Investor implications – Dividend Allowance cuts

With the UK in the midst of a sharp tax-raising drive, understanding the full impact of fiscal changes on investments has arguably never been so critical. One area that has been subject to particularly draconian reductions is Dividend Allowance, with changes in this area likely to have a significant impact on many investors. 

Six-year slide 

The annual tax-free Dividend Allowance was first introduced in 2016/17 and originally stood at £5,000. In 2018/19, it was reduced to £2,000, and was then halved to £1,000 from the start of the current tax year. This figure is set to halve again next April to stand at £500 – overall, this equates to a 90% reduction in the value of the allowance in the space of just six years. 

Implications 

Once an investor uses up their annual allowance they are liable for Income Tax on dividends, with the rate payable based on the Income Tax band they fall into. These changes will therefore inevitably increase the tax pressure on any individuals who own significant dividend-paying stocks or rely on dividends as a primary source of income. 

Other options 

The Dividend Allowance is just one of the tax-free allowances investors can utilise in the UK. As a result of the cuts, it could therefore be increasingly beneficial for dividend-heavy investors to explore routes that offer exemption from dividend tax on qualifying shares, such as ISAs (which are also free of Capital Gains Tax). Alternatively, it may be appropriate for some investors to consider equity options that prioritise long-term capital growth over dividend payments. 

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. 

Mortgages – keep calm

After successive Bank Rate rises, the cost of a mortgage hit a 15-year high in July and will likely stay high for much of the next year. In unpredictable and unsettling times, here are some ways for mortgage holders to keep a cool head. 

Help is available 

If you’re worried about your mortgage payments, in the first instance, seek help from your lender, to come up with a payment plan to help you get back on your feet. Repossession is a last resort; in the first three months of this year, only 750 homes and 410 buy-to-let properties were repossessed1. The best thing to do is communicate with us early if you are finding it hard to keep up with costs. 

Careful stress tests 

When we send lenders a mortgage application, they check whether your finances will be able to withstand higher interest rates. With rates spiralling again, lenders are testing applicants more stringently to make sure they would cope with interest rates of 8% or 9%. 

Room for manoeuvre 

In difficult economic conditions, existing borrowers are finding new ways to mitigate the higher bills. Examples include extending the term of their mortgage, which can reduce the burden now but will ultimately result in more being paid back in total. First-time buyers are seeing their plans change too. Options to navigate the rising rates include putting down a larger deposit or buying a smaller property. 

Job security and protection are key 

A positive economic indicator has been the jobs market, which has remained resilient throughout the past year. Lenders say the most common reasons for people falling behind on mortgage payments generally involve life-changing events such as a job loss or serious illness, highlighting the importance of protection policies such as income protection or critical illness cover. 

Unpredictable rates 

According to the Bank of England, one million people will see their mortgage bill rise by more than £500 a month by the end of 2026. As has always been the case, however, mortgage rates fluctuate in relation to other economic factors. For example, rates offered by many big lenders fell significantly in August after official inflation figures came in lower than expected. 

And above all else… 

Keep calm and call us. 

1UK Finance, 2023 

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments 

News in Review

“It’s great to see financial services firms reporting another positive quarter”

Financial services activity held relatively firm in the third quarter, according to the latest Financial Services Survey released last week by the Confederation of British Industry (CBI).

In total, optimism and business volumes grew slightly less quickly than in the buoyant second quarter. Moreover, following a 27% uplift in Q3, firms now predict business volume growth at a faster pace next quarter (+41%). Optimism among firms (+20%) remains considerably higher than the long-run average (+3%).

Louise Hellem, CBI Chief Economist, commented, “It’s great to see financial services firms reporting another positive quarter, with optimism and volume growth both firm, and activity expected to pick up further in the months ahead. A critically important sector to the UK economy, financial services also serve as a key catalyst and backer for a wealth of business activity across the country.”

Twice as many US jobs as predicted

The number of US jobs surged more than expected last month, figures released by the Labor Department have revealed, with employers adding some 336,000 jobs in September. Additionally, the August tally was also revised upwards from 187,000 to 227,000 jobs.

The surge was led by leisure and hospitality, which alone accounted for 96,000 jobs in September; other top-performing sectors included food services and bars, which rose by 61,000 over the month. After almost doubling analysts’ estimates of 170,000 new jobs, speculation that interest rates could rise further has been rife.

Unemployment stayed unchanged at 3.8%. Likewise, monthly wage growth remained moderate, with average hourly earnings rising by 4.2% in the year to September.

Private buyers steering clear of electric cars

Sales of new electric cars to private buyers fell sharply in September compared with the same period a year ago, figures released last week by the Society of Motor Manufacturers and Traders (SMMT) revealed.

According to the SMMT, sales to private buyers fell by 14%, even though overall registrations of electric cars rose by almost 19%, driven by company fleet buyers. Overall, new car registrations grew by 21% last month compared with the same period in 2022, a fourteenth consecutive month of growth.

National debt interest at 20-year high

The interest the government pays on national debt has soared to a 20-year high, as the rate on 30-year bonds increased to 5.05%. The UK’s national debt is currently estimated at £2.59trn; a higher cost of servicing this debt could influence the government’s spending plans ahead of the Autumn Statement, which is due to be delivered on 22 November.

Taxes at £40bn a year by 2028

Frozen personal tax thresholds will see taxpayers pay £40bn a year by 2028, new analysis from the Resolution Foundation estimates. With Income Tax and National Insurance thresholds scheduled to remain frozen until 2028 and inflation pushing wages higher, the research suggests that taxpayers could face the biggest tax rise in at least 50 years.

Millions of people will be pulled into a higher tax band or see a greater proportion of their salaries taxed, according to the Resolution Foundation, which has called the frozen thresholds a ‘stealth tax’. In response, a spokesperson for HM Treasury said that taxes were lower than elsewhere in Europe ‘despite the difficult decisions we’ve had to make to restore public finances after the dual shocks of the pandemic and Putin’s illegal invasion of Ukraine’.

Northern leg of HS2 scrapped

The Conservative party conference closed last week, with confirmation that the northern leg of the HS2 high speed rail link would be scrapped. After announcing the Birmingham to Manchester leg of HS2 would not go ahead, Prime Minister Rishi Sunak pledged billions of pounds to transport projects around the country, “Every region outside of London will receive the same or more government investment than they would have done under HS2, with quicker results.”

Middle East scare pushes oil price up
On Monday, Brent Crude oil prices climbed by $2.50 a barrel amid concerns that an escalation of conflict in Israel and Gaza could disrupt output from the Middle East. The Middle Eastern region accounts for almost a third of global supply, although Israel and Palestinian territories are themselves oil producers.

Here to help

Financial advice is key, so please do not hesitate to get in contact with any questions or concerns you may have.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

All details are correct at time of writing (11 October 2023)

Mortgage Charter provides relief 

A helping hand for mortgage holders was announced at the start of August by Chancellor Jeremy Hunt with a view to providing support to residential mortgage customers suffering from rising interest rates. 

Three-part plan 

The Mortgage Charter has three key elements: 

  1. Anyone can talk to their bank or mortgage lender for information and support, and this will have no impact on their credit score 
  1. People can choose to swap to an interest-only mortgage or extend their mortgage term, with the option to switch back to their original mortgage deal within six months with ‘no questions asked’ and no impact on their credit score 
  1. Customers won’t be forced to have their homes repossessed within 12 months of their first missed payment. 

More flexible 

Further flexibility relates to customers approaching the end of a fixed-rate deal. 

Under the new Mortgage Charter, customers will be able to lock in a deal up to six months ahead and still apply for any better deals that are available right up to the start of their new term. 

Affordability checks will be waived for those switching to a new mortgage deal if they are up to date with their payments when their fixed term ends. 

“Comfort for the anxious” 

In the Foreword to the Charter, Jeremy Hunt commented, “These measures should offer comfort to those who are anxious about high interest rates and support for those who do get into difficulty. As we have consistently shown through the pandemic, and the consequences of the war in Ukraine, we will always be on the side of households.” 

Nikhil Rathi, Chief Executive of the Financial Conduct Authority said, “This Charter builds on the work we and lenders have done over recent years to ensure those who get into difficulty receive the support they need. The additional commitments from signatories provides customers with clarity and certainty on how they can expect to be treated.” 

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments 

Your long-term financial goals

After more than a decade of putting up with paltry savings rates, the sharp increase in rates over the past two years has certainly brought considerable cheer to savers. However, while the rise is certainly welcome, it is important savers do not overly rely on cash savings but carry on investing if they are to maximise returns and achieve their long-term financial goals. 

Think holistically 

Although the availability of higher rates has provided a boost to cash savings, assessing the appropriate amount to hold in rainy-day funds is always difficult, particularly given recent cost-of-living pressures. However, history suggests holding too much money in cash can hold back your future wealth, as returns on both bonds and equities have a better long-term record in terms of outpacing inflation. 

Time in the market 

History also suggests long periods out of the market increase investors’ chances of underperforming. This is because, while cash rates may look attractive, knowing when to sell and buy back into the market is extremely difficult if not impossible, particularly when markets are volatile. The best approach is therefore usually to stay in the market and build a portfolio capable of capitalising on any improved outlook in order to maximise potential long-term gains. 

Don’t be intimidated 

Another reason why some people might shy away from investing is because they feel overawed. Indeed, a recent survey1 found that half of the UK population admits to being intimidated by investing, with more respondents saying it would be easier to learn a new language than start investing. On a more positive note, however, other research2 recently showed growth in the uptake of regulated financial advice, with 4.4 million UK adults seeking advice in 2022, up from 3.8 million two years earlier. 

Here to help 

And of course, we’re always here for you; so, if you need any advice get in touch and we’ll help you build an investment strategy focused squarely on your future dreams and aspirations. 

1Lloyds Bank, July 2023 

2FCA, July 2023 

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. 

Lifetime Allowance removal provides pension boost 

Several months have passed since the Spring Budget, which, although not necessarily packed with good news stories, held one announcement that certainly did bring considerable cheer to higher rate taxpayers. A recent survey has revealed the dramatic impact that Chancellor Jeremy Hunt’s decision to scrap the pension Lifetime Allowance (LTA) is having on people’s retirement planning strategies. 

Purpose of the move 

In his first Spring Budget Statement delivered on 15 March, the Chancellor announced that the LTA charge would be removed from April 2023 and that the LTA would be abolished altogether from April 2024. This decision was essentially designed to remove a disincentive for retirement saving amongst higher earners and dissuade an increasing number of this group from retiring early. 

Boosting pension contributions  

New research1 suggests the change has already had a significant impact on higher earners’ pension saving and retirement planning decisions both in terms of spurring more contributions and encouraging retirement delays. According to the survey, 51% of higher rate taxpayers have restarted, increased or made plans to increase their pension payments since the announcement, with average additional payments amounting to £650 a month. 

Extending working lives 

In addition, 23% of respondents said they had delayed their planned retirement or are likely to delay their retirement due to the fact that they can now save a higher amount in their pension pot without facing a heavy tax charge. Furthermore, around 10% said they had actually come out of retirement as a result of the change, while another 6% were planning to come out of retirement. 

Advice is paramount 

While abolition of the LTA has undoubtedly simplified some decisions in relation to retirement and estate planning, it has also effectively increased the need for clients to seek professional advice on their pension arrangements due to the change in tax treatment. There is also always an element of political risk in financial planning which means clients may need to act quickly if they are to make the most of the opportunity the Chancellor has provided. 

1Investec, July 2023 

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. 

News in Review

“Our new estimates indicate a stronger performance for professional and scientific businesses”

The UK’s economy has grown faster since the start of the pandemic than had initially been stated, according to new data released last week by the Office for National Statistics (ONS).

Under the updated figures, the UK’s economy is estimated to have grown by 1.8% since the end of 2019, compared to a previous estimate of a 0.2% contraction. This makes the UK’s growth faster than both France and Germany for that period.

The upward change came mostly from a dramatic revision to the GDP figures for 2020 and 2021, with new data showing that the UK experienced a much better recovery from the pandemic than previously thought.

In response to the positive news, the FTSE 100 ended the third quarter with a 1% gain, following a 1.3% fall in the previous quarter. Elsewhere, the new data raised speculation that the Bank of England (BoE) will again hold Bank Rate unchanged at its November meeting.

The revised figures also presented a new picture of which sectors performed well over the past four years. Specifically, science firms were shown to have grown faster than previously thought. ONS Chief Economist Grant Fitzner explained, “Our new estimates indicate a stronger performance for professional and scientific businesses due to improved data sources. Meanwhile, healthcare grew less because of new near real-time information showing the cost of delivering services.”

No tax cut but living wage going up

On Monday, Chancellor Jeremy Hunt confirmed in a speech at the Conservative Party conference that the National Living Wage is set to increase to at least £11 an hour from next April, a move that will benefit two million of the lowest-paid workers. The National Living Wage – the lowest amount workers aged 23 and over can be paid per hour by law – is currently £10.42 per hour. Elsewhere in the speech, Mr Hunt said that the “level of tax is too high,” though the government has already hinted that no tax cuts are expected this year.

Mortgage lending slows

The latest statistics from the BoE on mortgage lending and approvals presented a mixed picture. Net borrowing of mortgage debt by individuals increased for the fourth consecutive month to £1.2bn in August, up from £0.2bn in July. On the other hand, net mortgage approvals for house purchases fell from 49,500 in July to 45,400 in August, the lowest level in six months.

Meanwhile, net approvals for remortgaging dropped from 39,300 to 25,000 during the same period, to reach its lowest point since July 2012. Moreover, net borrowing of consumer credit by individuals amounted to £1.6bn in August, a rise from £1.3bn in the previous month. At the last meeting of the Monetary Policy Committee (MPC), the BoE kept interest rates at a 15-year high of 5.25%.

Rosebank gets go ahead

Last week, the North Sea Transition Authority (NSTA) granted development and production consent for the Rosebank field, situated to the north-west of Shetland, to owners Equinor and Ithaca Energy. Rosebank is the UK’s largest untapped oil field and is estimated to contain up to 300 million barrels of oil.

NSTA spokesperson commented, “We have today approved the Rosebank Field Development Plan A which allows the owners to proceed with their project. The FDP is awarded in accordance with our published guidance and taking net zero considerations into account throughout the project’s lifecycle.”

Last month, 50 MPs and peers from all major parties raised concerns that Rosebank could produce 200 million tonnes of carbon dioxide. Mark Ruskell, climate spokesperson for the Scottish Greens, said that granting the licence was the “worst possible choice at the worst possible time.”

Here to help

Financial advice is key, so please do not hesitate to get in contact with any questions or concerns you may have.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

All details are correct at time of writing (4 October 2023)

Older homeowners staying put

First home, family home… then what? Maybe nothing, new research suggests1, with older homeowners standing their ground and not considering downsizing. 

Indeed, seven in 10 respondents said that they are not looking to downsize, in a survey of 1,000 homeowners. Moreover, although 29% do plan to downsize within the next five years, only 13% of over-75s have actually done so. So, what’s stopping them? 

Forever home 

The main reasons cited for not wanting to downsize include not being suited to a smaller house (31%), already living in their ‘forever home’ (25%) and having no desire to move away from their community (23%). 

Moreover, the process of moving was also called into question on the grounds that it would be ‘exhausting’ (22%) and would not bring financial benefit once costs were taken into account (16%). 

Downsizers 

On the other hand, of those who do plan to downsize, 43% cited finding it easier to look after a smaller property, while 38% said that it would be cheaper and 27% noted a desire to have more money to retire with. 

1Key, 2023 

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments. 

FTSE 350 female board representation – a defining moment

Three years ahead of schedule, FTSE 350 companies have met the target of achieving 40% female board representation, according to the latest FTSE Women Leaders Review1. 

The report highlights ‘steady progress’ in getting women leaders to the ‘top table of business in the UK,’ with Nimesh Patel and Penny James, co-chairs of the Review describing the achievement as “a defining moment and testament to the power of the voluntary approach and the collective efforts of many businesses and individuals over the last decade.” 

1FTSE Women Leaders, 2023 

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. 

Economic Review – September 2023

Rate-hike pause as inflation dips 

Last month, the Bank of England announced a pause in its long run of interest rate rises following an unexpected dip in the UK headline rate of inflation and ‘increasing signs’ that higher rates were starting to hurt the real economy. 

Following its latest meeting, which concluded on 20 September, the BoE’s Monetary Policy Committee (MPC) voted by a narrow margin to leave Bank Rate unchanged at 5.25%. This was the first occasion since December 2021 that an MPC meeting had not resulted in the Bank’s benchmark rate of interest being raised.  

The decision was clearly a very close call with four of the nine-member committee voting to increase rates by a further 0.25 percentage points. The minutes to the meeting also reiterated that the MPC would be prepared to raise rates again if there was ‘evidence of more persistent inflationary pressures.’ They also repeated previous guidance that monetary policy would remain ‘sufficiently restrictive for sufficiently long’ to return inflation back to its target level. 

Commenting on the day the decision was announced, BoE Governor Andrew Bailey said, “Inflation has fallen a lot in recent months and we think it will continue to do so.” The Governor did, however, warn against “complacency” and “premature celebration” and added, “We need to be sure inflation returns to normal and we will continue to take the decisions necessary to do just that.” 

Data published by the Office for National Statistics (ONS) the day before the MPC’s announcement had revealed a surprise fall in inflation. The Consumer Prices Index (CPI) 12-month rate – which compares prices in the current month with the same period a year earlier – fell to 6.7% in August, down from 6.8% in July. Most economists had predicted a slight uptick in August’s CPI rate primarily due to a rise in global fuel prices. 

UK economy contracts in July 

Gross domestic product (GDP) figures released last month showed the UK economy shrank by a greater than expected amount in July, while forward-looking indicators suggest a recession looks ‘increasingly likely.’ 

The latest monthly GDP statistics produced by ONS revealed that the economy shrank by 0.5% in July. This figure was worse than all forecasts submitted to a Reuters poll of economists with the consensus prediction suggesting the economy would suffer a 0.2% contraction. 

ONS said July’s weak figure partly stemmed from a reduction in output within the services sector, with this drop driven by the impact of industrial action by NHS workers and teachers. In addition, heavy rainfall across the month also hit activity in both the construction and retail industries. 

The UK economy has so far avoided recession this year with positive growth numbers recorded across both the first and second quarters. New data released at the end of September confirmed that the UK’s economy grew 0.2% in Q2. 

The preliminary headline reading from the S&P Global/CIPS UK Purchasing Managers’ Index (PMI) fell from 48.6 in August to 46.8 in September. This represents the sharpest fall in output since January 2021 and, excluding pandemic lockdown months, the steepest decline since the height of the global financial crisis in March 2009. 

Commenting on the findings, S&P Global Market Intelligence’s Chief Business Economist Chris Williamson said, “The steep fall in output signalled by the flash PMI data is consistent with GDP contracting at a quarterly rate of over 0.4%, with a broad-based downturn gathering momentum to hint at few hopes of any imminent improvement.”  

Markets (Data compiled by TOMD) 

As September drew to a close, many major global stock markets ended the month in negative territory. During the final trading days of Q3, some European markets were boosted as data indicated the UK’s economy grew in Q2 and inflation across the eurozone is cooling. 

In the US, the latest consumer confidence and home sales reports fuelled economic concerns and weighed on markets. The Dow Jones Index closed the month down 3.50% on 33,507.50, while the tech-orientated NASDAQ closed the month down 5.81% on 13,219.32. 

In the UK, the FTSE 100 closed the month on 7,608.08, a gain of 2.27%, while the mid cap focused FTSE 250 closed down 1.75% on 18,279.42. The FTSE AIM closed September on 726.18, a loss during the month of 2.12%. On the continent, the Euro Stoxx 50 closed on 4,174.66, a loss of 2.85%.  

In Asia, ongoing weakness in China’s property sector continues to weigh on the region. The Japanese Nikkei 225 closed the month on 31,857.62 down 2.34%.  

On the foreign exchanges, the euro closed the month at €1.15 against sterling. The US dollar closed at $1.21 against sterling and at $1.05 against the euro.  

Brent crude closed September trading at around $92, a gain over the month of 6.89%. Russia’s announcement of a temporary ban on gasoline and diesel exports to most countries is bringing uncertainty into the market. Gold closed the month trading at around $1,870 a troy ounce, a monthly loss of around 3.70%.  

Retail sector shows signs of recovery 

The latest official retail sales statistics revealed a partial rebound in sales volumes during August while more recent survey evidence highlights ‘elements of optimism’ within the retail sector. 

According to ONS data published last month, total retail sales volumes rose by 0.4% in August. This growth in the quantity of goods bought by consumers follows July’s 1.1% fall when sales were impacted by an unseasonal spell of wet weather which upset normal summer spending patterns. ONS noted that August’s partial recovery was driven by increased food sales and a strong month for clothing. 

Recently-released survey data from GfK also shows consumers remain remarkably resilient with sentiment at its highest level since the start of 2022 as households become increasingly hopeful about the economy. The latest CBI Distributive Trades Survey also suggests the retail sector expects to see modest sales improvements in the coming months with one gauge of retailers’ expectations hitting a three-month high.  

Commenting on the findings, CBI Principal Economist Martin Sartorius said, “There are some elements of optimism in our survey. Lower than expected inflation figures, which in turn will ease pressure on household budgets, will also give retailers some hope going into the crucial autumn and winter trading period.”  

Chancellor downplays tax-cut hopes 

Analysts have warned that the latest public sector finance statistics leave the Chancellor with little room to offer tax cuts when he delivers his Autumn Statement next month. 

ONS data recently revealed that government borrowing totalled £11.6bn in August, the fourth highest amount ever recorded for that month. The figure was also £3.5bn more than the government borrowed in the same month last year and was slightly ahead of analysts’ expectations.  

While inclusion of the latest data does still leave the fiscal year-to-date deficit comfortably below the most recent forecast published by the Office for Budget Responsibility (OBR), analysts typically believe there remains little scope for potential tax cuts in the near future. This reflects the expected economic slowdown, which is likely to hit tax revenues, as well as anticipated upward revisions to OBR projections due to higher debt interest costs. 

Chancellor Jeremy Hunt also recently acknowledged that rising debt interest payments caused by higher long-term interest rates were putting increased pressure on the public finances. He also admitted it would be “virtually impossible” to include tax cuts in his upcoming fiscal update. Earlier in the month, Mr Hunt announced he will deliver this year’s Autumn Statement on 22 November. 

All details are correct at the time of writing (02 October 2023 ) 

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.