Economic Review March 2022

Bank Rate raised again

Last month, the Bank of England (BoE) sanctioned a further increase in its benchmark interest rate as inflation continues to surge significantly ahead of the Bank’s target level.

Following a meeting held in mid-March, the BoE’s nine-member Monetary Policy Committee (MPC) voted by an 8-1 majority to raise Bank Rate from 0.5% to 0.75%. This was the third meeting in a row that the MPC had signalled a tightening of monetary policy, taking the Bank’s main interest rate back to its pre-pandemic level.

Policymakers cited a strong labour market and continuing signs of ‘robust domestic cost and price pressures’ as key reasons for the hike. Minutes to the meeting also noted that Russia’s invasion of Ukraine had led to ‘further large increases in energy and other commodity prices including food prices.’ As a result, the BoE now expects inflation to reach ‘around 8% in April,’ almost a full percentage point higher than it forecast in February and four times its 2% target figure.

While the minutes did say that ‘some further modest tightening in monetary policy may be appropriate in the coming months’ they also pointed to concerns about the outlook for growth as households struggle with a squeeze on incomes. Indeed, analysts noted a more dovish tone than was evident in the previous set of minutes, with a distinct softening of the language on the need for future rate hikes.

Data subsequently released by the Office for National Statistics (ONS), however, showed that price rises continue to exceed analysts’ expectations. In the 12 months to February, the rate of inflation as measured by the Consumer Prices Index, surged to a 30-year high of 6.2%. This was significantly up on the previous month’s rate of 5.5%, and 0.3% higher than the median forecast in a Reuters poll of economists.

OBR downgrades growth forecast

The Office for Budget Responsibility (OBR) has downgraded its forecast for UK economic growth over the next two years amid an unprecedented squeeze on household finances.

Chancellor Rishi Sunak unveiled the independent forecaster’s revised projections during his Spring Statement, delivered to the House of Commons on 23 March. The new forecast suggests the economy will expand by 3.8% in 2022, significantly down on October’s 6.0% prediction. Next year is also expected to yield lower growth, with the economy forecast to expand by 1.8% compared to a previous prediction of 2.1%.

The downgrades partly relate to Russia’s invasion of Ukraine which the OBR warned would have ‘major repercussions for the global economy.’ In addition, they reflect a sharp squeeze on living standards with real disposable household incomes expected to fall by 2.2% in the coming financial year – this would represent the biggest annual decline in UK living standards since records began in 1956.

Ironically, the latest gross domestic product statistics released by ONS showed the UK economy grew by a faster than expected 0.8% in January. This was the strongest monthly expansion since last June and beat all forecasts in a Reuters poll of economists.

Survey data also suggests the economy continued to expand at a robust pace during the last two months. The preliminary reading of the S&P Global/CIPS Composite Purchasing Managers’ Index (PMI), for instance, came in at 59.7 in March, only marginally below February’s historically high figure of 59.9.

S&P Global Chief Business Economist Chris Williamson said, “The further reopening of the economy after COVID-19 containment measures helped offset headwinds from the Ukraine war, Brexit and rising prices.” However, he also noted that the PMI’s measure of business optimism slumped to a 17-month low in March, adding, “Indicators point to potentially sharply slower growth in the coming months.”

Markets (Data compiled by TOMD)

The ongoing conflict in Ukraine continues to impact global markets, as they closed out a turbulent quarter. The invasion is exacerbating inflationary pressures, driving up the cost of everything from fuels to food, leading to volatility across commodity markets in particular.

At the end of March, falling oil prices and escalating inflation figures from the US weighed on investor sentiment. The oil price declined after the Organization of the Petroleum Exporting Countries and allies (OPEC+) agreed to another modest monthly oil output boost, resisting pressure to pump more oil, despite consumer calls for increases. Joe Biden later issued the release of one million barrels a day from crude reserves in an effort to tame energy costs, commencing in May.

Looking at major global indices, in the UK, as the dust settles on the Spring Statement and recent OBR estimates, the FTSE 100 closed the month up 0.77% on 7,515.68, while the FTSE 250 and AIM both recorded marginal gains of 0.37% and 0.19% respectively. In the US, the Dow Jones closed March up 2.32%, while the NASDAQ finished 3.41% up. In Japan, the Nikkei 225 ended the month on 27,821.43, up 4.88%, and the Euro Stoxx 50 closed March down 0.55% on 3,902.52.

On the foreign exchanges, sterling closed the month at $1.31 against the US dollar. The euro closed at €1.18 against sterling and at $1.10 against the US dollar.

Brent Crude closed the month trading at around $108 a barrel, a gain of over 10%. Gold is currently trading at around $1,924 a troy ounce, a gain of just over 1% on the month.

Unemployment below pre-pandemic rate

The latest set of labour market statistics published by ONS revealed a further fall in the rate of unemployment, although real pay growth continues to lag the spiralling cost of living.

In the three months to January, the unemployment rate fell to 3.9%, down from 4.1% across the previous three-month period. This was the lowest level since the three months to January 2020 and took the jobless rate back below its pre-pandemic level.

The data also showed another strong rise in the number of pay-rolled employees in February and yet another record number of job vacancies. The number of people out of work but not looking for a job also rose again, however, which meant the total number of people in employment remains well below its equivalent pre-pandemic figure.

In terms of wage growth, the data showed average weekly earnings, excluding bonuses, rising at an annual rate of 3.8% across the November–January period. Although this was a slight increase from the previous three-month period, it did mean that pay once again failed to keep up with the rapid rise in prices. Indeed, after taking account of inflation, regular earnings fell by 1% compared to year earlier levels.

Retail sales decline

Official retail sales figures have revealed a drop in sales volumes during February while survey evidence suggests sales remained disappointing in March.

ONS data showed that total retail sales volumes unexpectedly declined by 0.3% in February compared to the previous month. An ONS spokesperson said retailer feedback linked some of the fall to stormy weather which had kept shoppers at home, while the easing of COVID restrictions resulted in more people returning to pubs and restaurants at the expense of grocery sales.

The latest Distributive Trades Survey from the CBI suggests sales growth remained relatively weak last month with its sales-for-the-time-of-year gauge falling from +16 in February to -23 in March. Retailers also said they expect sales to remain below seasonal norms this month, although to a lesser extent.

Commenting on the findings, CBI Principal Economist Martin Sartorius said, “Retailers had a mediocre March, with sales reported as being below seasonal norms. The cost-of-living crisis is looming large across the sector, as households’ wallets are being hit by the fastest rate of inflation in decades. Further action will be needed to galvanise consumer confidence, shore up incomes, and support spending on UK high streets in the tough months to come.”

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. 

News in Review

“This is a moment of consequence and peril for the world”

Last Thursday, major news broke as Joe Biden ordered an unprecedented release of crude oil from America’s Strategic Petroleum Reserves to tame rising energy costs. In an attempt to combat what the US President branded “Putin’s price hike,” he issued the release of one million barrels of oil per day from May, totalling 180 million barrels over six months, the largest amount in 48 years, since the Reserve was established.

Addressing the nation, the US President spoke of the intended action, “Putin’s war is imposing a cost on America and our allies and democracies around the world… This is a moment of consequence and peril for the world…The action I’m calling for will make a real difference over time, but the truth is it takes months, not days, for companies to increase production. This is a wartime bridge to increase oil supply until production ramps up later this year.“

President Biden also appealed to large oil companies to assist the situation by producing more oil by restarting idle wells, or producing on sites they already lease, instead of financially exploiting the situation and benefiting from higher profits because of the price hikes.

On the same day, the Organization of the Petroleum Exporting Countries and allies (OPEC+) agreed to another modest monthly oil output boost, despite calls from the US, UK and others to ramp up output. In a statement, the group outlined, ‘Continuing oil market fundamentals and the consensus on the outlook pointed to a well-balanced market. Current volatility is not caused by fundamentals, but by ongoing geopolitical developments.’

UK house price growth

The latest House Price Index from Nationwide has revealed some interesting data, especially considering the current squeeze on finances and gradual rise in borrowing costs; buyer momentum is continuing. Prices are being pushed higher by robust demand and limited supply. Annual house price growth increased to 14.3% in March, up from 12.6% the previous month – this is the eighth consecutive monthly increase and represents the strongest pace of growth since November 2004. The report highlights that strong labour market conditions have also contributed to the buoyancy of the market. The average cost of a home in the UK has reached a new record high of £265,312. Prices are now 21% higher than prior to the pandemic in early 2020. Regionally, Wales was the strongest performer in Q1, with prices up 15.3% year-on-year and London was the weakest. Detached properties have increased in value by nearly £68,000 since the onset of the pandemic, with average  prices for flats up by £24,000.

Looking ahead, Robert Gardner, Nationwide’s Chief Economist, commented on the outlook, “We still think that the housing market is likely to slow in the quarters ahead. The squeeze on household incomes is set to intensify, with inflation expected to rise further, perhaps reaching double digits in the quarters ahead if global energy prices remain high. Moreover, assuming that labour market conditions remain strong, the Bank of England is likely to raise interest rates further, which will also exert a drag on the market if this feeds through to mortgage rates.”

Chinese manufacturing and services contract

With the latest virus resurgence and subsequent lockdowns taking their toll, activity in Chinese manufacturing and services simultaneously contracted in March, fuelling the requirement for policy intervention to stabilise the economy. Escalating control measures added downward pressure on the world’s second-largest economy. The uncertainty of the conflict in Ukraine is also weighing on the economy. The finance ministry has pledged a raft of policies to support small firms, the country’s main source of jobs. The manufacturing Purchasing Managers’ Index (PMI) fell to 49.5 from 50.2 in February, and the non-manufacturing PMI reduced to 48.4 from 51.6 in February. A reading below 50 indicates contraction.

Markets

Despite ongoing woes over the cost-of-living crisis, on what was dubbed ‘Bleak Friday’ for households on 1 April, as a raft of price hikes took effect, retailers and consumer staple firms lifted the FTSE 100, marking the index’s fourth consecutive weekly gain. The index continued its positive trajectory this week, buoyed by some positive US employment statistics on Monday and solid performances from UK utilities on Tuesday, ahead of the government’s new energy security strategy later this week.

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.

Getting a mortgage when retired – what you need to know

Becoming a homeowner later in life is not uncommon these days, but is it possible to get a mortgage if you’re retired?

All the fives

It’s true that getting a mortgage becomes a lot harder after the age of 55. First because it is more difficult to prove retirement income than it is to prove a salary, and second because mortgage providers will want to be sure you’re able to pay off the loan during your lifetime.

Pensions and spending plans

Difficult doesn’t mean impossible though. Some lenders are willing to provide mortgage finance to retirees so long as you can prove your income. Sources of income include a private or workplace pension (or a mixture of the two), as well as any savings you might have. These details, along with an outline of your expenditure, will help prove you will have enough to live on and to pay your mortgage for the duration of the term.

Depending on the lender, and your age, you may have to accept a shorter mortgage term or a higher interest rate. This is because most lenders have a maximum age by which they will want the mortgage to be paid off – this can be as high as 85 or as low as 70.

Find the right deal

For help and advice, get in touch and we will work with you to secure mortgage finance that suits your circumstances.

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

“The government will support the British people”

Rishi Sunak opened the Spring Statement on 23 March by speaking about his admiration for the Ukrainian people, commending the strength of the UK economy to help fund their army and impose sanctions on Putin’s regime. The Chancellor warned that actions against Russia are costly and present a risk – not just to the UK – but to the global recovery.

Due to the invasion, the latest economic projections produced by the Office for Budget Responsibility (OBR) for presentation at the Statement, noted an ‘unusually high uncertainty around the outlook’, with their revised growth figures indicating a slower-moving recovery. The UK economy is predicted to grow by 3.8% this year and by 1.8% in 2023, both downgrades from the previous forecasts of 6.0% and 2.1% respectively.

The latest OBR figures suggest inflation will average 7.4% across the rest of 2022, peaking at 8.7% during the final quarter. This followed on from the latest Office for National Statistics (ONS) release last Wednesday, showing that UK inflation had hit a 30-year high of 6.2% in the 12 months to February.

“I want to help people now”

The Chancellor revealed a three-part Tax Plan to cover the remainder of the Parliament. The Spring Statement formed the first part of the plan – setting out further steps to address the cost-of-living crisis. Mr Sunak outlined, “The government will support the British people as they deal with the rising costs of energy… people should know that we will stand by them, as we have throughout the last two years… I want to help people now.” These measures include:

  • Doubling the Household Support Fund to £1bn from April, allowing local authorities to help vulnerable families cope with rising living costs
  • A cut in fuel duty for petrol and diesel by 5p per litre until March 2023
  • Although the Chancellor confirmed implementation of the politically contentious 1.25 percentage-point rise in most National Insurance contributions (NICs) for the Health and Social Care Levy, he revealed that this would be mitigated by an increase to the National Insurance Primary Threshold and the Lower Profits Limit from £9,880 to £12,570 from July 2022
  • From April 2022, self-employed individuals with profits between the Small Profits Threshold and Lower Profits Limit will continue to build up National Insurance credits but will not pay any Class 2 NICs
  • Homeowners installing energy saving measures such as solar panels, heat pumps or insulation will pay no VAT on their purchases for the next five years.

The second part of the plan focuses on creating the right conditions for private sector led prosperity through growth and productivity. The government is investing £600bn over five years and intends to get businesses to invest more. The government will engage with businesses to determine the most effective way to cut and reform taxes on business investment.

In a tax break worth over £5bn a year, the final part of the Tax Plan, ‘Sharing Growth’, confirms a cut in the basic rate of Income Tax from 20% to 19% in England, Wales and Northern Ireland in 2024. The Scottish government will receive their share of this funding which can be used to cut taxes or increase spending.

Spring Statement reactions

Rachel Reeves, Shadow Chancellor said that the Chancellor, “Talks about providing security for working families but his choices are making the cost-of-living crisis worse, not better.”

The Resolution Foundation responded, ‘The Spring Statement saw the Chancellor prioritise rebuilding his tax-cutting credentials over supporting the low-to-middle income households who will be hardest hit from the surging cost of living, but while also leaving himself fiscal flexibility in the years ahead. The package of measures announced offered some immediate support to households and also laid the ground for a 2024 election. But on both counts – not least with a decision on this winter’s energy price cap due in less than six months – it looks likely to be far from the last word.’

Paul Johnson, Director of the Institute for Fiscal Studies (IFS) commented, “Perhaps what really stands out today is what was missing. In the face of what the OBR calls the biggest hit to household finances since comparable records began in 1956-57, he has done nothing more for those dependent on benefits, the very poorest, besides a small amount of extra cash for local authorities to dispense at their discretion. Their benefits will rise by just 3.1% for the coming financial year. Their cost of living could well rise by 10%.” 

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.

Residential Property Review – March 2022

Sales up as demand stays strong

2022 has picked up where 2021 left off, with near-record demand leading to the busiest January and February since 2016, according to Zoopla.

Sales agreed in February were 31% above the 2017-19 average for the month, according to TwentyCi, matching levels last seen at the start of 2021. Meanwhile, mortgage approvals in January were at their highest point since July 2021, 12% above the 2017-19 average for the month, according to the Bank of England.

The mismatch endures, however, between supply and demand. The number of prospective buyers is 70% higher than the five-year average, while the total number of homes for sale is 43% lower. The result of this imbalance is fierce competition for available stock; Zoopla figures show that half of all sold properties were purchased after less than three weeks on the market.

Soaring rents are here to stay

Private rents are rising nationwide at the fastest rate in five years, according to figures from the Office for National Statistics (ONS), with the average rent up by 2% in the year to January 2022.

This was a slight rise on the 1.8% growth recorded in the year to December 2021. The East Midlands was the region with the biggest increase in average rental prices (3.6%), while London had the smallest (0.1%).

With office workers and students returning to cities, the net balance of contributors noting an increase in demand rose to +55% in the Royal Institution of Chartered Surveyors’ (RICS) February survey.

Meanwhile, supply remains problematic; the RICS survey noted a decline in landlord instructions to a net balance of -21%. Respondents expect this trend to continue, anticipating that rents will increase annually by an average rate of 5% over the next five years.

Bedrooms lost as homeowners adapted to pandemic

Nine million bedrooms were ‘lost’ during the pandemic, as versatile Brits repurposed existing space to meet their work and leisure needs.

A study by Zoopla found that two in five homeowners adapted their home during the pandemic, of whom more than half completely repurposed at least one bedroom. One in five households changed multiple bedrooms. With remote and hybrid working now on the agenda for many, almost half (46%) of those who have made changes created a home office.

The result was the creation of nearly five million home offices, 1.3 million home gyms, and a combined two million home bars, cinemas and music rooms. UK households spent, on average, £3,714 making these adaptations – a national total of around £36.5bn.

However, the study suggests that homeowners who have repurposed rooms may now feel less happy with the space they have. Of those who had to repurpose rooms, more than half said this meant having to compromise on their space at home, a figure that rose to 83% of homeowners under 25.

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.

Commercial Property Market Review – March 2022

Prime space snapped up by legal firms

More than one million sq. ft of Grade A office space was taken up by the legal sector in 2021, highlighting the importance of the ‘best’ space in the post-pandemic landscape.

London’s resilient legal sector has enjoyed strong revenue and increased headcount over the last year, which has driven demand for office space. The sector’s 2021 office take-up represents the strongest leasing activity of prime space for law firms on record.

International law firms have committed to the UK, with many choosing London as their European headquarters. Notable deals include two by American multinationals; Latham & Watkins, the second highest grossing law firm in the world, acquired 200,000 sq. ft at 1 Leadenhall EC3, while Baker McKenzie, the fourth largest by revenue, took 152,690 sq. ft at 280 Bishopsgate EC2.

Analysts expect the sector to acquire more of the prime space over the coming years. According to Savills, between 2022 and 2026, there are over 5.3m sq. ft of lease events within the legal sector in the City of London, of which 1.8m sq. ft have re-geared or committed to new office space.

Impact of Ukraine crisis on commercial property

Russia’s invasion of Ukraine has horrified people around the world and shaken markets and financial systems. What impact will it have on commercial property in the UK?

Directly, analysts think the impact will be limited. Russian investors are not major players in the UK commercial market, accounting for only 0.3% of purchases since 2015, according to Property Market Analysis LLP.

One view is that the Ukraine crisis might shift investor demand away from real estate in central Europe, which could benefit markets perceived to be safe havens, such as the UK and Switzerland.

Indirectly, however, the invasion could have a greater impact. Although Russia’s share of global gross domestic product (GDP) is only 1.7%, the country is a major energy producer. Since the start of the invasion, prices across a range of commodities, including oil and gas, have increased sharply.

Legal & General expect real estate impacts to become apparent in the longer term. They note two likely effects, both relating to energy and the green transition; a greater focus from occupiers on energy consumption in buildings and more attention paid by governments to energy security.

Yields back at pre-pandemic levels

The positive investment trend of Q4 2021 has spilled into 2022, according to the latest Savills Market in Minutes, with commercial property investment totalling £6.9bn in January and February, 35% above the same period a year earlier.

The UK average prime yield is now 4.84%, a level not seen since October 2019. The Savills report expects positive sentiment and yield hardening to continue in half of the sectors it monitors. Further downward pressure is expected in prime logistics, high street retail and shopping centres, with repurposing opportunities especially likely for shopping centres off the back of prime demand.

The return of larger deals, noted in Q4 2021, also continues: two assets over £100m were traded in December. In contrast, no deals over £100m were made in the whole of 2020.

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.

Spring Forecast Statement 2022

Chancellor of the Exchequer, Rishi Sunak, delivered his 2022 Spring Statement on 23 March, confirming implementation of the politically contentious 1.25 percentage-point rise in most National Insurance contributions, though with revised thresholds to mitigate the impact. He declared that his overall plan “builds a stronger, more secure economy for the United Kingdom.” The fiscal update included a number of specific measures and a new ‘Tax Plan’ which the Chancellor said would help families with the cost-of-living squeeze. Mr Sunak said, “People should know that we will stand by them, as we have throughout the last two years.”

Economic forecasts

Mr Sunak began his Statement by paying tribute to the soldiers and citizens of Ukraine, and said it was the strength of our economy that would enable the UK to help fund the Ukrainian army and impose sanctions on Putin’s regime. The Chancellor did, however, warn that actions against Russia “are not cost-free for us at home” and present a “risk to our recovery” before unveiling the latest economic projections produced by the Office for Budget Responsibility (OBR).

The Chancellor said the OBR had noted an “unusually high uncertainty around the outlook” as a result of Russia’s invasion, with its revised growth figures pointing to a more sluggish recovery; the UK economy is now predicted to grow by 3.8% this year and by 1.8% in 2023, both downgrades from last autumn’s forecasts of 6.0% and 2.1%, respectively. Growth is then expected to pick up in 2024, with OBR projections over the remaining three years of the forecast period stronger than last October’s predictions.

Mr Sunak went on to say that the most significant impact of the war in Ukraine relates to the cost of living, with the latest OBR figures suggesting inflation will average 7.4% across the remainder of this year, and peak at 8.7% in the final quarter. This followed on from the morning’s news that UK inflation had hit a 30-year high of 6.2% in the 12 months to February.

In terms of public finances, the forecasts show borrowing as a percentage of GDP falling from 83.5% in 2022/23 to 79.8% by 2026/27. However, the Chancellor said that in the next financial year the UK is forecast to spend a record £83bn on debt interest, and that the OBR has warned that the UK’s ‘fiscal headroom’ could be ‘wiped out by relatively small changes to the economic outlook.’

Living cost support measures

During his speech, Mr Sunak outlined three specific measures that he said would help households deal with the cost-of-living crisis. These were:

  • Fuel duty for petrol and diesel would be cut by 5p per litre from 6pm on 23 March with the reduction lasting until March 2023
  • Homeowners installing energy saving measures such as solar panels, heat pumps or insulation will pay no VAT on their purchases for the next five years
  • The Household Support Fund will double from £500m to £1bn from April, allowing local authorities to help vulnerable families cope with rising living costs.

The government have said they are continuing to monitor developments impacting the cost of living and will be ready to take further steps if needed to support households.

Previous steps taken to support households include:

  • Reducing the Universal Credit taper rate from 63% to 55%, and increasing Universal Credit work allowances by £500 a year to make work pay
  • Increasing the National Living Wage (NLW) for workers aged 23 and over by 6.6% to £9.50 an hour from April 2022
  • £9bn package announced in February 2022 to help households with rising energy bills.

Taxation

The Chancellor set out a three-part Tax Plan for a ‘lower tax economy’ which will cover the remainder of the Parliament. The key elements of the plan are:

  • The Spring Statement forms the first part of the plan – prioritising help for families with the cost of living – through the fuel duty cut (previously detailed) and an increase in National Insurance thresholds:

The Chancellor announced an increase in the annual National Insurance Primary Threshold and the Lower Profits Limit from £9,880 to £12,570 from July 2022, to align with the Income Tax personal allowance. This is a tax cut of over £6bn and worth over £330 for a typical employee in the year from July

In addition, from April 2022, self-employed individuals with profits between the Small Profits Threshold and Lower Profits Limit will continue to build up National Insurance credits but will not pay any Class 2 NICs

  • The second part of the plan is entitled ‘Capital, People and Ideas’ and focuses on creating the right conditions for private sector led prosperity through growth and productivity. The government intends to work with industry over the remainder of 2022 and will announce its conclusions in the Autumn Budget
  • In a tax break worth over £5bn a year, the final part of the Tax Plan, entitled ‘Sharing Growth’, confirms a cut in the basic rate of Income Tax from 20% to 19% in England, Wales and Northern Ireland in 2024. The Scottish government will receive their share of this funding which can be used to cut taxes or increase spending.

As part of the Tax Plan, the Chancellor has reaffirmed plans for tax reform to make the tax system ‘simpler, fairer and more efficient.’ This will be done by continuing the review of over 1,000 tax reliefs and allowances in the tax system by 2024.

Key allowances

No changes were made to personal tax allowances for the forthcoming 2022/23 tax year, which include:

  • Inheritance Tax (IHT) nil-rate band remains at £325,000 and the residence nil-rate band at £175,000, until April 2026
  • Capital Gains Tax (CGT) annual exemption remains at £12,300 for individuals and £6,150 for most trusts
  • Lifetime Allowance for pensions remains at £1,073,100 until April 2026, the Annual Allowance remains at £40,000
  • New single-tier State Pension will increase to £185.15 per week in April 2022, the older basic State Pension will increase to £141.85 per week
  • Individual Savings Account (ISA) allowance remains at £20,000 for the 2022/23 tax year
  • Junior Individual Savings Account (JISA) allowance and Child Trust Fund (CTF) annual subscription limits remain at £9,000
  • Most National Insurance contributions (except for certain employee categories and Class 2 self-employed) and Dividend Tax rates will increase by 1.25 percentage points from April 2022.

Business support

The Chancellor announced measures to help smaller businesses with rising energy costs, recruitment and training, as well as to close what he termed the “productivity gap” between UK businesses and those in other member countries of the Organisation for Economic Cooperation and Development (OECD). To this end, he pledged:

  • A £1,000 increase to the Employment Allowance, providing smaller businesses with relief of up to £5,000 on National Insurance contributions from April 2022
  • Two new business rates discounts, brought forward by a year to April 2022, which will reduce rates to 0% for businesses investing in eligible green technology and heat networks.

He reiterated previous measures announced in the Autumn Budget 2021:

  • A 50% discount (up to £110,000) on business rates for eligible retail, hospitality and leisure businesses, coming into effect in April 2022
  • An extension of the temporary £1m Annual Investment Allowance to 31 March 2023.

Mr Sunak also re-emphasised the government’s commitment to reforming the research and development (R&D) tax system, as previously outlined in 2021. Measures include increasing the generosity of R&D reliefs and expanding the qualifying criteria to include data, cloud computing and pure mathematics. Furthermore, he announced that the government would be investigating how the tax system – including the operation of the Apprenticeship Levy – could be reformed to further encourage employers to invest in adult training.

Other key points

  • The government has announced that it will phase out the import of Russian oil by the end of 2022
  • The government will be setting out an energy security plan, including measures across hydrocarbons, nuclear and renewables, to support energy resilience and security
  • Funding of £48.8m over three years to support the creation of a new Public Sector Fraud Authority and enhance counter-fraud work across the British Business Bank and the National Intelligence Service
  • A new Efficiency and Value for Money Committee will be set up to cut £5.5bn of cross-Whitehall waste, with savings to be used to fund public services
  • Investing £12m in HMRC to help prevent error and fraud in tax credits
  • NHS efficiency commitment will double from 1.1% to 2.2% a year to free up £4.75bn to fund NHS priority areas
  • The government is launching the second round of the Levelling Up Fund, inviting bids to come forward from all eligible organisations across the UK – this Fund provides £4.8bn for local infrastructure projects.

Closing comments

Rishi Sunak signed off his announcement saying, “We can deliver for the British people today and into the future. We have a plan… A plan that reforms and improves public services, a plan to grow our economy, a plan to level up across the United Kingdom, a plan that helps families with the cost of living. And yes, a tax plan… My Tax Plan delivers the biggest net cut to personal taxes in over a quarter of a century. And I commend it to the House.”

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 of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. 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.

All details are correct at the time of writing (23 March 2022)

News in Review

‘The economy has recently been subject to a succession of very large shocks’

Last Thursday, as highly anticipated, the Bank of England (BoE) announced the third increase in Bank Rate in four months, placing more pressure on household finances. The Monetary Policy Committee (MPC) members voted by an eight to one majority in favour of the 0.25 percentage point rise from 0.5% to 0.75%, in a bid to dampen soaring inflation.

Bank Rate is now at its highest level since March 2020, at the start of the pandemic. The policymakers felt that the rate rise was justified ‘given the current tightness of the labour market, continuing signs of robust domestic cost and price pressures, and the risk that those pressures will persist.’

The Committee said that depending on how medium-term prospects evolve, including the economic implications of geopolitical events, ‘some further modest tightening in monetary policy may be appropriate in the coming months.’ The next MPC meeting will take place in early May.

The Bank cautioned that the annual inflation rate may rise to around 8% in Q2 and potentially even higher later in the year, possibly reaching double digits if energy prices push up the energy price cap when it’s reset in October. Prices have already increased by 6.2% in the year to February, a new 30- year high and well above the BoE’s 2% inflation target. The Bank outlined that the Ukraine invasion has exacerbated supply chain disruption, placed upward pressure on energy, commodity and food prices, and has significantly increased uncertainty around the economic outlook, commenting, ‘The economy has recently been subject to a succession of very large shocks. Russia’s invasion of Ukraine is another such shock… should recent movements prove persistent, the very elevated levels of global energy and tradable goods prices, of which the United Kingdom is a net importer, will necessarily weigh further on UK real aggregate income and spending. This is something monetary policy is unable to prevent.’

The cost of doing business

Set against a backdrop of growing domestic and global headwinds, Head of Economics at the British Chambers of Commerce (BCC) Suren Thiru, said that although expected, the decision to raise interest rates was mistimed, arguing that higher rates will do little to curb some of the global causes behind the surge in prices and risk intensifying the financial squeeze on consumers and businesses, “While interest rates remain low by historic standards, the latest rise will be viewed by many as a further step in a prolonged period of aggressive monetary tightening at a time when consumers and businesses are struggling under a myriad of rising cost pressures… intensifying the headwinds facing the UK economy by damaging confidence and deepening the financial squeeze on consumers and businesses.” He urged the Chancellor to take the opportunity to use the Spring Forecast Statement on 23 March to address the “escalating cost of doing business crisis” and suggested that a delay in the National Insurance rise and introducing a temporary energy price cap for small businesses, would be enough to provide firms with the “headroom to keep a lid on prices, protect jobs and make investment that is so vital to sustaining our economic prospects.”

The Chancellor has pledged to help “where we can make a difference” as he faces pressure to assist struggling households. There have been reports that this could include a temporary cut in fuel duty.

Markets

Toward the end of last week, both US and European markets continued their recovery, delivering solid weekly advances, as investors positively regarded the certainty of the Federal Reserve’s monetary policy announcement on Wednesday. The Fed adopted a measured approach, raising interest rates 25 basis points and plotted out a route toward six additional rate hikes during 2022. This is the first time the US central bank has raised the interest rates since 2018.

On Tuesday, the price of Brent Crude reached over $118 a barrel as concerns persist over potential shortfalls in supplies. London stocks finished in positive territory following news from the Office for National Statistics (ONS) that government borrowing in February was £13.1bn, a drop of £2.4bn from February 2021.

Here to help

It is essential that investors focus on longer-term timescales instead of focusing too intently on short-term volatility. Rest assured we will continue to monitor events closely. 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.

News in Review

“At the Spring Statement, Rishi Sunak has to make a huge judgment call”

With a week to go until the next fiscal event in the government’s calendar – the Spring Forecast Statement on 23 March – new research from the Institute for Fiscal Studies (IFS) has highlighted its belief that the Chancellor has some big decisions to make in the face of soaring living costs and new economic challenges presented by the war in Ukraine.

Interestingly, a Spring Statement is usually regarded as a lesser fiscal event than a Budget; providing a set of new economic forecasts and updates, rather than the government’s planned spending and revenue gathering proposals which appear in the Budget. However, on this occasion, with inflation continuing its ascent, wages unable to keep pace, and the costs of energy, fuel and other commodities being driven even higher due to the invasion of Ukraine, the IFS is speculating whether the government will consider extra protection for households struggling to keep up with their bills, potentially making this a crucial event for many households.

The IFS analysis emphasises ‘the far-reaching economic challenges associated with this shifting outlook. Households and public services will be squeezed by higher inflation, the economy rocked by heightened uncertainty, and the public finances buffeted by the fallout from Ukraine.’ Paul Johnson IFS Director added, “At the Spring Statement, Rishi Sunak has to make a huge judgment call. Will he do more to protect households from the effects of energy prices, which have risen even further in the last two weeks? If he doesn’t, then many on moderate incomes will face the biggest hit to their living standards since at least the financial crisis. If he does, then there will be another big hit to the public finances.”

“Significant economic uncertainty”

Although the UK economy rebounded strongly in January, analysts’ expectations indicate more subdued growth moving through 2022 as the cost-of-living crisis intensifies. Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC) believes the Ukraine invasion “has increased the risk of a recession in the UK” by exacerbating the inflationary squeeze and “derailing the supply of critical commodities to many sectors of the economy.” Chancellor Rishi Sunak said that Russia’s invasion “is creating significant economic uncertainty.” He added that the government’s “unprecedented support” provided during the pandemic “has put our economy in a strong position to deal with current cost of living challenges.”

Further emergency funding

In addition to funding provided by the World Bank, the International Monetary Fund (IMF) last week approved $1.4bn of emergency funding for Ukraine, to meet the country’s urgent spending needs and help alleviate the devastating economic impact of the war. Kristalina Georgieva, Managing Director of the IMF said, “The Russian military invasion of Ukraine has been responsible for a massive humanitarian and economic crisis… The tragic loss of life, huge refugee flows, and immense destruction of infrastructure and productive capacity is causing severe human suffering and will lead to a deep recession this year. Financing needs are large, urgent, and could rise significantly as the war continues.”

G7 Leaders showed support for the people of Ukraine and condemnation of Putin’s war by issuing a joint statement, ‘We are united in our determination to hold President Putin and his regime accountable for this unjustified and unprovoked war that has already isolated Russia in the world. The world should join together in calling on President Putin and his regime to immediately stop its ongoing assault against Ukraine and withdraw its military forces. We stand in solidarity with those who are bravely opposing the invasion of Ukraine.’

Markets

At the end of last week, many European markets responded positively on tentative hopes that discussions between Ukraine and Russia were progressing, however US indices were more subdued, following the release of February’s inflation figure which reached a 40-year high of 7.9%.

London stocks dropped into the red on Tuesday as Office for National Statistics (ONS) data revealed that real wages in the UK, taking inflation into account, had dropped by 1% in the three months to January, the biggest fall since 2014.

Here to help

It is essential that investors focus on longer-term timescales instead of focusing too intently on short-term volatility. Rest assured we will continue to monitor events closely. 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.

Preserving your retirement from the risk of mental decline

Many of us can now look forward to a longer retirement, due to increased life expectancy, however this unfortunately comes at a cost. The prevalence of age-related cognitive decline is on the rise, which could leave us vulnerable to costly financial errors.

There are nearly 885,000 people living with dementia in the UK1, with estimates suggesting that between 5% and 20% of over-65s suffer from mild cognitive impairment (MCI). This is a condition in which someone has minor problems with cognition, such as thought process and memory.

Planning for every eventuality

An essential element of preparing for your retirement should involve planning for the possibility of cognitive decline. Despite many people still having the capacity to make decisions and live independently, MCI has been linked in studies to poorer financial capacity and a greater susceptibility to scams.

It’s all about timing

In a recent survey2, over 80% of investors felt the ideal time to transfer financial control would be ‘sometime after they had begun to experience some cognitive decline but before they became completely incapable.’ Respondents thought there was a higher than one-in-three chance of a mistimed transfer, partly attributable to a reluctance to relinquish control, which highlights the need to plan sooner rather than later, so that any future transfer takes place on your terms.

Make time to talk

Preparing for the possibility of cognitive decline requires careful planning, not only having legal documents in place but also starting conversations with your family and those you trust about your finances and objectives, in advance of its possible onset. This fosters transparency and, with everything out in the open, close connections are more likely to notice if you begin making decisions about your money that don’t align with your objectives.

We can assist you with planning and in starting these conversations well in advance, enabling you to better plan for the future, giving you a greater sense of control and ownership of your plans.

1Alzheimers Society, 2019

2Vanguard, 2021

The value of investments and income from them may go down. You may not get back the original amount invested. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.