An ISA – or Individual Savings Account – is a tax-free savings account. If you are a resident in the UK or a Crown servant (for example a diplomatic or overseas civil service Crown servant) and spouse or civil partner, you can squirrel away £20,000 a year into a tax efficient savings or investment vehicle – and it’s arguably never been more important to make use of all the tax allowances available to us where possible.
Research by the campaign group TaxPayers’ Alliance has found that the number of people now paying income tax has surged by 4.5 million in the last 14 years – there are now 35.5 million paying income tax, compared to 31 million in 2010. But most of these have become new taxpayers over the last three years.
The plethora of stealth taxes, such as the ongoing freeze to our Personal Allowances, means that 2.5 million have become taxpayers since these stealth taxes came into force in 2021 – and more than a million people have been dragged into the higher rate tax bracket.
What’s been happening to ISA rates?
As savings rates started to rise in 2022, initially ISAs were largely ignored – instead there was a pretty fierce battle in the fixed rate bond tables. As a result, the gap between the top paying bonds and equivalent ISAs increased to more than 40% - far more than the tax benefit of putting money into these tax-free savings accounts. For example, in August 2021 the top 1-year bond was paying 1.38% before the deduction of tax – 1.10% if basic rate tax was deducted and 0.83% if higher rate 40% tax was accounted for. The top ISA on the other hand was paying just 0.80% - less than the rate even a higher rate taxpayer could have earned on the bond.
The good news is that as savings rates have risen, people are utilising their Personal Savings Allowance (PSA) with smaller and smaller deposits.
The PSA allows basic rate taxpayers to pay no tax on up to £1,000 in savings interest, whilst higher rate tax payers can earn £500 a year tax free (this is interest earned outside of an ISA – interest earned inside an ISA is always tax free, regardless of the amount). Additional rate tax payers don’t have a PSA at all.
As a result of rising interest rate savers began turning back to ISAs to shelter their cash, and that has generated some competition between providers, closing the gap between the top rates of bonds versus ISAs, significantly. Today, while the top 1 year fixed rate bond is paying 5.21%, the top ISA is paying 5%, so anyone paying tax on their savings would earn more by putting their money into the ISA.
What changes are coming?
One of the barriers that some savers find when deciding whether to open an ISA or not is the complexity. There are too many rules and regulations. So, it was good news that in the 2023 Autumn Statement last November, some of these rules are to be simplified with effect from the new tax year. Unfortunately, the annual allowance will remain at £20,000 for the eighth year in a row, but some of the complex rules have been removed, which may help people to navigate the ISA maze a little more easily.
The changes that will affect cash ISAs are as follows:
- Allowing multiple ISA subscriptions: People will be allowed to open and pay into multiple ISAs of the same type in a single tax year – as long as they do not exceed the overall ISA allowance of £20,000. Currently people can only pay into one of each type of ISA every tax year, unless the ISAs are what are known as Portfolio ISAs. Where this could be an issue was if you had had funded a fixed term ISA with less than the full allowance and then wanted to top up at a later date. As you are normally only given a short window to fund a fixed term account, you would have needed to open another ISA, which in the majority of cases, is not allowed. So this really is a good move.
- Partial transfers allowed: Partial transfers of ISA funds in-year will be allowed, rather than being forced to transfer the whole amount of your current tax year ISA. Why was it previously a rule that while you could make partial transfers of old ISAs, you’d have to transfer the current tax year’s ISA entirely?
- Increase the age for opening a cash ISAs from 16 to 18 years of age: The minimum opening age for adult ISAs will be 18. This doesn’t appear to be such good news for younger savers, as at the moment a 16-year-old can open an adult cash ISA.
As the ISA season is getting into full swing and with rates continuing to rise, make sure you don’t miss out on the opportunity to protect some of your savings from the taxman. Please see Savings Champion website for the best rates on the market.
If you’d like to speak to an independent financial adviser about your own personal savings, please get in touch.
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 tax advice.
There’s no getting away from it, costs have risen exponentially. With a growing cost of living crisis throughout the country, the need for cash retention to act as a buffer in these circumstances remains vital for everyone. This increase in costs will likely mean most people will need to try and save money where they can. Nevertheless, while cash is a crucial component of a well-rounded financial strategy, it's essential to strike a balance. Allocating too much cash for an extended period could expose your wealth to inflation risk, where the purchasing power of your money will decrease over time. It is therefore imperative to assess your overall financial goals, time horizon and risk appetite when deciding how much to keep in cash versus how much to invest in other assets.
There are many reasons to hold money in cash, so we look to explore the importance of cash and its inherent benefits within personal finance, whilst also considering the common risks associated with cash investments. Of course, managing your savings is a highly personalised process, and how much you save should reflect your individual circumstances.
The term ‘emergency fund’ or ‘buffer’ refers to money set aside for the sole purpose of being used in times of financial distress. The fund provides a financial safety net to cover any unexpected, and typically costly, expenses that may arise such as those following a loss of job or unexpected tax bill. The amount you should target for an emergency fund depends on a number of factors, including your financial situation, expenses, lifestyle, and debts. Typically, consideration may be given between three to six months of normal expenditure in cash, to be drawn from in the event of an emergency. This is considered a prudent financial practice because it helps avoid unnecessary debt and financial stress.
Top Tip: Starting off small is better than not starting at all!
The Stock Market
While investing in the stock market offers great potential opportunities for accumulating wealth and financial growth, it is important to be aware of the fundamental downsides and risks, and striking the right balance between investments and cash has proven particularly relevant over the past few years with investment markets going through a turbulent time.
Although investors are attracted to the idea of growing their wealth through stock market investments, this should always be looked at as a long-term strategy given the risks associated.
Up until November 2021, there were very few options for your lower risk portion of your wealth, as interest rates were extremely low. However, since the recent interest rate hikes many investors are turning their attention towards setting aside some cash into savings account and are benefiting from some of the highest returns in almost two decades. Unsurprisingly, the last few years have witnessed huge inflows of cash into savings, particularly fixed time deposits, with investors looking elsewhere from the stock market in providing safer and guaranteed returns.
Nonetheless, whilst saving rates have risen, cash has been a depreciating asset, after inflation, with ‘real returns’, remaining negative over the long term. So, for many, it is fundamental to have a comprehensive financial plan in place, to ensure your investment and cash allocations are aligned to meet your objectives and goals.
When it comes to investing, however, one particular benefit of holding some money in cash is managing sequencing risk with your investments. This refers to the impact of the timing of investment returns on a portfolio, particularly when withdrawals are made. If an investor needs to sell assets to cover income or emergency expenses, this can significantly affect the overall portfolio value. As such, the benefit of holding some money in cash is that you help reduce the chances of becoming a forced seller during an investment market downturn. By having this safety measure in place, you can help cover some expected or unexpected expenditure without negatively impacting your long-term investment strategy.
If you are interested in exploring what savings accounts have to offer, please check out the Savings Champion website, which compares the best accounts on the market.
Holding cash as you approach retirement plays a vital role in providing financial flexibility, security and peace of mind when we consider aforementioned risks with invested pension provisions.
As we have covered, sequencing risk can be a major issue for investors. This risk is more common during retirement, as you are far more dependent on your retirement income through your invested pension pots. Significant market downturns alongside taking pension income could be detrimental on your long-term retirement goals, where cash reserves are not in place, as you could be realising losses that could impact the value of your future pension provisions.
Furthermore, healthcare costs are increasingly forming a large part of unexpected costs during retirement. Health spending per person steeply increases after the age of 50, so having cash buffers in place to cover immediate healthcare needs is important.
Using cash in place of drawing from your pension can also have tax benefits, as some pensions sit outside the scope of inheritance tax. This means that the assets held within a pension fund may not be subject to inheritance tax when passed on to beneficiaries. However, given the complexity of inheritance tax laws, it is recommended to seek advice from professionals who have the expertise to guide you through your estate and pension planning.
If you’d like to learn more about how cash can best play a part in your wealth strategy, why not get in touch and speak to one of our experts.
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, estate planning or tax advice.
Savings Champion and their associated services are not regulated by the Financial Conduct Authority (FCA).
In an era of instant information and digital connectivity, obtaining financial advice has become more accessible than ever. However, it's important to consider the reliability of your sources, particularly on the internet and from individuals lacking the necessary qualifications and expertise to provide advice. Research by the Financial Service Compensation Scheme (FSCS) revealed that 22% of individuals seek advice from friends, family, or colleagues, 31% turn to online forums or tools, and 9% rely on advice from Social Media Influencers.
While the internet offers a plethora of sources for managing finances, the crucial question remains: is it trustworthy? The easy spread of information on social media and the internet has created a risky environment with unregulated content directing financial decisions. Without regulatory oversight, misleading or inaccurate advice can quickly circulate, posing a potential threat to unsuspecting investors.
Additionally, while seeking advice from close relationships can create a comfortable space for discussing financial matters, it's key to exercise caution. The existing trust and comfort within such relationships may foster a sense of security, but it's equally important to evaluate the individual's expertise. Just as you wouldn't turn to your electrician for medical advice, the same principle should apply to decisions impacting your financial well-being.
The FSCS study further delved into the reasons individuals hesitated to enlist the services of a regulated financial advisor, revealing intriguing insight. Specifically, 23% believed the value of their savings and investments fell short of the amount needed, and 38% expressed concerns about associated costs and value for money. These findings highlight a significant gap in understanding regarding the financial and emotional benefits derived from seeking professional financial advice, contributing to the emergence of the Advice Gap.
The Advice Gap
In the United Kingdom, the Advice Gap refers to a staggering 39 million adults who currently abstain from seeking any form of professional financial advice. Research conducted by the Financial Conduct Authority (FCA) in 2022 sheds light on this issue, revealing that a 60% of individuals with £10,000 or more of investable assets do not consider financial advice, due to the perception that they wouldn't benefit from it. Further insights from the FSCS investigation, revealed interesting thresholds for considering financial advice worthwhile. 13% of respondents believed that a minimum of £100,000 in funds was necessary, while 21% admitted they were uncertain about the financial threshold. This reveals a substantial segment of the population, hesitant to seek advice due to uncertainty about the potential benefits awaiting them.
The real value of Professional Guidance
A study conducted in 2019 by the International Longevity Centre (ILC) in the UK, illuminates the financial impact of seeking professional advice. The research uncovered that those individuals who sought financial guidance during the period from 2001 to 2006, experienced a total wealth boost of £47,706 in their assets over the following decade, compared to those who navigated the financial landscape independently. While the estimated average cost of a one-off independent financial consultation may be approximately £2,000, the benefits accrued over a 10-year period exceed this cost by an impressive 24 times, resulting in a net gain of £4,570 per year. This emphasises that investment in financial advice is essentially an investment in securing a more resilient and prosperous financial future.
The study goes beyond highlighting the importance of a single consultation; it emphasises the significant impact of continuous advice. Individuals who sought financial guidance more than once over the decade, experienced a remarkable 61% improvement in overall financial well-being compared to those who sought advice only once. Achieving financial well-being is not a destination, but a journey. It involves adapting to changing circumstances, making informed decisions, and staying proactive in financial planning. The study's findings highlight the importance of having a trusted advisor who can provide ongoing support, helping individuals navigate the complexities of the financial landscape.
The FSCS study brought to light a common scepticism regarding the minimum asset requirement for benefiting from financial advice. Contrary to the notion that financial advice primarily caters to those with high net worth, the ILC study, mentioned above, demonstrated that individuals who consider themselves in the "just getting by" category experienced a more substantial financial enhancement compared to their wealthier counterparts. For instance, while the affluent group saw an 11% increase in pension wealth, the "just getting by" group experienced an impressive 24% boost in pension income. The key takeaway is quite evident; irrespective of your income level, seeking financial advice can indeed exert a meaningful influence on your financial well-being.
Emotional value of advice
In reference to the ILC study, a whopping 88% of people who have taken advice think it’s good value for money. However, the worth of advice extends beyond financial gains. Amidst the backdrop of market volatility and continuing uncertainty in the political and economic spheres over the past year, it’s good to see that the emotional benefits of advice plays an important role.
A study conducted by Royal London delves into the emotional well-being advantages of seeking advice, revealing that it can offer more than just financial perks. The top three cited benefits include:
- Enhanced confidence in financial plans and the future.
- Heightened control over one's finances.
- Peace of mind and sense of preparedness to navigate life's unforeseen challenges.
Moreover, individuals reported being less anxious about their financial preparedness for retirement, highlighting the emotional impact that sound advice can have at various stages of life.
In conclusion, the studies provided by the FSCS, FCA, ILC and Royal London, paint a compelling picture of the misconceptions around financial advice and the hidden value both for financial and emotional well-being in seeking professional guidance. If you've found yourself questioning the relevance of financial advice in your life, this body of research strongly indicates that taking professional guidance could be a crucial step toward unlocking a more prosperous financial future. So don’t just take our word for it, the research speaks for itself.
If you’d like to learn more about how we can help you achieve the financial future you want, why not get in touch and speak to one our qualified financial advisors for a free initial consultation.
And why not have a look on independent website VouchedFor, to see what our existing clients have to say about us.
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.
Although many could be forgiven for believing the tax year 23/24 has been a fairly quiet year from a tax perspective, the simple act of freezing tax brackets and freezing or reducing allowances means these are likely to be the biggest tax raising measures since the 1970s. This statement continues to ring true even after taking into account the announcements made in the Autumn Statement back in November. As we now move closer to the Budget, due on the 6th March, with the current government looking at all options to keep them in power in an election year, one thing is for sure, we’re all feeling the effects of stealth taxes. So, will this change?
Stealth tax refers to government policies that increase tax revenue without directly or explicitly labelling them as tax hikes. These taxes often take the form of adjustments to existing taxes and allowances, fees, or other government charges, rather than the introduction of new higher taxes.
The term stealth taxes implies that these changes are designed to be less noticeable to the general public. Bluntly, the Government may look to introduce these less obvious changes, or indeed make no changes at all, so as to avoid criticism, potentially relying on blind siding taxpayers.
However, some would argue that such measures can be necessary for funding government programs and services or indeed paying back the mountain of debt the UK is now faced with, while avoiding public backlash. One thing is certain however, there are currently many different types of stealth taxes, which means few people are immune from paying much more tax now and potentially in the coming years. Even those not normally concerned are starting to sit up and notice; with the impact of fiscal drag on their finances, it’s hard not to feel the pinch.
Latest figures from HM Revenue and Customs (HMRC) show that total tax receipts for April 2023 to November 2023 are £515.9 billion, which is £24.0 billion higher than the same period last year.
In ‘normal’ times the Government has typically pursued a policy to increase tax allowances with the rate of inflation. However back in in 2021 the Government announced plans to freeze allowances and thresholds until 2026. This was later extended to 2028. A clever and rewarding move by the Government. The impact of this is staggering and continues to grow, for example, according to the BBC, simply freezing Income Tax bands until 2028 will create an additional 3.2 million new taxpayers and mean 2.6 million more people will pay higher rate tax. In fact, the Institute for Fiscal studies has stated that by 2027/28 one in eight nurses and one in four teachers will pay higher rate tax.
Even pensioners aren’t immune. According to HMRC an additional 800,000 pensioners will be paying income tax this year due to higher inflation pushing up state pension, which will take many of them over the frozen personal allowance.
Added to this, in the spring Budget early in 2023, the Chancellor announced a reduction in the amount you could earn before paying additional rate tax at 45%. Previously you would have breached the additional rate tax band once your earnings exceeded £150,000 per year, however, from April 2023 it was cut to £125,000, dragging many more people into the additional rate tax net.
Impacts of the Autumn Statement 2023
Following the Autumn Statement delivered by the Chancellor, Jeremy Hunt, in November last year, it should be noted that despite some changes designed to give the public back some money in their pocket, by reducing National Insurance payments, stealth taxes continue to be ever present. My colleague Alex Shields wrote a great article summarising the changes outlined in the Autumn Statement.
The first area of note is the changes to National Insurance (NI) payments - as a result of higher inflation, higher interest rates and frozen tax bands, the Office for Budget Responsibility (OBR) states “Living standards, as measured by real household disposable income per person, are forecast to be 3.5 per cent lower in 2024-25 than their pre-pandemic level.” With this in mind even the 2% reduction for employee NI contributions only results in a £754 p.a. for anyone earning over £50,270, which is a relatively small amount given the increasing day to day costs driven by inflation over the last 12-18 months.
What Stealth Taxes are the biggest earners?
Income Tax Freeze
The stealth tax which is arguably the most prominent and takes in the largest receipts are the income tax bands, which are frozen until 2028. Given that on average UK wages increase year on year, and even more so while inflation rocketed, individuals have been moving up the income tax bands, potentially without realising, just by receiving routine pay increases each year. Some 5.59 million people in the UK currently pay higher rate tax, official HMRC figures show, with an additional 310,000 dragged into it in the year 2022 alone. Over the last few years inflation and interest rates have been in a constant battle in order to try and bring inflation back to its 2% target, while wage inflation had been steadily increasing in the background. Although inflation had been falling in recent months, this month saw a surprise small uptick from 3.90% to 4%, meaning it’s stickier than expected and certainly well above the target 2%, so it’s little wonder that demand from the UK labour force for higher wages continues to increase. This, in tandem, drives up the impact of this particular stealth tax – as wages increase over the frozen income tax bands.
Furthermore, as mentioned above, pensioners received a boost as the Government remained committed to the State Pension triple lock; it was announced in the Autumn Statement 2023 that the full State Pension will be increasing to £11,501 per annum from April 2024. But, this in turn leads to many pensioners having to pay more tax than the year before given the freeze on income tax bands. In fact, those on low pension incomes are in risk of paying tax for the first time as they breach the personal allowance of £12,570. This could squeeze the finances of those pensioners on lower incomes more than they were previously, while also pushing others into a higher tax bracket – pointing to the benefit of ongoing financial planning.
Latest costings of personal tax threshold measures
Source: Office for Budget Responsibility
Savings Allowance Freeze
Another potential stealth tax to be aware of is the tax on savings interest. A basic rate taxpayer can earn up to £1,000 interest outside an ISA without facing a tax bill. This is known as your Personal Savings Allowance (PSA). The allowance is £500 for those paying higher rate tax, and additional rate taxpayers have no allowance at all. Due to very low interest rates in previous years, this tax allowance has been all but forgotten about, with the majority of savers accumulating savings interest tax free.
However, given the Bank of England base rate rose 14 times consecutively from December 2021 in an attempt to combat inflation, cash savings rates became much more attractive as a result (see Savings Champion best buys). Many savers will now accrue significant taxable interest, which in turn takes them over their Personal Savings Allowance and they will therefore need to pay tax.
To put this into context, back in December 2021 a saver could deposit over £133,000 in a best buy easy access account before breaching the basic rate taxpayers PSA. Fast forward to October 2023, when interest rates were peaking, if you saved in the top easy access account, you would breach the PSA on a balance of just over £19,000.
In fact, it’s been reported that the number of people paying tax on their savings income in the 2022/23 tax year has almost doubled to 1.77 million compared to the 0.97 million people the year before. And the amount collected has more than doubled from £1.2 billion to £3.4 billion.
In a similar light to the Income Tax freeze, the Inheritance Tax (IHT) nil rate band (NRB) and residence NRB have also been frozen until 2028. Worst still, however, the current NRB hasn’t changed since 2009, so has remained the same for 14 years. As it stands for the current tax year 2023/24, you will have to pay Inheritance Tax if the value of your estate exceeds £325,000. Anything below this threshold is tax free. Anything above this threshold would be charged at 40%. Those who are passing down their main home to direct descendants are also entitled to an additional allowance of £175,000, known as the residence nil rate band (RNRB), however this allowance actually starts to be withdrawn where the value of the estate exceeds the £2 million taper threshold.
Due to the rising rate of inflation coupled with increasing property values across the UK, the freeze essentially means that a greater number of people will cross the inheritance tax threshold each year, as the value of their total assets have increased, whilst the allowance has remained the same. In the 22/23 tax year a record £7.1 billion in IHT receipts was raised, which was up £1 billion from the previous tax year. With freezing this allowance and estates growing, IHT receipts are expected to increase consistently. In fact, figures from HM Revenue & Customs (HMRC) show a record breaking £2.6bn of inheritance tax receipts were collected in just the 13 weeks between April and July 2023.
The latest figures from HMRC show Inheritance Tax receipts for April 2023 to November 2023 were £5.2 billion, which is £0.4 billion higher than the same period last year.
Why should there be more awareness of these stealth taxes?
Given the current economic climate, it’s wise to ensure your hard-earned money, whether that’s income, investments or savings, are working for you in the most tax efficient way possible. These stealth taxes, if left unattended, will drag on your accumulated and accumulating wealth. The good news is, there are simple ways of mitigating the impact of stealth taxes by being aware of and using the allowances available to you (but be conscious not to creep over them). Moreover, ensuring you are investing, saving, and contributing to tax efficient savings and investments with tax free wrappers will also help to mitigate some of these stealth taxes.
A few examples include:
Use your ISA Allowance
- Saving money into an ISA (the most common being Stocks and Shares or Cash); everyone gets a £20,000 per tax year allowance and any growth within an ISA is totally tax free.
Fund your pension
- If you find yourself entering a new tax bracket, whether that is higher or additional rate, by funding a pension you will receive tax relief at your marginal rate, so are effectively given a tax boost by contributing. For example, a basic rate taxpayer would receive tax relief at 20%, a higher rate by 40% and additional rate by 45%.
- Added to the fact, by contributing to a pension you could even reduce your income as the money is taken at source, so therefore you could change the income tax bracket you fall into.
Watch out for the 60% tax trap
If you earn over £100,000 you begin to lose your personal allowance and could find yourself effectively paying 60% income tax as you lose it – this makes pension funding in this bracket especially attractive.
High Income Child Benefit tax charge
- For parents claiming child benefit, if you or your partner have an income of more than £50,000 a tax charge applies. One way you may avoid the tax charge is if a personal pension contribution is made. If the contribution is enough to reduce your income below £50,000, the High Income Child Benefit tax charge will be avoided.
Use allowances before they are cut
- From 6th April 2024 both the Capital Gains Tax and Dividend Allowance are being halved, £6,000 to £3,000 and £1,000 to £500 respectively.
Whatever side you’re on, working through the political landscape right now can be hard. Therefore, having regular financial planning sessions with a professional independent financial adviser could help mitigate against many of the stealth taxes, so why not get in touch and see how we can help you.
This article is also based upon our understanding of current law, HM Revenue and Custom's practice, tax rates and exemptions which are subject to change.
Savings Champion and their associated services are not regulated by the Financial Conduct Authority (FCA).
The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning, tax or trust advice.
Were you one of the 4,757 people that filed their tax return on Christmas Day? Or the 12,136 that filed on Boxing Day? It may seem extreme to be doing your tax return over the festive period, but for those diligent people the chore is done for another year – and they have avoided the stress of leaving it too late and risking an automatic penalty of £100. In the 2020/21 tax year around 290,000 were fined.
And it’s not just late filing that can see you paying a penalty. You also have to pay the tax due! In that same tax year a further 1.43 million people were fined for not paying up on time, up from 1.24 million the year before. And that was despite the fact that HMRC waived the late filing and late payment penalties by one month that year, in recognition of the pressures caused by the Covid-19 pandemic.
HMRC has announced that it will only be dealing with priority calls in the lead up to the end of the month, as according to The Times, waiting times to speak to someone for assistance have soared from 5 minutes in 2017 to 20 minutes in 2022.
Who has to send in a tax return
Apparently more than 1 million people will have been drawn into self-assessment for the first time due to the increase in taxes due on everything from savings and dividends to capital gains, because of the freeze in many allowances that was introduced in 2021 and it set to continue until 2028.
And some people could be first timers if the increase to their income, including the State Pension, pushes their income over £100,000.* But there could be other situations too, so, you might be surprised to find that you do need to file a self-assessment tax return.
As there are so many more who may need to do a self-assessment tax return, it could be wise to check if you need to send a tax return if you’re not sure.
According to the gov.uk website, you must send a tax return if, in the last tax year (6 April to 5 April), any of the following applied:
- you were self-employed as a ‘sole trader’ and earned more than £1,000 (before taking off anything you can claim tax relief on)
- you were a partner in a business partnership
- you had a total taxable income of more than £100,000
- you had to pay the High Income Child Benefit Charge
You may also need to send a tax return if you have any untaxed income, such as:
- some COVID-19 grant or support payments
- money from renting out a property
- tips and commission
- income from savings, investments and dividends
- foreign income
What do you need if you have to file a tax return?
If you are filing online you’ll need to have a login to the Government Gateway and you’ll need your Unique Taxpayer Reference (UTR) number.
More information is available on gov.uk, so this is a great reference point especially if you don’t yet have a Government Gateway account. But you really need to get a move on if you want to avoid a penalty.
Remember that HMRC will charge interest on these fines and any unpaid tax and the amount is calculated as base rate plus 2.5% - so currently this is 7.75%. This is bad enough, but if HMRC owes you money because you have overpaid tax, they will only apply base rate minus 1% (4.25%), known as the repayment interest rate! Even more of a reason to make sure you pay up on time and accurately.
The Financial Conduct Authority (FCA) does not regulate tax advice.
Are you the one who deals with the finances in the home? Would your loved ones know where to look if something were to happen to you?
Traditionally, writing a will would be the crucial difference between having your final wishes granted when it comes to the distribution of your assets after death. But is it enough in the new digital world?
We, like most of the world, rely on technology. It connects us to friends, fulfils our shopping needs and most importantly it gives us access to our financial accounts and all manner of private and confidential documents. Gone are the days when a loved one passes that you’re searching through the cabinet to find old statements and building society savings books. Now, with what appears to be an ever increasing number of people online, it’s a virtual search you need to undertake. So how do you store your documents? In a separately labelled email folder? On your hard drive? Maybe you saved them to the cloud in an online filing system? However they are saved, the question is are they easily accessible when you pass away?
According to Statista, a global statistic gathering company, more than 90% of adults in the UK used online banking in 2022, for the combination of speed, convenience and ease of use. With the rise of a cashless payment system, it really does show how the digital world has taken over in recent years.
What is the TPO digital filing cabinet?
All clients of The Private Office have access, at no additional cost, to our online portal, TPO Wealth. Here, you can store all personal documents in a safe and secure space. Where this portal is useful is, with your consent, we are able to grant access to your accountants and solicitors to access your relevant information, such as tax folders and other personal documents to make it a seamless and effortless experience for you. This can be particularly useful for the self-employed.
As of March 2022, the Office for National Statistics (ONS) states there are a grand total of 4.2 million people who are self-employed – that’s 13% of the working population! Most self-employed people operate with an accountant to help with filing tax returns and completing their annual accounts. However, this all requires paperwork which needs to be kept on top of, so it’s important to collate all of this into one easy-to-use and secure place.
Navigating the death of a loved one is one of life’s biggest challenges, without the additional complexity of trying to track down and locate all the relevant documents to manage their estate. While you are able to name a ‘digital executor’ within your will, unfortunately that doesn’t mean consolidation of all your personal and important documents.
Here’s a list of some of the types of things our clients share on TPO Wealth, both for personal filing and to share with their other professional contacts:
- Tax Information
- In Case of Emergency
- Invoices and fees
- Details of professional contacts
- Insurance details
With TPO Wealth, your loved ones can reach out to your adviser and know everything is stored in one place, which many of our clients have found to be a great help at a difficult time.
What about if you become incapacitated?
Aside from the death of a loved one, there are other instances where information may be required, such as critical illness or incapacity. With the average time for a Lasting Power of Attorney (LPA) to be processed and granted in the UK taking between 20-21 weeks, according to Clare Fuller of Compassion in Dying, searching through paper filing or numerous accounts could be the difference between your loved ones being able to afford your care or not. This increases the need for your loved ones to be able to access your finances almost instantly and seamlessly.
The added value comes where your adviser can reach out to your accountants and solicitors on your behalf as well as granting loved ones access to your TPO Wealth account and accounts within Power of Attorney (POA) rights.
TPO Wealth doesn’t stop at just secure storage of important files, you can view all your investments and savings accounts too. It has a built-in property calculator where you can estimate the value of your main residence and any other properties, as well as being able to track the value of your net worth. You are able to securely message your adviser and provide any necessary signatures through the portal.
The flexibility in making the portal what you need is the benefit. Storing any file you wish on the portal could make it the one-stop-shop you need for a secure filing system of non-financial related files as well!
TPO Wealth is only available to clients of The Private Office.
The Financial Conduct Authority (FCA) does not regulate estate planning or tax advice.
2023 was another extraordinary year for savers. Even though I look at these figures regularly – providing statistics for the financial press, each time I do, it amazes me about just how much more you could be earning – and with inflation now falling below base rate, there are scores of accounts paying interest rates that are keeping up with the cost of living.
We've put together a roundup of all the action from the last 12 months.
We started 2023 feeling pretty cock-a-hoop, as the top easy access rates had increased over the previous year from 0.61% AER to 2.86%, a more than fourfold increase. But there was a lot more to come. At the time of writing, the top rate is 5.22% with Metro Bank and in fact there are almost 30 accounts that are paying more than 5% - a rate than is by far the highest in Savings Champion’s history. So, although the top rates have only doubled in the last year, on a deposit of £50,000 the increase of interest is £1,180, from £1,430 a year to £2,610, a year – I know I could do with an extra few hundred pounds or more which is the reality if you have kept your cash in a top paying account.
Of course, depending on who you have your cash with, will determine how smug you are feeling. If you had your £50,000 with Barclays Everyday Saver, the interest you are earning would have increased from £250 gross/AER with a rate of 0.50%, to a slightly better 1.26% AER (this is a blended rate as you earn 1.65% on the first £10,000 and 1.16% on the rest) so providing £630 in interest a year.
But if you had put your £50,000 in the Zopa Smart Saver, which was the top paying account at the start of the year, the rate on this account is currently 4.54% AER – so not market leading but definitely much more competitive than any of the high street banks.
However, there is a clear benefit to monitoring your variable rate accounts closely and switching regularly if you want to keep your accessible cash earning as much as possible.
Fixed Term Bonds
Anyone who regularly reads the Rates Rundown will not be surprised to hear that the top rates on offer seem to have peaked a few weeks ago. But those who opened a bond a year ago, will still be looking at earning more over the next year if they roll over, than they have over the last year. In January 2023 the top rate on a 1 year bond was 4.35%, so a deposit of £50,000 would have earned £2,125 before tax deducted, over the term of the bond – but if rolling over today for another year you could open a 1-year bond paying as much as 5.50% - so you would earn £2,750 before tax over the next 12 months – an improvement of £625.
There was a point, from early July until mid-October this year, that ALL of the top five 1-year bonds were paying 6% or more. But the last 6% bond left our table at the beginning of November, as the better-than-expected inflation news saw the Bank of England pause the base rate increases – leaving it at 5.25% since August 2023.
Back in July to October this year all of the top five bonds were also paying 6% or more, peaking at 6.20% for a couple of days with a bond from Vanquis. But, as with the 1-year bonds things have dropped and the top rate now (at the time of writing), is 5.40% AER. However, this is still a significant improvement from the start of 2023, when the top rate was just 4.53%.
Longer term bonds
It’s a similar picture with the longer-term bonds, although as has been the pattern throughout the year, rates as a whole are lower the longer the term.
The top 3-year bond was paying 4.55% AER as we started the year and the top 5-year bond was 4.60%. But while the top 3-year rates did get as high as 6.10%, the top 5-year bonds only just hit 6% for the briefest of periods.
Fast forward to today and only three of the top five 3-year bonds are paying 5% or more and none of the top five 5-year bonds are paying 5%. But, while longer term bond rates are lower than short term, it could still pay off to lock some of your cash up for the longer term – hedging against possible interest cuts over the next few years.
The good news for savers is that it’s looking likely that whilst we might now be at the top of the interest rate cycle, the Bank of England has hinted heavily that the markets are wrong to anticipate that base rate will start to fall again in the first half of 2024 – instead it’s expected that rates will stay higher for longer, hopefully giving savers some stability for a while.
Fixed Term Cash ISAs
There has been a great deal of activity in the fixed term cash ISA market recently but unfortunately not in a good way!
That said, the rates available today are still much better than they were at the beginning of the year.
The top 1-year ISA in January 2023 was 4% - today three of the top five are still paying 5% or more. Rates had risen to as much as 5.86% by October, but whilst the average of the top five was 5.78% at that time, rates have started to fall quite rapidly recently and now the top rate available has fallen to 5.01% with Shawbrook Bank – and the average of the top five is 4.98%.
As with fixed term bonds, the activity has been similar and although the top 2-year ISA available in January was paying a little more than the 1-year rate, at 4.15% the top rate at the time of writing is just 4.95% with Melton Building Society.
You could have earned a little more over 3-years back in January as the top rate was 4.25% - but interesting the top rate is now 5% with the Hinckley & Rugby Building Society - so higher than the top 2-year ISA and marginally less than the top 1-year.
Over five years all of the top five are now paying 4.50% or less and there has been a plethora of accounts being withdrawn, replaced by lower paying accounts. So right now the average of the top five is just 4.38% - down from 4.73% at the beginning of December but up from 4.13% at the beginning of the year.
Although the recent news isn’t great, as many more savers are paying tax on their interest once again, cash ISAs are still vital as the tax free rate of the ISA can still be considerably more than the interest earned after tax has been deducted on the taxable non ISA bond equivalents. So, for many the ISA allowance is not to be disregarded.
As we start the New Year, although it’s early days, things do seem to have settled a little, so hopefully we’ll enjoy some stability, even if we're not expecting any more rates increases. Keep an eye on the Savings Champion best buy tables for all the top rates available.
The accounts and rates mentioned in this article are accurate and correct as the time of writing 22/09/2023. as 02/01/2024.
Better than expected inflation data has led investors to speculate that central banks have room to cut interest rates in 2024 by more than the bankers have previously been implying. The shift in sentiment had a big impact on equity and bond markets but can this momentum be maintained?
This article explains some of the background and concludes that markets have room to move higher, but question marks will resurface as central bankers don’t want to be seen to be soft on inflation risks.
Changing expectations on inflation?
Interest rates and inflation expectations have fluctuated significantly in 2023. After over a year of rising rates as central banks battled high inflation, markets have begun pricing in the possibility of rate cuts in 2024 as price pressures start to ease. This article will examine interest rate expectations in the US, UK, and Eurozone (with emphasis on the US) and explore how these shifting expectations have impacted asset prices and investor sentiment.
Figure 1. The journey that US inflation has been on as represented by Headline Consumer Prices, Source: U.S. Bureau of Labor Statistics
Figure 1 above shows the path of consumer prices in the US, the figure is the headline rate when comparing prices now to a period 12 months prior. The headline figure includes volatile items such as energy and food prices, along with the more stubborn inflation that is associated with wages. It is the latter that the central banks worry about. In November, it was the lower than expected consumer prices figure that got investors excited that the Federal Reserve in the US may have room to cut interest rates more quickly than they have been indicating.
As it stands today, the Federal Reserve is indicating that there might be 3 rates cuts next year, each of 0.25%. However, following the November inflation number and more recent comments from the Federal Reserve Chairman, Powell, investors are now factoring in 6 interest rate cuts of 0.25%. The last time expectations of interest rate cuts got to anything like this level was during the regional banking crisis in May this year. So, you can see that dramatic moves in interest rate expectations are more usually associated with crisis situations.
US inflation has slowed materially in the last few months, as the labour market has come into greater balance. In addition, supply chain pressures have eased and falling oil prices have dampened cost pressures on businesses and consumers. As inflation has come closer to the 2% target (core inflation has run at around 3.5% over the last three months) investors have begun to look ahead to a return to interest rates that are closer to the so-called ‘natural’ rate of interest – this is the theoretical rate of interest consistent with neither a contracting or overheating economy and is estimated at around 1-1.5% above the rate of inflation by the Federal Reserve Bank of New York.
The roadmap for Interest rates
It is not only in the US that markets are seeing slowing inflation and an increased likelihood of interest rate cuts, as the following graph shows:
Figure 2. The path of expected interest rates in the US, UK and Europe, Source: Trading Economics
The above chart compares investor expectations for the number of interest rate cuts of 0.25% in 2024, across three central bank regions, the US, UK and Europe. The bars show the number of cuts expected in each region
Looking at an international comparison, we see that interest rate cuts are not only expected in the US, but also in the UK and EU. Europe stands out, with markets expecting over 8 cuts by December 2024. European inflation has followed US inflation down, however that is only half the story, as economic growth in Europe is expected to deteriorate to a greater extent than in the US. Growth has been weaker in the EU than US throughout 2023 and that relative position is expected to continue, with US growth slowing and the EU expected to see economic contraction.
Markets expect the ECB will have to loosen monetary policy substantially in a bid to kickstart growth. The UK, on the other hand, is expected to have comparatively few interest rate cuts. This is owing to the perception of more entrenched UK inflation, particularly wage-driven inflation in the services sector. (this topic was covered in the previous edition of the investment market update).
Figure 3: Performance of the S&P 500 (orange line) and the markets expectations of a fall in US interest rates (white line), Source: Trading Economics
This graph shows the S&P 500 equity index (the main US stock market) in orange, with the number of cuts expected by December 2024 in white.
There is clearly a link between rate cut expectations and equity market performance. This has led the S&P 500 to gain over 8% through the month of November. The increase though in the S&P 500 during November and over the course of the year has been the result of seven of the largest stocks dubbed the ‘Magnificent 7’ outperforming given that they are beneficiaries of the artificial intelligence wave which has been a key theme in markets. Conversely the performance of remaining 493 stocks has been broadly flat which has created a divergence in the performance of US large cap companies and small cap companies.
We have begun though to see increased attention for those stocks which have underperformed year-to-date most notably with small cap companies. This move from an ‘only the 7 rally’ to ‘everything rally’ was not an exclusively equity market phenomena, with rallies seen in government bonds, corporate bonds and even beaten-down asset classes like infrastructure. Rallies in bond markets pulled bond yields down, which allowed corporations to access financing at lower rates than they had seen in months, leading to a bumper month of corporate bond issuance.
The result of this is that the traditional 60% equity and 40% bonds portfolio saw its best November since 1991, returning 9.6% in dollar terms. This highlights the benefit of staying invested in markets, as if you we're to have missed out on last month's returns then this will have compromised your returns for the overall year.
And what does the future hold?
Looking ahead we continue to expect a supportive environment for financial markets.
The recent increase in small cap (or unloved) companies means equity markets are trading at (relatively) more attractive valuations which provides an opportunity for investors, but also reduces the risk that the small minority of companies (the Magnificent 7) which have contributed to most of the recent performance, will fall in price. Similarly with bonds the combination of robust corporate balance sheets and that companies do not need to immediately refinance their debt (and in doing so increase their ongoing costs) means the outlook for bonds is also positive and offer investors an attractive level of income.
As a final word, while recent market developments have been encouraging, reasons for caution remain. As noted in the paragraph comparing interest rate expectations internationally, in Europe the expectations for cuts are driven in large part by expectations of deteriorating economic growth. While the US is expected to be stronger there is still the expectation that growth will slow and as a result, we continue to favour holding a diversified portfolio which provides diversification not just by investing in several different countries but also investing across multiple asset classes (equities and bonds) and different industries.
Note: This Market update is for general information only, does not constitute individual advice and should not be used to inform financial decisions. Additionally, past performance is not a guide to future returns. Investment returns are not guaranteed, and you may get back less than you originally invested.
Some of the biggest changes included the ability to pay into multiple ISAs of the same type in each tax year, as long as the overall allowance is not breached, and the ability to do partial transfers of ISA funds regardless of when you first deposited the money.
Currently, you can pay into just one ISA of each type per tax year, for example just one cash ISA and one stocks and shares ISA and can only do partial transfers of funds that you’ve paid in before the current tax year.
With the new changes, cash savers will have the option to open multiple cash ISAs each year, which could be particularly helpful if you’ve opened a fixed rate cash ISA , for example, with less than the full allowance. With a fixed rate cash ISA, once the initial deposit has been made, you are unable to add any further monies. Therefore, at present, unless you wanted to utilise your remaining allowance in a stocks and shares ISA, you wouldn’t be able to open another cash ISA, so would be unable to utilise your remaining allowance. Investors too will be able to open ISAs with more than one provider and have far more flexibility switching.
But it’s worth remembering that the potential disadvantage that this flexibility brings is that if you are opening multiple accounts you will need to be mindful of the total amount you have contributed so that you make sure you have not exceeded the ISA limits. Plus, the added time and resources needed to review and potentially switch multiple ISAs, going forward.
In short, the changes give significant adaptability back to savers, allowing them to adjust to the financial climate in a far more fluid way.
However, this extra flexibility does not come without it’s caveats. When opening multiple accounts, savers will need to be mindful of the total amount they are contributing so that they don’t breach their £20,000 ISA contribution limit. Opening multiple accounts will also come with an increased demand of the saver’s time to review and manage these different accounts.
It’s important to note that the amount you can save in ISAs and JISAs is not changing, and instead remains frozen at £20,000 for ISAs and £9,000 for JISAs. Similarly, Child Trust Funds remain frozen at £9,000 and LISAs at £4,000, excluding the Government 25% bonus.
And for those under 18, adult cash ISAs will no longer be accessible. At the moment you can still open an adult cash ISA from the age of 16. However, with the new changes, those aged 16 and 17 will only have access to Junior ISAs. So, for those falling in that age-bracket, now might be the time to consider opening an adult cash ISA before next April (2024) when the policy comes into effect.
What is an ISA?
An ISA, or Individual Savings Account, is a scheme that allows individuals to save up to £20,000 in total into cash and investments the returns of which are free of tax on dividends, interest, and capital gains. Essentially, it’s a savings account that you don’t pay tax on.
The different types of ISAs
There is a variety of ISAs to choose from in the UK, each with their own unique features and benefits. As a starting point, there are three main types to consider:
A cash ISA is essentially a tax-free savings account that allows you to invest up to £20,000 each tax year. What’s notable about cash ISAs is that you do not have to pay any tax on the interest you earn. Cash ISAs have become particularly valuable as interest rates have risen as people are paying more on their non-ISA savings accounts. Where larger amounts of savings are concerned the difference can be significant.
Stocks and Shares ISA
Much like the cash ISA, you can deposit up to £20,000 each tax year (but this is the total that you can deposit across all ISAs that you subscribe to each year) and you do not pay tax on any gains made. As the name suggests, in a stocks and shares ISA your funds are invested in a range of assets including stocks, shares, bonds and funds. With many stocks and shares ISAs, you will get to choose where you invest your savings. This means that there is some inherent risk in stocks and shares ISAs, as the value of investments can go down as well as up.
Lifetime ISAs are notable because of the relatively huge, guaranteed returns. Although you can only save up to £4,000 a year in lifetime ISAs, the Government guarantees that 25% of your investment will be matched. That means if you deposit the maximum amount of £4,000 in your lifetime ISA each year, the Government will add an additional £1,000 tax-free annually. The caveat is that the money accumulated in a lifetime ISA can only be used to either buy your first home, or to be withdrawn after the age of 60 for retirement. Any earlier withdrawal incurs a 25% penalty.
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 professional independent financial 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 find out how we can help.
Investment returns are not guaranteed, and you may get back less than you originally invested.
Most parents would like to ensure their children have a strong financial footing when they are older, but don’t always know the best way to do this. There are many ways to support your children financially throughout their lifetime, but what if there was a way to make them a millionaire before they even reached retirement age? Here we look at the best ways to put money aside for your children and how you can maximise the benefits of compound interest to make your child a “millionaire”!
The first step to saving for your children’s future is understanding your saving options. Here are the most common options that benefit from tax-free growth:
From the day a child is born you can put money into a JISA for them. The current contribution limit is £9,000 per tax year (or £750 per month) and you have the choice of a Junior Investment ISA or a Junior Cash ISA. The most important benefit of a JISA is that any gains made, or interest earned will be tax-free!
If we assume you receive an average annual net return of 5% per year and you save the maximum of £9,000 every tax year, from the day your child is born until they turn 18, you will have contributed a total of £162,000 to their account. However, due to the magic of compound interest (where you earn interest on interest), they will have a pot of over £265,000 saved in a tax-efficient wrapper, what a great 18th birthday present!
At their 18th birthday they can transfer their JISA into an Adult ISA to continue to receive tax-free interest/ investment returns.
Junior Self-Invested Personal Pension (Junior SIPP)
Setting up a pension up for your children may seem like you are overly preparing but this can actually give your children a significant head start. The maximum you can currently save into a Junior SIPP is £2,880 per tax year, and the UK government will add tax 20% tax relief of £720 per tax year, which would bring the total contribution to £3,600. If you can contribute to your child’s Junior SIPP for 18 years and again assuming a 5% growth rate, you will have contributed £51,840 but their pension pot will be worth £106,340 due to the added tax relief. If your child doesn’t contribute to the pension again, by age 57* they could have a pension pot worth around £712,986. Similar to the JISA, any gains made within the SIPP are exempt from tax, and based on current pension rules, you can take up to 25% as a tax-free lump sum upon reaching retirement age.
Recent statistics released by the Office for National Statistics (ONS) stated how the average pension wealth for all persons in the UK is £67,800 at age 57*, highlighting how starting to save early can set your child up for their future and give them a greater opportunity in retirement or even to retire early.
How to make your child a millionaire!
And this is how to do it!!.. If you do the following and assume a 5% growth rate per annum:
- Open a JISA before your child’s first birthday and contribute £9,000 every year until age 18. This results in a total contribution of £162,000 (18 years x £9,000).
- Open a Junior SIPP before your child’s first birthday and contribute £3,600 (including tax relief) to the Junior SIPP every year up to their 18th birthday. This totals 18 years x £2,880 (or £3,600 with tax relief) which equals £51,840 (£64,800)
This would mean you will have contributed a total of £226,800 (including tax relief) to the JISA (£162,000), and Junior SIPP (£64,800). At age 18 when you stop contributing, they could have a total net worth of £372,191 when taking into account compound interest and growth. If they leave this money invested and continue to achieve 5% per year growth, by age 39 they could have a total net worth of just over £1million (£1,036,911), although the funds in the pension would not be accessible until age 57*.
At that point the pension fund could have grown to £712,986, while the ISA, could be worth £1.782.465 is it remained untouched too. An extraordinary total of almost £2.5m. That is a gift worth giving.
The power of starting to save early
Using the same assumptions as above, with a 5% annual growth rate and maximising both Junior SIPP and JISA contributions until age 18:
|Starting from date of birth
|Starting at age 5
|Starting at age 10
|JISA Value at age 30
|Junior SIPP value at age 30
|Total Value at age 30
This shows the benefits you can provide by starting the process of saving early for your child through compounding the interest or investment returns. This is a representation of how you can save for your children and assumes maximum contributions are made at each birthday, but we understand the circumstances for each parent & child will be different and may require different forms of financial planning, such as monthly contributions instead of lump sums.
Despite the examples above, it is never too late to start. If you would like to understand how, The Private Office can structure savings and investments for you and your children to help provide the whole family with a strong financial future. So why not get in touch for a free initial consultation.
* Based on current pension regulation, where the normal minimum pension age is increasing to age 57 from April 2028.
All the calculations in this article assume that lump sum contributions are made for 18 years, from birth, unless otherwise stated, to the 17th birthday and are not adjusted for inflation.
The Financial Conduct Authority (FCA) does not regulate tax or cash advice.
The growth rates provided are for illustrative purposes only. Investment returns can fall as well as rise and are not guaranteed. You may get back less than you originally invested. Investments may be subject to advice fees and product charges which will impact the overall level of return you achieve.