for large institutional investors, has been to go long US tech balanced against a short position in US small caps. This means buying US tech paired against selling of US small caps. This trade is usually implemented with significant leverage to boost returns. US tech has seen strong earnings growth while small caps have been squeezed particularly hard by high interest rates, leading to outperformance of US tech, rewarding those in this trade. 

As investors became increasingly worried about economic growth in mid-July there was a deleveraging (selling down) of this position. Institutional investors often use leverage for both the long and short side of the trade, so as they cut their overall leverage, they are forced to buy back the stocks they are short and sell the stocks they are long. This meant buying small caps and selling tech. You see this in the returns below, in which small cap (white) rallied and tech (orange) sank from July 11th to 31st: 

Figure 1 – NASDAQ Index (orange) and Russell 2000 Index (white) returns – Source: TradingView 2024

Japan raises rates, unwinding the “carry trade”

Japan has maintained unusually low interest rates relative to peers in an attempt to spur economic activity and introduce a moderate level of inflation to their long-deflating economy. An unfortunate side-effect has been significant currency weakness. 

For those borrowing in Yen to buy foreign assets (the “carry trade”) a weaker Yen is beneficial, as it effectively cuts the cost of your borrowings relative to the value of the foreign asset you have bought – for example, if your borrowed 100 Yen to buy $100 of US assets at a 1:1 rate, but then Yen devalues such that $1 now gets you 2 Yen, you could sell just half of your $100 of assets to fully pay back your 100 Yen borrowings, leaving you in $50 profit. However, that same process works in reverse when the Yen strengthens, potentially pushing the investor to have to sell up their foreign assets to pay back their Yen borrowings.

Last week saw Japanese labour market data released showing a ~5% rise in wages for unionised workers, leading the Bank of Japan to conclude that there was a risk of inflation pushing beyond the moderate levels they targeted and becoming similar to the issues seen in Europe in 2022/3.As a result, they chose to raise interest rates by 0.15%. While the raise itself was small, the signal to markets was large and caused Japanese bond yields to rise in expectation of further rate hikes.

The Japanese Yen then rallied hard, shown in the chart below:

Figure 2 - Japanese Yen versus US Dollar - Source: TradingView, 2024.

Many investors were therefore forced to sell their foreign risk-assets to pay back their Yen borrowings.

Israel-Iran tension rise, increasing geopolitical risk

Although this is not the primary driver, it certainly has contributed to the overall risk-off attitude. Rising tensions in the middle east following Israel’s assassination of Hamas leadership on Iranian soil, along with further Israeli attacks in Syria and Lebanon, led Iran to threaten retaliation and an escalation in tensions. Oil prices jumped and geopolitically sensitive assets dropped, indicating a rise in geopolitical risk premium.

US labour market data indicates the beginning of a recession

Before anything else, it should be stressed that for a recession to be unequivocally marked there needs to be decline in the following 4 indicators: industrial production, personal incomes, employment and retail sales volumes. Friday’s employment data points to the start of employment problems, so is not the official start of a recession, however if those trends in employment persist it can be expected that the other three components also deteriorate.

What was the data? The US economy added 114,000 jobs in July, below the roughly 200,000 jobs needed to keep up with population growth. This meant that unemployment rose sharply from 4.1% to 4.3% in July, up from 3.4% in April 2023. 

Historically the US unemployment rate has never risen 1% without a recession occurring shortly afterwards. A similar concept, the Sahm rule, was also triggered, which states that a recession is entered when the 3-month average of unemployment is 0.5% above the minimum unemployment rate of the previous 12-months. Please see the Sahm rule chart below.

Figure 3 – Sahm Rule, with US recessions shaded – Source: Federal Reserve Bank of St Louis, 2024.

With investors now firmly in the recessionary camp, equity selling became rather indiscriminate, with few names remaining unscathed. Our next section will cover the market moves.

Market moves

Figure 4 – US stock market heatmap at the US market open 05/08/24 - Source: TradingView, 2024.

Starting with equity markets, the heatmap above shows US equity sectors as US markets opened on Monday. Defensive sectors like consumer staples (labelled consumer durables) and utilities saw positive performance, while most other sectors have seen rapid declines. Notably, many of the most overvalued technology names saw the most rapid price declines. Through the trading day equities subsequently rebounded and regained much of the value they lost. Although equities rebounded, volatility is high, with the VIX volatility index hitting 49 intraday and settling closer to 30; 49 is a level last seen during the 2020 COVID crash:

Figure 5 – VIX Volatility Index – Source: TradingView, 2024.

On a country level selling was fairly indiscriminate, and Japan, which is at the centre of the carry trade, was hit hardest:

Figure 6 – National stock market returns 05/08/2024 - Source: Koyfin, 2024. 

In the following hours, particularly the second half of the US trading session, Japanese equities also rebounded and made up around half of their losses.

In terms of currencies, there has been a strong safe-haven effect, as investors pull money home, or crowd into currencies perceived as safe havens. Unsurprisingly the Japanese Yen has rallied hard as the increase in Japanese interest rates has made it more attractive, continuing the strength that originally unwound the carry trade. The Swiss Franc, a typical safe-haven, has rallied. The Euro has seen repatriation flows from nervous European investors. All are typical signs of risk-off mentality.

Finally, moving to bonds and fixed income where the safe-haven effect has also been very apparent. Investors crowded into safe government bonds, betting on imminent emergency rate cuts (more on this below). High yield credit sold off, as investors bet on slowing growth causing increased corporate bankruptcies.

The rapidity of this recent move in fixed income yields is quite extraordinary and is well characterised in the following graph, showing US 2-year yields in white and US 10-year yields in orange:  

Figure 7 – US 10-year (orange) and 2-year (white) yields – Source: TradingView, 2024.

Yields declined -0.5% in the space of hours– you would normally expect to only see moves this large once every 10 years. Bond yields gyrated rapidly through the day, with the US 2-year yield subsequently gaining 0.3%, leaving the net daily change in yields close to –0.2%.

Where do we go from here?

The Federal Reserve just had a Federal Open Market Committee (FOMC) meeting in which they chose to keep rates on hold, in contrast to the Bank of England who cut rates. Markets are now assigning a 16% probability to an emergency rate cut in the next two weeks. Beyond that, they are also predicting a double rate cut at the September FOMC meeting, 5 rate cuts by the end of 2024, and 7 cuts by March of 2025. If markets are correct, that would leave interest rates below 4% for the first time since December 2022.

While this will certainly bring hope to investors in government bonds, as mechanically they will have to appreciate in value as interest rates fall, the outlook for risk assets is more sanguine. History has shown that Central Banks cut interest rates just as an economy enters recession and do not prevent recession (although they may shorten it), and risk assets typically fall in the 6-24 months following the implementation of a cutting cycle – it took until March of 2009 for equities to bottom out, yet rates were first cut in August of 2007, meaning nearly 2 full years of declines. That said, circumstances are very different now compared with 2008. Banks are much stronger and better regulated so a credit crunch is unlikely. However, this could mean that we are possibly in for a bumpy ride in the near future.

Economies enter recessions when imbalances, whether in the financial system or real economy, become too extreme to paper-over and lead to outright ruptures. In 2007 the main imbalances were between booming sub-prime home lending and deteriorating borrower credit quality, along with extreme imbalances in commercial bank balance sheets. This blew up, but it laid the foundations for more sustainable growth from 2009 onwards that no longer relied on excessive buildup of household debts. Similarly, we now see enormous imbalances between the outcomes of large and small companies, in trading relations between the US and China, in demand and supply of commercial real estate, in US budget deficits versus economic growth. While a recession, if it happens, will be painful, it will also hopefully allow for future growth that is built upon more sustainable foundations. Additionally, from an investor perspective, will allow for enticing entry points into risk assets for those who are in their accumulation phase.

Let us hope, however, that this all turns out to just be a growth scare, rather than an actual recession.

There are ways to ensure that turbulent market environments do not have a significantly adverse impact on your invested wealth. Investing for the long term and picking appropriate risk mandates helps ensure that you will not need to draw on money that suffers greatly from short term volatility. At The Private Office we invest our clients wealth in portfolios which have been selected to benefit from long term growth in line with each individual’s needs and objectives. If you have any questions about your portfolio, please contact your adviser.

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The information in this article is correct as at 07/08/2024.

This Market update is for general information only, does not constitute individual advice and should not be used to inform financial decisions. Investment returns are not guaranteed, and you may get back less than originally invested; past performance is not a guide to future returns.

The recent change of Government in the UK has naturally brought with it a number of speculations about what Labour will look to target when it lays out its fiscal policy for the term ahead. You will have heard about potential changes to Capital Gains Tax (CGT), or modifying Inheritance Tax (IHT), however there have been significant changes in recent years to many other areas, and one in particular is the dividend allowance. It has shrunk dramatically in recent years, from £5,000 per annum in 2017/18 to £500 per annum in 2024/25. It is important, then, that if you are getting income from dividends, you need to understand your tax implications. 

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What is a dividend?

Dividends are periodic payments made to shareholders by the companies they have invested in. It is a slice of the company’s post-tax profits that is ‘divided up’ among its shareholders. Clearly, the dividend amount is variable and is dependent on strong corporate performance in order for them to pay out to shareholders. 

Is there a tax free Allowance for dividends in the UK?

In the UK, HMRC allows individuals to receive a certain amount of dividend income before they start paying tax, known as the dividend tax free allowance.

This allowance was first introduced on 6 April 2016 to all UK residents, replacing the dividend tax credit at that time.

Although in the UK we can utilise the dividend allowance, recently the amount at which you can earn before paying tax was reduced, meaning more people will have started paying tax on their dividend income. 

What is tax free dividend allowance?

For the 2024/25 tax year, the dividend tax free allowance is £500. This means that you can receive income of up to £500 from shares and some equity-based collective investment funds without paying any tax.

Dividends that arise within ISA and pension wrappers are exempt from dividend tax due to the favourable tax-free growth nature of these investments. 

Understanding tax on dividends

Once the amount of dividend income an individual receives breaches the dividend allowance, the level of tax you pay on this income depends on what level of total income you receive in any given tax year.

The above table shows the level of tax you will pay if you receive more than £500 worth of dividend income in the current tax year. If your total income for the year is less than the Personal Allowance, which sits at £12,570 in the current tax year, you will also not pay tax on your dividend income.

As per the table above, dividend tax rates are less than income tax rates, making dividends a more favourable form of income. Individuals who own their own limited company can take dividends from the profits of their company instead of a salary in order to decrease their tax liability for a given tax year.

Can I transfer tax free allowance to share dividend allowance?

Although it is not possible to transfer your dividend allowance to your spouse, like it is with part of the Personal Allowance, transferring dividends to your spouse is an effective way to mitigate dividend tax if one member of the couple falls into a lower tax bracket than the other. As assets can be passed between spouses free of inheritance tax implications, assigning shares to the lower earner means that any dividend income they receive over the dividend allowance will be taxed in accordance with their relevant, lower rate of dividend tax. For this to be effective, the transfer of the shares/investment should be a genuine and unconditional transfer of ‘beneficial’ ownership, from which the transferor should receive no benefit.

Please keep in mind this is a complex area of taxation and such work should be undertaken with help of your accountant or financial adviser. 

How do I pay dividend tax?

Unlike a salary, dividends are not taxed at source. If you earn under the dividend allowance of £500, you do not need to do anything. If you earn above this, but below £10,000 in the current tax year, you must contact HMRC. HMRC will give you the option of either adjusting your tax code to pay your dividend tax liability or completing a self-assessment tax return. 

If you earn over £10,000 of dividend income in the current tax year, your only option for paying your dividend tax bill is by completing a self-assessment tax return.

 Self-assessment tax returns must be completed for the previous tax year by 31st October if choosing to fill in a paper form or 31st January if you opt of an online form. For example, you must complete your online tax return for the 2023/24 tax year by 31st January 2025. 

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Whether you are a business owner who would like to efficiently draw an income from your business, or you are receiving income from your investments, we can build an effective, tax efficient income strategy that suits you and your family's needs. We make it a priority to stay on top of legislative changes to taxes applicable and work with a number of client accountants to ensure we have the most up to date tax information available for each client.

If you’d like to learn more about how we can help you, why not get in touch for free initial review with one of our expert advisers.

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The FCA does not regulate estate or tax planning. 

The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

In last month’s update we touched upon the French and British general elections, however at the time of writing the UK election hadn’t yet taken place and the French election had only passed its first round. Now that both elections have concluded we can take a deeper dive into market reactions.

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The election results

Before we get going it’s worth summarising recent events, starting with the UK. Pollsters had been predicting a Labour landslide, and while they overestimated the realised vote share for Labour, due to our first-past-the-post voting system this still translated into one of the largest majorities our parliament has seen. This result should provide the foundation for a stable government with the ability to enact its desired agenda. 

In France results were less conclusive, in part due to their more proportional voting system. Le Pen’s National Rally party won the largest vote share of any individual party, however due to the fractured nature of their parliament, with three roughly equal coalitions, it seems unlikely that a government will be formed in the very near term. This will not provide the foundation for a stable government with the ability to smoothly enact its desired agenda.

Market reactions to the UK election result

The UK had looked like a bit of a political basket case over the last few years, so the contrast of that to a new stable government is stark and has not been lost on international investors. The first port of call for market reactions to government policy, particularly the reactions of international investors, are the currency markets, where sterling has seen significant strength since the election results. Because the results were fairly certain, currency markets began to price-in a Labour victory at the start of the election week, so the chart below starts there. The blue line shows sterling against the Japanese Yen, the yellow line sterling against the Swiss Franc, the white line sterling against the US Dollar, and the orange line sterling against the Euro. 

Figure 1 – Sterling versus major developed economy currencies – Source: TradingView, 2024.

As the chart shows, sterling has been strong against the major developed market currencies, with inflows to British markets pulling up the currency value.

The next port of call is the bond market. If markets perceive a new government to be more stable and fiscally trustworthy, they should demand less compensation for risk and thus a lower government bond yield. Looking at recent moves in the gilt market, this is the result we find. 

Figure 2 – 10-year UK Gilt yield – Source: TradingView, 2024.

The chart above shows the yield on a 10-year gilt over the last three weeks, with the beginning of the election week marked by the red dotted line. Clearly, since the start of the election week gilt yields have come down as would be expected.

The final market we will examine is the equity market. The two main index groupings of UK equities are the FTSE 100 and FTSE 250, where the former are the largest 100 companies, typically international businesses, and the latter are the next 250 largest companies, typically domestically focused. An election has the largest impact on the prospects of domestically focused companies, so we should expect the FTSE 250 to outperform the FTSE 100 if investors see the election as being positive for the UK economy, and within the FTSE 250 we should expect domestically focused sectors to see the strongest performance. The chart below shows the performance of the two indices, starting at the beginning of the election week. The FTSE 100 is depicted by the white line and the FTSE 250 by the orange line.

Figure 3 – FTSE 100 & 250 returns – Source: TradingView, 2024.

As predicted, the FTSE 250 has outperformed the FTSE 100 over the period, with a pronounced spike in returns on Friday the 5th, the day election results were confirmed.

When breaking this down on a sector basis, we see that of the 15 top performing FTSE 250 sectors that week, 7 are industries that are very domestically focused (highlighted in blue). 

Figure 4 – FTSE 250 sector returns – Source: FE Analytics, 2024.

The strong performance of construction & materials and household goods & home construction sectors is notable, as house building is a key priority of the Labour government – markets are taking this seriously and pricing it into equity valuations. 

Market reaction to the French election result

Moving to France, where markets have been less than enthused by the results, to put it mildly. 

France no longer has the Franc as an independent currency, meaning changes in the value of the Euro are not a pure proxy for changes in sentiment towards France, however as the second largest economy in the EU, France exerts a large weight on the value of the Euro, particularly on the day of the election result. The chart below shows the value of the Euro versus the Dollar on the day of the election, with the drop in value boxed in red.

Figure 5 – Euro versus Dollar – Source: TradingView, 2024.

As the chart shows, there was a significant uptick in volatility in Euro currency markets. This volatility isn’t restricted to currency markets, with equity markets across Europe seeing increased volatility, particularly when compared with UK equity markets. The chart below from Bloomberg shows the volatility of UK and European equity markets, with a clear spike during the election.

Figure 6 – UK and European equity volatility – Source: Bloomberg, 2024.

The chart above shows European equity volatility, but when breaking that down to look at the performance of French equities we see that much of this volatility has been caused by downwards moves in French markets. The chart below shows the returns of the French CAC 40 index in white and the German DAX 30 index in orange, with red dotted lines marking the calling of the election and the results of the election.

Figure 7 – French and German equity returns – Source: TradingView, 2024.

While German markets have moved broadly inline with French markets, downward movements have been less pronounced in Germany and recoveries weaker in France, with French equities exhibiting overall higher levels of volatility.

Finally, in fixed income markets the risks posed by the incoming French government are already being priced in, with bond investors demanding a premium to own French debt versus safer German debt.

What does this all mean going forward?

Looking purely from a market perspective these results are unambiguously good for UK markets. Valuations in UK markets have been particularly low since the 2016 Brexit vote and the subsequent political uncertainty, while France has attracted much inbound capital that would likely have landed on our shores. For so long as France remains politically unstable this is likely to reverse – we have already seen large Japanese and Taiwanese bond investors, primarily insurers, pull away from new French bond issuances and start to trim their holdings. 

Outside of the France vs UK capital attraction comparison there is also the question of the FTSE 250, which having already got off to a good start looks primed to continue its strong performance – caveated with the fact that external factors, like a global recession, could easily blow things off course. Should the Labour government successfully implement their desired planning reforms and even get close to their target of the highest GDP growth in the G7, smaller UK companies can be expected to see material improvements in their business fundamentals, and with international investors finally giving the UK serious consideration, should also see the stock price gains to match. We remain cautiously optimistic for future UK market prospects.

If you have any questions about your portfolio please don’t hesitate to contact your adviser.

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This market update is for general information only, does not constitute individual advice and should not be used to inform financial decisions.

Past performance is not a guide to future returns. Investment returns are not guaranteed, and you may get back less than you originally invested.

After years of frozen thresholds, reduced allowances, and quiet but powerful fiscal drag, the most recent Budget offered little respite for those deemed ‘High Earners’ which used to be those earning just over £50,000. In fact, for many, it marked a new phase in what’s becoming a stealthy but sustained squeeze on take-home pay.

While many higher earners accept the principle of paying their fair share, there's a growing sense that we’ve hit a tipping point. Tax is no longer just a cost of success; it’s fast becoming a sticking point to long-term financial growth. With more and more people drifting into higher tax bands, the cumulative impact is starting to bite.

That’s why tax planning is no longer just prudent, it’s essential. If you’re a ‘high earner’ whether that be on a little over £50,000 or well into six figures, navigating the tax system could mean the difference between merely treading water and building real, lasting wealth. From reclaiming lost allowances to making strategic use of pensions, charitable giving, and relief schemes, the opportunities are still there, you just need to know where to look.

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Tax can have a big impact on your ability to preserve the value of your savings and investments in retirement. As such, one of the main focuses when advising clients, is creating a plan that helps them achieve their objectives in the most tax-efficient manner. There are several ways to reduce the tax you pay on your annual income, especially if you’re in the higher or additional rate tax bracket.

What are the main taxes?

Income tax

Income tax is a tax imposed directly on your personal income. In simple terms, it is paid at rates between 0% and 45% dependent on which of the income tax brackets you fall into.

Once your earnings exceed your personal allowance, you are required to pay tax on the following sources of income:

1. Income from employment
2. Income from pension
3. Interest on savings
4. Property rental income
5. Employment benefits
6. Income from a trust

As of the 2025/26 tax year:

• The personal allowance remains at £12,570
• Basic rate tax (20%) applies to income from £12,571 to £50,270
• Higher rate tax (40%) applies from £50,271 to £125,140
• Additional rate tax (45%) applies from £125,141+

These thresholds are now frozen until 2031, further extending the impact of fiscal drag.

The tax rates on dividends are lower but again will increase by 2 percentage points for basic and higher rate taxpayers from 6 April 2026.

Furthermore, an additional 2% tax will be introduced from 6 April 2027 on savings interest and property rental income, increasing the tax burden from these sources. If you're a Scottish taxpayer, note that income tax bands differ from the rest of the UK. It's essential to consider regional differences when planning.

Capital Gains Tax

Capital Gains Tax (CGT) is paid on the profit made when you dispose of certain assets, such as shares, second homes, or other investments held outside of a tax-efficient wrapper.

Update for 2025/26:

• The CGT annual exemption is £3,000, much lower than £12,300 in 2022/23
  Tax is charged on gains above this allowance at:
• 18% (basic rate) or 24% (higher rate) for individuals (not including carried interest gains) on financial assets and property depending on the tax band the proportion of the gain falls within
• With the CGT allowance significantly reducing in recent years, proper use of tax wrappers (like ISAs and pensions) is crucial.

Inheritance Tax

Inheritance Tax (IHT) is a tax on the value of an estate upon death or on certain gifts made during your lifetime.

• The nil-rate band remains at £325,000
• The residence nil-rate band offers an additional £175,000 if passing a home to direct descendants
• The standard rate of IHT is 40%, or 36% if at least 10% of the net estate is left to charity

From April 2027, pensions will form part of a person's estate for inheritance tax purposes. Currently, pensions are generally outside of IHT calculations, but this will change for most type of pensions. If you're relying on your pension as an IHT-efficient tool, it's important to review your estate planning and options now.

How to reduce taxable income as a high earner

Reducing your taxable income can be one of the most effective ways to lower your overall tax bill. For high earners, this might mean utilising pension contributions, salary sacrifice, or charitable giving to stay within lower tax bands or reclaim lost allowances.
For example, reducing your adjusted net income to below £100,000 can help you reclaim your personal allowance, while staying below £50,270 may mean avoiding higher rate tax entirely. Strategic use of deductions and allowances can significantly reduce the income you are taxed on, without reducing your overall wealth.

Why is tax planning important?

Tax planning involves minimising tax liabilities by utilising allowances,  exemptions, and tax reducers to lower the tax you pay, so it should be an essential part of an individual’s financial plan.

Effective tax planning can be instrumental in saving individuals money, maximising wealth and achieving your financial goals. By proactively managing finances and optimising tax planning opportunities, individuals can ensure they are on track to meet their objectives.

What is higher rate tax?

In the UK, we do not get taxed on the first £12,570 we earn from our salary, bonuses, rental income, pensions, and other various income types - this is called our Personal Allowance. Income exceeding the Personal Allowance is then subject to income tax. This is banded so:

• Your earnings between £12,570 and £50,270 are currently taxed at the basic rate of 20%.
• Earnings from £50,271 and £125,140 at the higher rate of 40%.
• Anything above £125,140 is taxed at an additional rate of 45%.

The personal allowance and the higher rate threshold (£50,270) have been frozen until 2031 following an announcement by the Chancellor in the Autumn Statement 2025.

Therefore, more people are and will continue to be pulled into paying 40%-45% tax on their earnings, so it is increasingly important we utilise the tax planning opportunities available to us to minimise the impact of the frozen tax allowances and tax bands.

High earners cutting pay: Should you consider it?

Some high earners are now deliberately cutting their pay or exchanging salary for pension contributions or other benefits as a strategic way to reduce tax liability. This is often done through salary sacrifice or personal pension contributions, which can lower your taxable income, increase pension savings, and in some cases reclaim lost allowances such as the personal allowance or avoid additional tax charges like the High-Income Child Benefit Charge.

Reducing pay might not be a step back, but a smarter move towards long-term financial efficiency. It’s worth speaking to a financial adviser before making any changes, to ensure it aligns with your wider goals and that you aren’t giving up valuable benefits or protections.

Ways to reduce your income tax bill

There are a few ways in which you can reduce your income tax bill. Broadly, they are as follows:

Contribute to your pension

Contributions to a pension are usually made from taxed money unless in  a 'net pay' scheme' or using 'salary sacrifice' . However, when you pay in, you will pay the “net” amount (80% for a basic rate taxpayer). The government will then make up the tax paid on the amount contributed.

For example, if you’re a basic rate taxpayer you can receive tax relief of 20% from the government, therefore it costs you 80p to make a £1 pension contribution. For a higher rate taxpayer the cost is only 60p.

Contribute to your pension via salary sacrifice

You can ask your employer to enter into a salary sacrifice contribution arrangement to your pension, which will reduce the amount of money subjected to the highest rate of income tax (or various rates depending on the tax bands the income falls into after the sacrifice), along with also providing valuable National Insurance savings. This can become quite complicated, and more details can be found on the government website.

A notable additional benefit of salary sacrifice arrangements is that depending on your employer, they may pay the National Insurance Contributions savings they make from the forgone salary into your pension.

Do take care though as the government is planning to make changes to how salary sacrifice for pension contributions work from April 2029 by capping the National Insurance (NI) exemption to £2,000 per year.

Make full use of your pension annual allowance

The annual allowance is currently £60,000 and this is the maximum that you can tax efficiently contribute to a pension each tax year, without suffering a tax charge. This rose from £40,000 in the 2023/24 tax year.

If you are not subject to tapering of your annual allowance and you have not utilised your full allowance of £60,000, then you could consider making use of the full allowance from a personal contribution or carrying-forward unused annual allowance from previous years. Please note, however, this can only be done up to a maximum of the three previous tax years, and personal tax-relievable contributions are capped at 100% relevant UK earnings regardless of the amount of unused annual allowance.

Make full use of your ISA annual allowance

Both income and growth within an ISA are free of tax making this one of the best savings wrappers in the UK. You can currently contribute £20,000 per year into a Cash or Stocks and Shares ISA, however the Cash ISA allowance will be reducing to £12,000 for under 65s from April 2027.

Up to 60% tax relief available when you invest in a pension

Investing in your pension pot is an attractive option to increase your savings in a tax efficient way. We actively encourage clients, when suitable, to contribute regular amounts to their pension to not only build up their pension pot but also to benefit from tax efficiencies.

For those earning between £100,000 and £125,140 you could be in the 60% tax trap. But this also presents an opportunity when it comes to saving for retirement. If you have taxable income in this range, you can effectively receive income tax relief of 60% on your pension contributions as this is the marginal rate of tax paid on earnings within this band. This is due to the impact of your personal tax allowance of £12,570 being reduced by £1 for every £2 you earn over £100,000 meaning the allowance is reduced to zero when your income reaches £125,140. A pension contribution within this band of earnings effectively reclaims part, or all, of your personal allowance thus increasing the rate of tax relief to 60%.

How to avoid the High Income Child Benefit Charge

For the 2025/2026 tax year in the UK, Child Benefit rates are £26.05 per week for the eldest or only child and £17.25 per week for any additional children, with these rates increasing to £27.05 and £17.90 respectively from April 2026, based on CPI uprating. Payments are usually every four weeks and eligibility applies for children under 16, or under 20 if in full-time education or training, with higher earners potentially facing the High Income Child Benefit Charge (HICBC).

If you are a couple claiming Child Benefit, where one or both individuals have an income above £60,000 per annum, or someone else claims Child Benefit for a child living with you and they contribute at least an equal amount towards the child’s upkeep, you may have to pay a tax charge. This is known as the ‘High Income Child Benefit Charge’.

The tax charge is calculated through the tax return on any partner whose income is more than £60,000 a year. In the event that both partners have incomes over £60,000, the charge will apply to the partner with the higher income. The tax charge will be one percent of the amount of Child Benefit received for every £200 of excess income, meaning that the Child Benefit is completely removed when income reaches £80,000.

One way you may avoid the tax charge is if a personal pension contribution is made, as the adjusted net income used by HMRC will reduce. If the contribution is enough to reduce this to below £60,000, the High Income Child Benefit tax charge will be avoided.

The benefits of charitable giving

Giving to charity is not only good for the cause receiving your donations but is also beneficial to your annual tax bill. If you keep a record of your donations, you will be entitled to report these on your tax return.

The most common way to donate to a UK registered charity or community amateur sport clubs (CASCs) is through Gift Aid. Gift Aid can only be claimed by UK taxpayers and is effectively the repayment of basic rate tax on the donation. This is not repaid to the donor but is given to the charity as they can claim an additional 25p for every £1 they receive.

If you are a higher (40%) or additional rate (45%) taxpayer, you are able to claim the difference between your tax rate and the basic rate of tax (20%) on your total charitable donation. An example of this is shown below:

If you make a charitable gift of £100, the charity will be able to receive £25 from HMRC to reclaim the basic rate tax. As a higher/additional rate taxpayer, you can then claim a further £25 (higher) or £31.25 (additional) relief back via your self-assessment for the £125 (gross) contribution you originally made. To do this, you must register for gift aid with a ‘Gift Aid Declaration’, keep a record of your gifts and gift no more than four times your total income and capital gains tax payment for the tax year in question. More information can be found here.

And not forgetting, charitable giving is a great way to lower your loved one's inheritance tax bill.

Tax relief schemes and other allowances

An investment into a qualifying Venture Capital Trust (VCT), Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) attracts significant tax benefits. For an EIS or VCT, you can receive 30% income tax relief (reducing to 20% for VCTs from 6 April 2026) on the amount you invest, for SEIS this increases to 50% relief. This 30% or 50% is only achievable if you have paid sufficient tax for the year in question. For example, if you invested £200,000 into a VCT, you would receive £60,000 tax relief if you had an income tax bill of at least £60,000.

These investments were created by the government, as an initiative designed to help small and medium sized companies raise finance to grow, by offering tax benefits to investors. Given the type of companies they invest in, they are classified as to be high-risk investments.

They can be attractive to those who have maximised their other allowances for the tax year and are earning a significant salary which takes them into the higher and additional rate tax band.

But, as higher risk investments they are not suitable for all investors. There is a chance that all of your capital could be at risk and you should not invest into these types of plans without seeking expert advice from a reputable firm of independent advisers such as The Private Office.

How we can help

There are a number of steps that can be taken to reduce the amount of income tax you pay, which are especially beneficial if you fall into the higher or additional rate tax bands. These tax efficiencies are built into our financial plans, and we actively help clients maximise their allowances and income so they can achieve their goals throughout their lives. If you would like to find out more about how The Private Office can help you with personalised tax efficient financial plans, please enquire for a free initial consultation with one of our Independent Financial Advisers.

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The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The content in this article is for information only and does not constitute individual financial advice.

The value of your investments can go down as well as up, so you could get back less than you invested.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.

Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation. 

The Financial Conduct Authority (FCA) does not regulate estate planning or tax advice.

VCTs are high risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital.

The financial industry regulator, the Financial Conduct Authority (FCA), has charged nine ‘finfluencers’ – individuals that give unlicensed financial advice on social media – in a crackdown on financial misinformation and exploitation, which can be rampant on social media platforms.

One of the nine, Emmanuel Nwanze, was charged with running an unauthorised investment scheme and issuing unauthorised financial promotions. The FCA alleges that, between 19 May 2018 and 13 April 2021, Nwanze used an Instagram account to provide advice on buying and selling Contracts For Difference (CFDs) when they were not authorised to do so.  CFDs are well known for being high-risk investment products that are used to bet on the price of an asset.

The FCA is intent on making an example out of the nine to discourage further unregulated advice of this nature.

Six of the defendants appeared before Westminster Magistrates Court on 13 June 2024. A further three with appear before the court on the 3 July.

What is a ‘finfluencer’?

Finfluencer is a relatively new term, used to describe a content creator who operates on social media to promote financial products and services to their audience. What separates a finfluencer’s advice from regulated financial advice is the finfluencer is often unqualified, unauthorised and unregulated. This means that it is common for them to promote risky investments, with no understanding of the consequences, often to the detriment of their audience and pure financial gain to them.

Finfluencer derives from the term ‘influencer’ which, in marketing and social media terms, refers to a person with the ability to influence viewer’s opinions on social media or video sharing platforms like YouTube.

The problem with finfluencers

If an finfluencer is knowledgeable about the product or service they promote and their content is considered 'responsible' by the FCA, finfluencers can actually be beneficial. They help buyers evaluate their choices and understand the variety of products available to them in a simple and easy to digest way.

The problem is that there are many examples like the nine that have been charged by the FCA, where this is not the case. Many finfluencers promote illegitimate 'get rich quick' schemes or act irresponsibly in their communications, with endorsement of questionable crypto investments and ‘memestocks’ being a common trend. In such cases, less knowledgeable audience members get exploited and even scammed.

Aside from the obvious detriment to the victims of this kind of unlicensed advice, the wider reaching implications is that this misinformation leads to a general distrust of the financial services industry, further discouraging financial literary and ultimately hurting the consumer.

If you are concerned about possible misinformation and are seeking real, impartial and fully qualified financial advice, book a free non-committal initial consultation with one of our qualified advisers who will be happy to see if we can help. Alternatively, you can give us a call on 0333 323 9065 to get in touch with a member of our team to find out more.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

Investment returns are not guaranteed, and you may get back less than you originally invested. 

This month’s TPO Investment Market Update looks at how markets have developed since last month’s update, reiterating the benefits of portfolio diversification. The drivers of the top 3 performing major equity indices are looked at in more detail and we discuss the recent and upcoming elections globally and the impact of these on markets.

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In last month’s update we discussed the benefit of holding a regionally diversified portfolio, given the reversal of return patterns between Q1 and April  i.e. UK and Chinese equities outperformed, having lagged behind in Q1. We are now two thirds of the way into Q2 so for this month’s edition let’s see how markets have developed. We will also touch on the political environment, focussing on elections happening across the globe.

Market returns and the benefit of diversification

Figure 1 – Major equity & fixed income index returns – Source: FE Analytics, 2024.

May again proved the benefit of not concentrating your portfolio in just one or two assets. The S&P 500, which tracks the US stock market, was the second-best performer, having been amongst the worst in April. The FTSE 250, which tracks medium sized UK companies, was the best performer in May, having been towards the bottom in April and Q1. On the other end, gold, which had been the second-best performer in April was towards the bottom in May. Unless you have a crystal ball, it therefore pays to split your eggs amongst many baskets.

US Markets

Having reiterated the benefit of diversification, lets dive into the most notable drivers of returns in May, starting with the world’s largest equity market, the United States. Returns in the US have become increasingly dominated by only a handful of companies, to a degree that is unprecedented in recent memory. The chart below shows the top 10 companies’ share of total S&P 500 market capitalization, and the table shows the specific companies.

Figure 2 – Top 10 companies share of S&P 500 market capitalization – Source: Yahoo Finance, 2024.

Figure 3 – Top 10 S&P 500 companies by market capitalization – Source:  Slickcharts, 2024.  

It is striking that the top 6, along with Broadcom, are all semi-monopoly technology companies. The dominant market positions they have achieved allow them to rake in large and growing profits and build up significant cash buffers. Investors have therefore piled into these stocks due to their superior profit growth, along with the safety afforded by their large cash piles. US investor sentiment is such that investors are willing to take risk and buy up on equities, but are still somewhat worried about a slowdown in economic growth, and so are averse to taking the risks associated with owning stocks more exposed to the business cycle and with smaller cash buffers.

European Markets

European equities have had a similarly good month. This came on the back of two primary causes, the first being a better-than-expected earnings season (in which 288 of 600 companies have so far reported their Q1 earnings), and the second being the expectation during May that the ECB would cut interest rates in June, which they now have. Looking at the first of those causes, the chart below shows by how much reported earnings beat market expectations by sector.

 Figure 4 – STOXX 600 Q1 sectoral earnings surprise – Source: LSEG, 2024.

Across the whole market, European companies have beaten expectations by 10%, with only industrials and real estate underperforming expectations.

The second cause for European equity strength was the expectation of an ECB rate cut in June. Inflation has been falling in Europe and has got close to the 2% target, allowing the ECB to make an initial rate cut. This is in the context of a German economy still struggling with the effects of high energy prices, due to the Ukraine war, and increased export competition from China.   

UK Markets

The final market that’s worth covering before we touch on elections is the FTSE 250, an index measuring the performance of mid-sized UK companies. The chart below shows the valuation of the FTSE 250 (dark blue line) versus mid-sized companies in other developed markets. The valuation metric used is Price-to-Earnings (P/E), which describes how many pounds you pay in stock price for a pound of company profits. 

Figure 5 – P/E ratio of mid-cap indices in major developed markets – Source: Morningstar, 2024.

For mid-sized US companies, you are paying £20 for every £1 of company profits, whereas in the UK you only pay £14 for every £1 of company profits. While the US has long traded at a premium, this gap is wider than the long-term average and represents good value to international investors looking for a bargain. Where we have seen the most interest has been from large companies and private equity investors looking to purchase whole companies – recent examples include the £5bn private equity bid for Hargreaves Lansdown and American Industrial Partners £2.5bn bid for Serco. As this inbound merger and acquisition activity has increased, investors have bid up shares they think could be a future takeover target.

Elections

It has been a busy month for elections, with European, Mexican and Indian elections all taking place already, UK and French elections being called, and US election campaigning getting started.

Indian and European elections both caused volatility in their respective markets. Indian equities fell around 8% and then quickly regained that upon Modi’s win. In Europe, the surprise victory of the Le Pen’s National Rally in France during the European Parliamentary elections caused jitters in bond and currency markets. UK and European elections are yet to cause significant volatility but it is expected closer to voting.  

Figure 6 – UK stock market returns 6m after elections – Source: FE Analytics, 2024.

Average returns following a Labour victory, which is expected this election, have been better than under Conservative victories, although this number is distorted by the 1987 and ‘covid’ market crashes. From speaking to fund managers and allocators in the City, most are broadly welcoming of the stability expected under Starmer and Reeves, so the election should be supportive of equity returns.

Conclusion

In conclusion, equity markets continue to move upwards and make all-time highs, despite the bumps in the road felt during April. While performance has varied between regional markets from month to month, reinforcing the value of a diversified portfolio, the general trend is upwards. Political instability, primarily caused by elections, has, and will increase the volatility of markets, however the historical data, at least in the UK, points to the election being supportive of equity returns.

If you have any questions about your portfolio please don’t hesitate to contact your adviser.

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This market update is for general information only, does not constitute individual advice and should not be used to inform financial decisions.

Past performance is not a guide to future returns. Investment returns are not guaranteed, and you may get back less than you originally invested.

Environmental, Social, and Governance (ESG) investing refers to an investor's desire to invest not only for financial gain but also to have a positive impact on the environment, ensuring that a company has a positive impact on society while adhering to strong governance standards.

The term ‘ESG investing’ has also been used interchangeably to describe ethical investing which is to invest in line with one’s own belief system, and impact investing which is to invest for both a financial goal and a specific environmental or social outcome.

The history of ESG investing

You might think that ESG investing is a relatively new concept, but we can go back to the early 1950s with Howard Bowen's book "Social Responsibilities of the Businessman," in which he articulated that businesses have a moral obligation to serve not only their customers, but also the society in which they operate (and thrive). The UN's "Who Cares Wins" report in 2004 was another watershed moment in which the term 'ESG' was formally introduced into our common language. It served as the foundation for the launch of the UN Principles for Responsible Investment (PRI) in 2006, which encouraged the incorporation and adoption of ESG values into an investor's decision-making processes.

Demand for ESG products still exists

Fast forward to the present day, and while there have been additional (welcome) developments in the regulation and formalisation of ESG investing, there has also been a notable alignment of economic and social goals. 

Some notable examples include the strong emphasis from governments to adopt clean energy policies and labour policies across the western world, coming under further scrutiny with the ‘fair pay for fair work’ campaign.

This demand for ESG products is only likely to accelerate with further need for companies to adopt sustainable business practises.

Greenwashing & the number of ESG funds

Due to this rising consumer demand, the market has seen an increase in the number of financial products and services that claim sustainability features. However, this has increased the risk of greenwashing, in which companies' sustainability claims are exaggerated, misleading, or unsubstantiated.

Between 2021 and 2023, the FCA received over 1,700 applications to launch a new ESG or sustainability-focused fund (Source: Morningstar). This prompted the FCA to state that:

“We have seen numerous applications for authorisation of investment funds with an ESG or sustainability focus. A number of these have been poorly drafted and have fallen below our expectations. They often contain claims that do not bear scrutiny.” (July 2021).

What are Sustainability Disclosure Requirements?

In response, the FCA has introduced the Sustainability Disclosure Requirements, also known as 'SDR', with the goal of protecting consumers and ensuring a fair marketplace, published 28/11/2023.

The SDR are multifaceted, but the overarching goal is to assist consumers in making informed decisions based on their sustainability preferences, while also promoting fairness among firms that provide genuinely sustainable products and services.

The anti-greenwashing rule

The SDR introduces a new rule that requires all regulated firms, ensure that any sustainability-related marketing claims are clear, fair, and not misleading, as well as consistent with the product's sustainability profile. There are also limits on the use of sustainable terms in product names and marketing.

What is happening to the term ‘ESG Investing’?

To date, a fund could be marketed as 'ESG', 'Sustainable' or a range of other green descriptives with little oversight, however, the SDR has implemented a new fund labelling system with prescriptive guidelines on how funds can be marketed.

From 31st July 2024, fund managers can begin to use one of four labels which, whilst not meant to be hierarchical (an investor can choose a fund which aligns with their preference), will allow investors to identify suitable products and make comparison between funds far easier.

The four labels include:

To use a label a fund must have at least 70% of its assets in alignment with one of the above sustainability objectives. It remains to be seen how many funds will apply for a label but estimates from Morningstar are that 300 existing funds will seek a label.
It should be noted that the SDR applies only to UK domiciled funds this is unlike the SFDR (the European Commission’s approach to regulating ESG funds) which applies to funds globally if they are marketed in Europe. 

These labels can be accompanied by the following images:
 

Source: FCA's Policy statement PS23/16

If you would like more information, why not arrange an initial free consultation with a financial adviser today?

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

Investment returns are not guaranteed, and you may get back less than you originally invested.

Past performance is not a guide to future returns.

The Financial Conduct Authority (FCA) does not regulate cash flow planning or tax  advice.