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Stealth tax raid on your wealth

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?

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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.

Inheritance Tax   

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.  

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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.

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.

Tax return deadline looms - avoid a fine!

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:

  1. you were self-employed as a ‘sole trader’ and earned more than £1,000 (before taking off anything you can  claim tax relief on)
  2. you were a partner in a business partnership
  3. you had a total taxable income of more than £100,000
  4. 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.

*Source: gov.uk

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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 tax advice.

2023 – another great year for savers!

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.

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Easy Access

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.

2-year bonds

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. 

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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 accounts and rates mentioned in this article are accurate and correct as the time of writing 22/09/2023. as 02/01/2024.

Santa rally got here early in November, but will it stay for Christmas?

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. 

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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.  

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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.

How ISA rules are changing

In the November 2023 Autumn Statement, Chancellor Jeremy Hunt unveiled the new rules around Individual Savings Accounts (ISAs) to come into effect from April 2024.

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:

Cash ISA

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 ISA

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.

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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.

 

 

How to make your child a millionaire before 40!

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”!

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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: 

Junior ISA(JISA)

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:

  1. 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).
  2. 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 if 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 £477,430 £300,604 £162,056
Junior SIPP value at age 30 £190,972 £120,242 £64,823
Total Value at age 30 £668,402 £420,846 £226,879

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 and 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. 

If you would like to know more about this topic, one of our Partners Kirsty Stone appeared on BBC Radio 4 Money Box live, giving her suggestions in a programme all about saving for children.

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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.

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.

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Autumn Statement – what the announcements mean for your finances

Chancellor Jeremy Hunt promised to ‘reduce debt, cut taxes and reward work’ in his ‘Autumn Statement for growth’, but what might the changes he announced mean for your personal finances?

In the lead up to the Autumn Statement, we discussed the changes that were rumoured to have been announced in this article.

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These speculated changes included:

  • Reducing Inheritance tax
  • Announcing an additional ISA allowance for investment into UK companies
  • Changing the state pension triple lock calculation to limit next year’s state pension increase

In the end, none of these changes were introduced, with shadow chancellor Rachel Reeves claiming Hunt wanted to reduce inheritance tax but that he “couldn’t get away with it in the middle of a cost of living crisis”.  Instead, the headline grabbing change was the 2% reduction to employee national insurance contributions between £12,571 and £50,271.  This will equate to an annual saving of c. £754 p.a. to those earning over £50,270 p.a. with effect from January 2024.  Additionally, there were National Insurance reductions for the self-employed, with Class 2 contributions effectively abolished and Class 4 contributions reduced from 9% to 8% between £12,571 and £50,271 with effect from April 2024.

However, this will only go part of the way to make up for the impact of the continued freezing of the income tax bands, which will remain frozen until 2028.  Indeed, 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.” 

Separately, the speculated ISA allowance increase for investments into UK companies did not materialise and pensioners will be pleased to hear Mr Hunt state the government will “honour our commitment in full” as the state pension rises by 8.5% next year.

Regarding pensions, workers will hope a new legal right for their new employer to pay into their previous defined contribution pension scheme will simplify pension planning going forward and will mean an end to the accumulation of multiple schemes as individuals move between companies.

This was an Autumn Statement with half an eye on an upcoming general election, with announcements that should put more money in the pockets of workers and pensioners alike. Mr Hunt repeatedly referred to the OBR’s forecasts during his announcement as he tried to rebuild credibility, a little over a year after Liz Truss and Kwasi Kwarteng’s ‘mini-budget’, prior to which the OBR was not asked to run forecasts. Overall, Mr Hunt will have been grateful that he was able to use some of the fiscal headroom provided by then Chancellor, now Prime Minister, Rishi Sunak’s decision to freeze income tax bands back in 2021 to offer a national insurance cut and significant state pension rise to the voting public. 

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The opinions shared in this article are solely those of the individual and they do not necessarily reflect those of The Private Office.  

Best tips when saving for retirement

There is no right or wrong time to begin your retirement planning journey. Whether you are still finding your feet in the working world, or you have one foot in retirement, you need to be proactive in making your money work as best as possible for you within the timeframe that you have. Here we look to highlight some of the best tips when saving for retirement, including the  best time to get started, how much you should be putting aside and what you can do even if you’ve left it later in life. 

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When do you start saving for retirement? 

When deciding on when you should start saving for retirement, no matter the age you start, developing a monthly savings plan is an effective habit to cultivate. Setting aside a designated amount of your income automatically into a retirement pot will quickly become routine and may look something like the following: 

  • The bulk going towards mandatory expenses (food, bills etc). 
  • Smaller portion going towards retirement savings. 
  • Try to set aside funds for living life and enjoying yourself too. 
  • We also strongly recommend having an emergency fund in place to cover unexpected event or expenses. The size of this fund depends on your financial lifestyle, but a good rule of thumb is at least 3 months of your monthly outgoings.

Clearly, the earlier you start to save the easier it will be to accumulate wealth. With the benefit of compounding, you can afford to put away smaller amounts in the early years for longer rather than having to find larger amounts the later in life that you leave it. This is because compounding means that you can make returns or earn interest on interest or growth you have already received. 

When it comes to talking about wealth accumulation, the obvious elephant in the room is debt. This is the single biggest hurdle towards any savings for retirement and should be the first thing you target in your strategy. If you have numerous liabilities, it may be sensible to explore paying off those with higher interest rates first and work down. Only then can you properly focus on accumulating your wealth. 

How much should I save for retirement? 

A good rule of thumb might be to set aside 10%-15% of your income and try maintain discipline with this. As an example, assuming a 6% annual investment return a 25-year-old putting away £262 per month will have over £500,000 by 65. Notably, a quarter of this is made up from contributions with the remaining £375,000 from investment growth, further showcasing the beauty of compounding over time. 

Please note, the return on investment in the example above is purely for illustrative purposes. 

(source:https://www.vanguardinvestor.co.uk/articles/latest-thoughts/investing-s…).  

Is saving for retirement worth it? 

Retirement saving is a critical aspect that is often overlooked or delayed, but in 2023, we find ourselves in a world where this topic is more pertinent than ever. We are in a time of high life expectancy, high inflation rates with a cost-of-living crisis. Without being doom-and-gloom, how amongst all this do we stay on top of future planning when the present is taking so much precedent? 

It's vital, then, that you ask yourself ‘what am I trying to achieve?’. Without addressing this at the outset, you run the risk of aiming for a goal but lacking direction. For some, the answer might be to retire at 55 and move abroad with their spouse; for others it might be to live a comfortable retirement alone. Everyone’s situation is different. 

Best ways to save for retirement in your 30s 

You are still relatively early on in your career journey and it’s often a time for lots of change, whether personally or professionally. It’s natural to be focused on immediate financial goals, but this is a time where compounding can be at its most powerful. 

You may find yourself checking your pension plan and you’re met with the reassuring reminder ‘You’re due to retire in 25 years!’. You should, however, see this as a call to action. This longevity means that it’s worth exploring higher risk assets (i.e. equities) to allow the potential of higher returns. You can take comfort in the fact that you can ride out any stock market volatility over these years. Most employers in the UK offer you a pension plan, and most will match a portion of your contributions. You will receive tax relief from the government, further bolstering the amount: 

You are simultaneously contributing to your retirement pot whilst reducing your income tax bill – what’s not to love. 

A less trodden path for people in their 30s is financial protection (insurance). However, life policies, for example, can be a great way to protect your family should you/your spouse pass away. Due to your age, you will likely benefit from lower premiums and can give peace of mind that your loved ones are protected should the worst happen. 

Best way to save for retirement in your 40s 

In your 40s, you’ve likely established your career, increased your earnings, and are saving some way towards your future. However, competing goals like mortgage payments, childcare or retirement savings are all jostling for your attention.

As you can see from the above, increased earnings provides greater potential to supercharge retirement savings. Take advantage of this by looking at utilising your £20,000 ISA annual allowance for example; this tax-free pot is a great tool for wealth growth. 

You may also have jumped around various jobs in your career by now and have small pension pots dotted around. People often forget about these until they are staring retirement in the face. One option might be to explore ‘consolidating’ these pensions into one fund. A survey from Profile Pensions recently highlighted that nearly a quarter of UK adults under 55 have lost track of old pensions worth an est. £37bn in total. Consolidating will make it easier to manage and could potentially reduce the overall fees you are paying. 

Source: https://www.cipp.org.uk/resources/news/unclaimed-pension-funds.html 

Best way to save for retirement in your 50s 

Conversely, whilst we have discussed that time is your ally in your 30s and 40s, the reverse can ring true in your 50s. You will likely have one eye on retirement and ultimately you will have to begin considering accessing your funds, otherwise known as crystallizing your retirement funds and a keyway to do this is called 'drawdown’, when you use your pension fund to provide an appropriate income. It might be prudent, then, to explore de-risking your assets so that you are less exposed to market volatility in this period. Many pension funds offer ‘lifestyle’ options which mean they automatically de-risk your investments as you approach retirement. You should check your existing structures to see how they align with your goals as lifestyling may not always be the best approach.

What if I haven’t even started? 

You may be thinking ‘I’m too late’, but there is no need to panic. You will just need to take a more disciplined approach to these retirement tips by making sacrifices and saving larger portions of income to give ‘future you’ a financially healthier retirement. Try utilising your pension and ISA allowances and, on top of your state pension, you may still reach a comfortable retirement.  

We’re currently offering everyone with £100,000 in pensions, savings or investments a free retirement planning review, worth £500. Why not get in touch and see how we can help map out your financial future to give you the retirement you want.

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Note: This article is for general information only, does not constitute individual advice and should not be used to inform financial decisions. A pension is a form of investment. Investment returns are not guaranteed, and you may get back less than originally invested; past performance is not a guide to future returns. Your home may be repossessed if you do not keep up repayments on your mortgage. The FCA does not regulate tax advice, estate, tax or trust planning.

Savings Guide

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Guide to Saving Money
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Our free guide aims to make savings simple by explaining the options available and how they work, to enable you to make an informed  decision about which account is right for you.