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Spring Budget Summary 2024

By | Financial Planning

Jeremy Hunt delivered his much-awaited budget on 7 March. Given the upcoming election and challenging public opinion, the government has recently been under significant political pressure to assuage voters.

The headline measure was the cut to National Insurance rates, following a similar cut already announced in November 2023. Child benefit rules are also to be overhauled, and a new British ISA allowance is set to provide tax breaks for individuals investing in UK companies.

The key points are outlined below.

The Economy

  • The rate of inflation (currently 4%) is expected to reduce to the Bank of England target of 2% within a few months. This is an improvement on the Autumn statement’s forecast, which suggested that this target would not be reached until 2025.
  • Economic growth is projected to be 0.8% this year and 1.9% in 2025. Again, this is higher than estimated in November.
  • The rates are estimated to be 2%, 1.8%, and 1.7% in the three subsequent years, respectively.
  • 2022/2023 saw the largest drop in living standards since Office for National Statistics records began in the 1950s. However, real household disposable income is expected to return to pre-pandemic levels by 2025/2026, two years ahead of the November forecast.
  • Tax revenue is expected to rise to 37.1% of GDP by 2028/2029, the highest level since 1948. Despite highly publicised efforts to cut taxes, the freeze in personal tax thresholds means that most people will continue to pay more tax.
  • Public spending will grow at 1% in real terms rather than in line with inflation. This represents an 8% real terms drop since the policy was introduced in 2021.
  • Borrowing for the current tax year is estimated as £113 billion, which is £11 billion below the Office for Budget Responsibility’s November forecast.

Tax

  • As of April 2024, the rate of National Insurance contributions for employees will be cut from 10% to 8%. This is expected to save around £450 per year for someone earning an average salary of £35,000.
  • This follows the 2% cut (from 12% to 10%) already announced in November.
  • Non-dom status will be scrapped by April 2025. This refers to people who live in the UK but are domiciled (i.e. have permanent links) abroad and, therefore, only pay UK tax on UK income. The new rules mean that after four years of living in the UK, anyone with non-dom status will pay the same tax on worldwide income as other residents.

Work and Benefits

  • The earnings threshold for starting to lose Child Benefit will be increased from £50,000 to £60,000. Additionally, the level at which the benefit is lost completely will increase from £60,000 to £80,000. This will apply from April 2024.
  • Plans are in place to apply the limitations to household income rather than individuals starting in April 2026.

Investing

  • A new ‘British ISA’ scheme is to be introduced, offering investors an additional £5,000 ISA allowance to invest in British assets.
  • This is due for a consultation, with details and the timeline still to be announced.

Property

  • The capital gains tax rate (CGT) on property sales will reduce from 28% to 24%. This will benefit landlords and second homeowners who sell their properties, as CGT does not apply to the sale of a main residence.
  • However, the furnished holiday let scheme will be scrapped. This will reduce tax breaks on short-term lets and ultimately make it less profitable to let to holidaymakers than to long-term tenants.

Alcohol, Tobacco, & Fuel

  • Plans to increase alcohol duty by 3% in 2024 have been scrapped. Current rates will be frozen until February 2025.
  • Tobacco duty will increase and a levy on vape products will also be introduced in October 2026.
  • The fuel duty will also remain frozen for at least one more year. The 5% cut introduced in 2022 was due to expire this month but has now been extended.

Public Sector

  • Plans to digitise the NHS and make it more efficient are being introduced. Some of the measures mentioned include AI form-filling and making improvements to the NHS app.
  • Military spending is due to increase from 2% of GDP to 2.5%.

Childcare

  • Free childcare hours for children aged 9 months and over will continue for the next two years.
  • However, nurseries continue to struggle with rising costs and limited resources, which means that the free hours will not necessarily translate into more nursery places. Additional support has been promised, but concrete details are sparse.

The Arts

  • Independent films with a budget of below £15 million will benefit from a new tax credit.
  • Film studios will also benefit from 40% relief on business rates until 2034.
  • The National Theatre will receive a £26.4 million upgrade to its stages.

Conclusion

The new measures will mainly benefit middle-to-high earners, along with a small boost for property owners wishing to sell.

One of the main criticisms of the NI cut is that it benefits a specific portion of the population – people who are working and earning a reasonable income. The overall tax burden on the population will continue to increase given the freeze to the allowances and thresholds, which is expected to remain in place until 2028.

Doubts have also been raised about spending plans, which, along with the NI cut, will be funded in part by higher borrowing. Public finances are tight, and it has been argued that money could be better spent on public services. However, with Labour still leading the polls, it’s possible that this will be the next government’s problem to solve.

Please don’t hesitate to contact a team member to learn more about the topics covered.

Tax Year End Planning Guide – 2023/2024

By | Tax Planning

With the end of the tax year fast approaching, it’s a good time to organise your finances and make sure you make the most of your tax allowances, reliefs, and exemptions. Some of these allowances will be lost if you don’t use them before the end of the tax year. Additionally others will be reduced in the new tax year due to legislative changes.

This guide explains the main areas of planning you need to consider before the end of the tax year.

This year it’s important to note that the tax year end falls just after the long Easter weekend and therefore processing times may take slightly longer than usual. Our advice is always to beat the rush by being prepared and organised well in advance.

Individual Savings Accounts (ISAs)

  • You can contribute up to £20,000 to your ISA in the current tax year.
  • You need to use this allowance by 5th April 2024, or it will be lost.
  • If your ISA is a ‘flexible ISA’ then you can also replace any withdrawals within the same tax year. Again, you need to do this by 5th April, or that additional ‘replacement subscription’ opportunity is lost.
  • No tax is payable on any of the income or growth within your ISA, and you can usually withdraw money without penalty. Any money withdrawn can be replaced in the same tax year without using any of your allowance.
  • Choose a Cash ISA if you are likely to need the money within a shorter timeframe (say, within 3-5 years). Interest rates have significantly improved in the last year so it’s worth shopping around.
  • A Stocks and Shares ISA might be for you if you are seeking long-term growth and can cope with some potential market volatility. You can switch between Cash and Stocks and Shares later if you wish.
  • Consider a Lifetime ISA (LISA) if you are saving for a first home.

Pension Contributions

  • Pensions are extremely tax-efficient.
  • You should make sure you take advantage of any pension funding offered by your employer.
  • It’s worth making the maximum contribution to your pension, depending on your available allowances and personal budget.
  • Check you are reclaiming higher and additional rate tax relief, particularly if you are making personal pension contributions.
  • Higher and additional rate taxpayers can also use pension contributions to reduce their effective earnings, and bring them into a lower tax band.
  • Make use of your carried forward allowances if available.
  • If you have already taken taxable benefits from your pension, you might have triggered the Money Purchase Annual Allowance. If this applies to you, it’s even more important that you use your allowance before 5th April.
  • Check if your remuneration will exceed £260,000 (including employer pension contributions) as this will also reduce your annual allowance.

Income Tax Allowances

You have a number of income tax allowances that can help to increase your net household income. If you arrange your income and assets efficiently, there is still time to make the most of these before the end of the tax year. For example:

  • Personal Allowance – you can earn up to £12,570 before paying tax. If you are taking income from a pension, or planning a withdrawal from a bond, you can use this allowance to offset tax. Similarly, if you own a business, it’s a good idea to take some of your income as a salary to make use of this allowance.
  • Marriage Allowance – a lower-earning spouse can transfer up to £1,260 of their tax-free personal allowance to their higher-earning partner, potentially reducing the family’s tax bill by up to £252.
  • Dividend Allowance – dividends of up to £1,000 per year may be drawn (from your own company or from investments) without tax liability. This is reducing to £500 from April 2024, so if you have retained profits in a company, it’s worth making the most of this now.
  • You can transfer assets to your spouse if they pay a lower rate of tax, or to make use of both savings allowances.

Capital Gains Tax Exemptions

  • When you sell investments or property, you might need to pay Capital Gains Tax (CGT) on the profits.
  • You can use your annual exemption to avoid building up large taxable gains. This tax year, you can realise gains of up to £6,000 without paying tax. This is reducing to £3,000 from April 2024, so you could save tax by realising more in the current tax year.
  • Sell shares to realise a loss. The loss can be carried forward to set against gains in future years.
  • Allocate some shares to a spouse. This does not incur tax, and means that you have double the exemption to set against gains.

Inheritance Tax Planning

  • You can reduce your estate (and potential IHT liability) by making gifts to individuals, charities, or trusts. Charitable gifts are immediately outside your estate.
  • You can gift up to £3,000 per year, which is immediately outside your estate. You can also carry forward this allowance by up to one tax year. A couple could potentially gift up to £12,000 by using two tax years’ worth of allowances. Some other exemptions are also available.
  • If no exemptions apply, most gifts drop out of your estate after 7 complete years, so making the gift now starts the clock ticking earlier.

Tax Advantaged Investments

  • Consider investing in smaller, early-stage companies. This can be done via Alternative Investment Market (AIM) listed shares, Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCT). These are very high-risk investments and are only suitable for experienced investors who can afford to lose the money. Advice is strongly recommended.
  • Investing in this type of asset could reduce your income tax bill by up to 30% of the investment amount, or 50% if the investment is allocated to a particularly high-risk version of the EIS.
  • An EIS investment offers the added advantage of being able to carry-back relief to the previous tax year, as well as the option to defer CGT on gains realised from other investments.
  • AIM and EIS investments are also considered to be business assets and are usually subject to 100% Inheritance Tax relief if held for at least 2 years.

Charitable Gifting

  • Make any charitable gifts you were planning before the end of the tax year. Gift Aid can increase the value of the gift in the hands of the charity, as well as reducing your tax bill.
  • Remember to claim tax relief on any charitable gifts made in 2022/2023, as you can carry-back tax relief to the previous tax year, providing this is done before your tax return is due. This can be useful if your tax bill was higher last year.
  • Think about gifting shares. No capital gains tax is due either when you gift the shares, or when the charity eventually sells them.

Saving for Children

  • Top up any Junior ISAs for your children or grandchildren. You can contribute up to £9,000 in the current tax year.
  • Consider making pension contributions for your child. Anyone can contribute up to £2,880 per year (grossed up to £3,600) to a pension for tax-efficient growth.
  • These gifts can be extra efficient if you use them in conjunction with your gifting allowances above, or as regular gifts from surplus income.

Please don’t hesitate to contact a member of the team if you would like to find out more about planning for the tax year-end.

Bonus Sacrifice – Should You Use it to Save Tax?

By | Tax Planning

If you are fortunate enough to receive a bonus this year, you may be considering ways to save tax. While a cash windfall is always welcome, your bonus might push you into higher rates of tax, meaning that you receive less than you were expecting.
Below, we explain how your bonus is taxed and some options for making savings.

Your Bonus – Tax Treatment

If you receive a bonus, this is added to your other income for the tax year to calculate your tax liability. This means you will pay tax on your bonus at your highest marginal rate.

National Insurance will also apply and if you have any other deductions from your salary, such as student loan repayments, these will also factor into the calculation.

A key point to be mindful of is that receiving a bonus can push you into the next tax band. Going from basic rate to higher rate tax can mean increasing your tax bill on the bonus by up to 20%.

If your bonus takes your earnings over £100,000, you will also start to lose your personal tax-free allowance of £12,570. This can take the effective tax rate on your bonus as high as 60%, as not only are you paying higher rate tax, but you are also extending the amount of income that is taxed overall.

Even if you have checked the tax treatment and are comfortable with the extra tax, remember to check your pay slip for emergency tax coding. Sometimes when you receive a one-off payment, HMRC will assume you will receive the same amount every month and adjust your tax code accordingly. This means paying significantly more tax, potentially for the rest of the tax year. It is normally corrected at the end of the tax year, or you can contact HMRC to receive a refund sooner.

How You Can Save Tax by Making Pension Contributions

Making a pension contribution is one way to reduce the amount of tax you pay on your bonus.

If your employer can arrange this through salary sacrifice, the administration is fairly simple. The bonus will be paid into your pension as an employer contribution and you won’t pay tax or National Insurance on it.

If your employer makes pension contributions via the ‘net pay method,’ your tax will be automatically reduced, but you won’t necessarily receive relief from National Insurance contributions.

If your employer is unable to pay the bonus into your pension, or you decide to make the contribution later, you can arrange a personal contribution. Basic rate tax relief is credited automatically, which means that for every £80 you contribute personally, HMRC adds a further £20. This means a gross contribution of £10,000 will only cost you £8,000 from net income.

There are, of course, limits to this. Pension contributions are generally capped at your gross annual earnings or the annual allowance (£60,000), whichever is lower. However, if you earn more than the annual allowance, you may be able to carry forward allowances from up to three previous tax years. This means that higher earners receiving a large one-off bonus have considerable scope to top-up their pensions.

The limits on pension contributions and tax relief available are explained further here.

Pensions are highly tax-efficient investments and do not incur any tax when the funds are invested. Currently, you can also pass the funds to your beneficiaries tax-free if you die before age 75. After age 75, any income drawn by your beneficiaries is simply taxable at their own marginal rate.

Are There Any Downsides?

The main downside to funding your pension is that you can’t access the money until your minimum retirement age. This is currently age 55, but is expected to rise to 57, and subsequently 58 as the State Pension is also due to increase.

At your retirement age, you can take up to 25% of your pension as a tax-free lump sum. The remainder is then taxed at your marginal rate. So, while you can substantially reduce the amount of tax you pay on your bonus, particularly if you move from higher to basic rate tax in retirement, you will probably still pay some tax on it eventually if you take benefits from your pension.

There is also the chance that the investments in your pension will be exposed to market volatility. You may even lose money, particularly if you make the an investment into equities close to your retirement age.

You also need to be mindful of pension allowances. Breaching the annual allowance means not only being taxed on the money as if it was earned income, but that the money is now tied up in a pension, to be taxed a second time if you take retirement benefits.

If you earn over £240,000 or have already taken benefits from your pension, you will have a lower annual allowance.

These risks can easily be addressed by careful planning, for example:

  • Keeping enough cash to cover potential emergencies and any planned spending.
  • Only investing if you can hold the fund for at least five years (ideally longer).
  • Investing in a suitable range of funds which is well diversified and matches the appropriate risk level.
  • Taking advice on larger pension contributions, particularly if you are a higher earner.

Other Options for Saving Tax

If you have maximised your pension allowances or wish to take a different route, there are a few other options to tax-efficiently invest your bonus, for example:

  • ISAs – while you don’t receive any tax relief on your contributions, all income and growth are tax-free and you can access your savings flexibly. This might be a suitable option if you are likely to need the money before retirement age and are comfortable paying tax on the bonus.
  • Venture Capital Trusts (VCTs) – these offer income tax relief of 30%, providing the relief is no more than your tax bill and you hold the investment for at least five years.
  • Enterprise Investment Schemes (EIS) – similarly, these schemes offer income tax relief of 30% (as well as benefits in terms of capital gains tax and inheritance tax), with a minimum holding period of three years.
  • Seed Enterprise Investment Schemes (SEIS) – these are a subset of the EIS regime and offer income tax relief of up to 50%. However, they are significantly higher risk as they target very early-stage companies.

The latter three options are very high-risk investments which invest in smaller companies. While the tax relief is a strong incentive to invest, you could lose some or all of your capital.

It’s a good idea to seek tax advice if you are considering higher risk investments or tax planning, as getting it wrong can cost much more than you saved.

Please don’t hesitate to contact a member of the team if you would like to discuss financial planning and tax.

The Autumn Statement 2023

By | Financial Planning

Jeremy Hunt delivered the Autumn Statement on 22 November following weeks of speculation about potential tax cuts. The headline measure, a reduction to National Insurance Contributions was something of a surprise. Beyond this, economic measures are looking more positive than indicated in March, and the government has committed to continue investing in businesses to boost growth.

The main measures announced are covered below.

The Economy

  • Inflation is expected to reduce to 2.8% by the end of 2024.
  • Overall, the rate is expected to stay ‘higher for longer,’ and is unlikely to drop to the Bank of England’s 2% target until 2025, a year later than previously predicted.
  • Based on this, it is suggested that the base rate will remain at around 4% until 2028, rather than dropping to 3% as previously indicated.
  • It is anticipated that the economy will grow by 0.6% this year and 0.7% next year. Incremental growth of 1.4% – 2% per year is expected over the following four years.
  • Overall, the economy has grown by 1.8% since before the pandemic.
  • In March, it was predicted that the economy would shrink by 0.2% this year, before growing at a higher rate than currently predicted. This suggests slower growth from a higher starting point than previously predicted.
  • Government debt is projected at 94% of GDP, which is lower than predicted in March.
  • The budget deficit, or difference between spending and income, is currently 4.5%.
  • Public borrowing is estimated at 5.1% of GDP, or around £132 billion.
  • While these figures are an improvement from March, it is likely that there will be little difference in long-term projections due to the additional cost of the measures announced.

Personal tax

  • The main rate of employee National Insurance Contributions are to be cut from 12% to 10%. This will take effect from 6 January 2024.
  • Class 2 National Insurance, payable by self-employed people at a rate of £3.45 per week, will be abolished.
  • Self-employed people will also see a 1% cut to Class 4 NI contributions, from 9% to 8%.
  • Both changes to self-employed rates will take effect from April 2024.
  • There were no changes to Inheritance Tax, despite discussions in the preceding weeks.
  • Alcohol duty will be frozen until August 2024 while tobacco duty will increase at 2% above inflation (12% above inflation for hand-rolled tobacco). No changes to fuel duty have been announced.

Pensions

  • A pension ‘pot for life’ will be introduced. This is intended to give employees more choice over where their pensions are invested and reduce the number of ‘small pots’ accumulated over the course of a working life.
  • The State Pension ‘triple-lock’ was re-affirmed, with an increase of 8.5% to retirement income from April 2024.

Investments

  • Currently, ISA investors can contribute to one cash ISA, and one stocks and shares ISA. From April 2024, this restriction will be removed. The contribution limit will remain at £20,000 per year.
  • The scope of investment choice for ISAs will also be widened to allow access to ‘long-term asset funds,’ which invest in illiquid assets such as property and private equity.
  • The government has committed to extend the tax advantages of Venture Capital Trusts and Enterprise Investment Schemes to 2035. This change follows a post-Brexit consultation as these investments did not align with EU rules.

Energy Crisis

  • Anyone living near new pylons and transmission infrastructure could be offered up to £10,000 off their energy bills over the next 10 years.

Business

  • Temporary measures allowing businesses to offset the cost of capital investment in the company (for example, by purchasing new equipment) will be made permanent.
  • Business rates will be discounted for hospitality, leisure, and retail businesses.
  • The government plans to invest £4.5 billion in manufacturing and £1 billion in aerospace/green technology between 2025 and 2030.
  • New investment zones will be introduced in Wrexham, Greater Manchester, the West Midlands and the East Midlands.
  • £80 million will be directed towards new levelling up projects in Scotland.
  • It is hoped that the total package of measures for businesses will increase investment by up to 1% of GDP.
  • The government is considering a sale of its remaining stake in NatWest Group following the bank’s bail out in 2008.

Property

  • New rules are under discussion which would allow existing houses to be converted to two flats, providing the exterior of the property is unchanged. This is intended to increase the number of homes available.

Work and Benefits

  • The National Living Wage will increase to £11.44 per hour from April 2024. This will be extended to all workers aged 21 and over.
  • The rate will increase to £8.60 per hour for 18- to 20-year-olds.
  • Universal credit and other benefits will increase by 6.7%, equivalent to September’s inflation rate. This represents an average gain of £470 for 5.5 million households.
  • Local housing allowance is to be increased, with an average raise of £800 for £1.6 million households. These rates have been frozen since 2020, despite average rental increases of over 30%.
  • Anyone claiming unemployment benefits will need to undertake mandatory work experience if they do not find a job within 18 months. If they do not actively look for work, benefits will be stopped.
  • £1.3 billion will be allocated over the next five years to help people with health conditions get back into work.

Public Services

  • £14.1 billion has been pledged for the NHS and adult social care, while schools will receive £2 billion in the current and next tax years.
  • Defence spending will remain at 2% of national income, with overseas aid spending falling 0.2% below target at 0.5%.

How Will You Be Affected?

If you are employed or self-employed, you can expect your net income to increase due to the reduction in National Insurance. Anyone receiving an income from pensions or investments will not be affected by this change.

Lower earners may benefit from the increase to the National Living Wage, particularly as this has now been extended to anyone aged 21 and above. However, despite the increases to benefit payments, the likelihood is that anyone claiming benefits will face increased pressure to find work, whether this is feasible or not.

While pension savers may eventually benefit from the ‘pot for life’ concept, the reality is many years away and concrete details are not yet available. It has been pointed out that investors can already set up pension schemes independently of their employer and that perhaps more guidance would have a greater impact than a brand-new pension system.

Conclusions

After weeks of speculation about a reduction to Inheritance Tax, the cut to NI rates was unexpected. However, this will offer more benefit to the average worker versus a tax cut on large estates.

Criticisms for the measures from Labour were limited and mainly focused on the idea that it was too little too late. The NI cut has been generally welcomed, but it was felt that it did not begin to compensate for frozen thresholds and stealth taxes.

Please do not hesitate to contact a member of the team if you would like to discuss any of the topics covered.

When returns aren’t quite what you expected

By | Investment Planning

We believe a globally diversified portfolio provides the best chance of capturing market returns. Occasionally we are asked why equity funds in our portfolios are held on local currencies rather than being hedged back to Sterling. We think this bulletin from investment group 7iM provides a helpful explanation why this makes good financial sense, and we thank 7IM for allowing us to reproduce this.

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Business as Usual, Only Better

By | News

It’s official. The communications have been sent out to our clients and it’s been humbling to receive so many kind responses, and overwhelmingly enthusiastic feedback, for which we are really appreciative. Now we’re excited to announce the next phase for WMM to our wider audience….

Here at our Oxfordshire office, we’re celebrating the merger of WMM with Evans Hart!

 

A bit of background…

We have noticed in recent years a greater call for planning services, partly due to a backdrop of economic factors making people take more notice of their existing arrangements and, certainly post-Covid, thinking more deeply about what really matters to them and their loved ones. People want to be more certain of their own futures and are seeking guidance on how to get there. Having good plans in place keeps things running on track.

WMM and London-based Evans Hart share a great deal in common and, at a time when demand for financial planning is at record levels, our joining forces will provide long-term benefits for all our clients.

Mike Weston, founder of Weston Murray & Moore, and Stephen Evans, founder of Evans Hart, were both leading the way in long-term financial planning back in the 80s, when the majority of advisers were focused on selling products. Both stood out for their client-centric approach and their strong belief in the benefit and value of financial planning leading advice for optimal client solutions. That ethos remains as strong today in both firms as it was over 35 years ago.

Our merger seems a very natural progression for us, and very much about carrying on doing what both firms do best…… Business as usual, only better.

So, what does this mean for our clients and anyone thinking of working with us? We’ve covered the questions that have been raised so far below, along with a few more for extra information.

What is happening to the office in Deddington?

It’s staying open! We remain here in our office with its beautiful outlook that we know so many of you appreciate. Having a local presence is important to many of you and it is therefore very important to us.

We love working in this space and we know you like coming to meet us here, so the office remains open as always.

How can I contact you?

Our office address and phone number will be unchanged. We will be given new email addresses in time, for efficiency as our back-office systems merge. Even then, our existing emails will still be monitored.

There are more advisers in Evans Hart – how will they be advising me?

Your main point of contact will be, and will remain with, the team at Deddington. At some stage in the not to distant future I’m sure we will harness the advantages of working within a larger team, including a wealth of technical information and support during busier periods.

Evans Hart is the umbrella company under whose banner WMM will continue to work and manage the business as we have always done.

Why did you need to do this?

"If you don't move forward-you begin to move backward". (Mikhail Gorbachev)

It’s important that we avail of extra resources as we continue to grow and, this way, we can keep our existing infrastructure while benefiting from the additional support of Evans Hart.

What are the benefits for your clients, current and future?

Our ambition is to continue growing, benefitting from sharing ideas and expertise. Our relationships will be enhanced through the greater resources available to us and a wider service proposition. We will update you when we are ready to roll out any new services.

What about our fees, are they going to increase now?

Each office/division within the larger group is responsible for their own direct running costs, so that each can run efficiently and avoids costs from other divisions impacting its clients. Our budget reflects our office size and location, our staff levels and all of the equipment and technical insight needed to support our clients with achieving their financial objectives and life goals.

As part of a ‘larger entity’ the Divisions may be able to benefit from cost savings in the coming years. However, as part of the agreement, we are able to guarantee that our fees are not going to increase as a result of the merger.

All fees have always been, and will continue to be, agreed and confirmed in writing before any work is undertaken.

 

If you’re reading this via our newsletter as an existing client or perhaps on our website as someone with an interest in working with us, and you have any additional questions please do get in touch on 01869 331 469.

How Behavioural Biases Can Affect Your Financial Plan

By | Financial Planning

Whether we are aware of them or not, we all carry biases which shape our thoughts and behaviour. Most investors know that making decisions based on emotion is likely to be counterproductive. But what about those subconscious beliefs that can fool us into thinking we are making an entirely rational choice?

Biases are apparent in all areas of life, and financial planning is no exception. It is only when we explore the reasons for the biases, and look past them, that we can make genuinely objective decisions.

Confirmation Bias

Have you ever started with a theory or a hunch and decided to carry out further research? Do you notice how straightforward it is to find information that supports your original view, while opposing evidence can be easily debunked or cast aside?

That’s confirmation bias. When we have a particular belief, we are naturally inclined to seek out evidence in favour of it. The more we find, the more this enforces the belief, making it easier to ignore or discredit the opposite view.

Confirmation bias stems from two things. Firstly, we like to believe we are right. And secondly, you can prove just about anything with statistics. The truth is rarely black and white and it’s not always easy to see the nuances.

In financial planning, we might favour a particular company or investment and look for reasons to use them, rather than taking an objective view. An independent financial adviser, by definition, must look at the whole of the market when making recommendations. Seeking advice can help you see the wider picture and make decisions based on evidence.

Overconfidence Bias

Overconfidence bias occurs when we place too much faith in our own judgement.

Evidence has proven that it’s virtually impossible for an individual investor to consistently ‘beat the market.’ This is particularly true when trading individual stocks and attempting to buy and sell at the right times. The market is too unpredictable, and any information that could affect your decision is already priced in.

But people still trade shares. This suggests that a huge number of investors place greater confidence in their own stock picking abilities than that of a professional manager, or the steady predictability of a passive fund.

Successful investing doesn’t just mean supercharging your growth in the short term. It’s also about managing risk and coping with the inevitable downside. Over the longer term, a diverse investment strategy that stays on course is likely to improve long-term growth prospects.

The Gambler’s Fallacy

Past performance is not necessarily an indication of future performance. This statement appears throughout the financial services industry, and is intended as a reminder that just because a fund has had a good run, this doesn’t mean it will continue.

But top performing funds attract attention, and therefore investment. This boosts the share price as demand increases. Eventually, this levels off, and another fund takes the top spot. And so it continues.

The gambler’s fallacy arises from a belief that just because a horse (or a fund) has performed well, it will continue to do so. Often, this doesn’t include in depth research into the reasons for the success or the underlying holdings. Many of the top performing funds in 2020 benefited from the circumstances, i.e. an increased demand for tech and healthcare products. That doesn’t mean that the same funds will outperform in 2021 as it’s likely that other trends will take over.

When investing, it’s important to look at factors other than past performance. As always, diversification is vital, as this can help to capture market trends that might otherwise be missed.

Loss Aversion

No one wants to lose money. In financial planning, sometimes we can take actions that are interpreted as ‘cautious’ or ‘risk-averse’ to avoid losses. For some investors, the pain of a loss can far exceed the elation of a gain.

But keeping all of your money in cash is not simply cautious. It’s creating a loss in real terms, as your money will lose spending power in every year that inflation rises. By eliminating one risk (investment fluctuations) you are creating another (inflation risk).

Similarly, selling investments when the market is falling is not a prudent move. It can prevent further losses, but what about the losses that have already occurred? When do you decide to buy back in? A habit of selling when the market is falling and buying when the market is rising is far less efficient than simply buying and holding.

Fluctuations are part of investing, and therefore part of financial planning. Rather than trying to avoid market dips, the secret is to understand how you will cope when (not if) they occur.

Herd Mentality

Herd mentality, or ‘groupthink’ means following the crowd.

Investment prices are driven by supply and demand. This not only relates to the underlying assets, but also to investor appetite for a particular fund or share. So if a particular stock falls out of favour, investors often believe they are taking the safe route by copying what everyone else is doing. But this causes the price to drop further, and those at the back of the queue will probably lose more than if they just stayed invested.

Cryptocurrency is an excellent example of this, as the wildly fluctuating values are based on little more than trends and opinions shared on social media.

Sometimes success comes with taking your own path rather than following the herd.

A financial adviser can help you to overcome biases and take an objective look at your financial situation.

Please don’t hesitate to contact a member of the team to find out more about financial planning.

5 Common Estate Planning Mistakes and How to Avoid Them

By | Estate Planning

Many people put off decisions around estate planning. It can be a complex area, as well as being a difficult subject to think about. But having an estate plan in place can help to reduce stress for your loved ones as well as saving on tax.

Below, we outline five common mistakes when it comes to estate planning.

Not Making a Will

Making a will is the most important thing you can do when it comes to estate planning. This is a legally binding document which outlines your wishes for your estate. It includes details of how you would like your assets to be distributed and who should be responsible for the administration of your estate.

If you die without a will, the rules of intestacy will apply. This means the court will nominate someone to deal with your estate – this may not be someone you would choose. Assets are then distributed in a strict priority order, starting with spouses and children – this depends on the value of your estate and where you are in the UK. If you aren’t married and don’t have children, your assets will pass to other family members. If you don’t have any living relatives, the Crown will receive your estate.

The rules do not account for unmarried partners, step-children, friends, or carers. They do not take into account your relationship with your family, for example, wishing to prioritise a niece or nephew over an estranged sibling.

Unless you put plans in place, there is also a risk that your children could be disinherited. If you die and your spouse remarries, their estate could theoretically pass to their new partner, and subsequently the new partner’s children. This can be avoided with proper estate planning.
Making a will is simple, inexpensive, and can easily be changed. It’s far better to have a basic will as soon as possible than to put it off.

Putting off Powers of Attorney

A Power of Attorney allows you to appoint someone you trust to make key decisions for you if you are no longer able to. This can include matters around property and finance as well as medical decisions, such as treatment and end of life care. You can appoint the same person to deal with both areas, but you don’t have to.

To be legally valid, your Power of Attorney must be registered with the Office of the Public Guardian. This is an important step, and must be done while you still have full capacity.

Without a Power of Attorney, the Court will appoint someone to deal with your affairs for you, who again, may not be someone you would choose. The whole process takes longer, which can cause delays in making financial or medical decisions.

A Power of Attorney can be made alongside your will and is simple to change at a later date.

Not Making Gifts in Your Lifetime

When you die, the value of your estate may be subject to Inheritance Tax (IHT). This is currently 40% of your estate value over the nil rate band (currently £325,000 for an individual or £650,000 for a married couple).

You can reduce this by giving away some of your estate during your lifetime. There are, of course, rules in place to deal with tax avoidance, for example making deathbed gifts to avoid IHT.

You can give away up to £3,000 per tax year, which is immediately outside your estate. You can also make gifts for special occasions as well as unlimited donations to charity. Larger gifts usually drop out of your estate after seven years (depending on the timing of other such gifts).

Given the limitations on gifts, the earlier you start planning, the more you can reduce your IHT liability. It also allows you to make gifts at the point your loved ones need it most.

Giving Away Too Much

Of course, you need to be careful to balance your own needs with the desire to reduce your estate. If you give away too much, too soon, you risk leaving yourself short of money later in life. This can cause problems, particularly if you need long-term care.

There are also situations where giving away assets can reduce the relief your estate can claim. If your estate includes a main residence, and you are passing this on to a direct descendant, you can use the residence nil rate band (RNRB) to reduce the value of your estate further. The amount is £175,000 (£350,000 for a couple), capped at the value of your property. If you gift the property, you could miss out on this relief.

If you give away assets, you need to be sure that you don’t require them for your own purposes. If you still use the asset or retain any benefit (for example, rental income), there could be tax consequences. It’s a good idea to seek advice if you are considering making large gifts.

Not Using Trusts Correctly

A trust allows you to set aside money or assets for your beneficiaries without giving up complete control. They are extremely useful in the right situation, but getting the balance right between tax-efficiency and flexibility can be tricky.

If you have a life insurance policy, it’s usually a good idea to place this in trust. This can help avoid delays, and as the money bypasses your estate, should not increase your IHT liability.

Pensions are also a type of trust, and should not be forgotten about when it comes to estate planning. A pension is highly tax-efficient, and it may be effective to use other assets first and preserve your pension for your beneficiaries.

Estate planning can be complicated, and it’s a good idea to seek advice, particularly if you have a large estate or complex family situation.

Please don’t hesitate to contact us on 01869 331 469 to find out more about estate planning in context to your wider financial planning.

State Pension Top Up Deadline Extended

By | Pensions

With the news that the Government have extended the deadline for filling any gaps in your National Insurance record, by making voluntary contributions, we wanted to revisit who should do this and the benefits.

Can I, and should I, boost my State Pension?

When the new State Pension was introduced from 6 April 2016, the Government also temporarily extended the normal six-year window which allows you to pay Voluntary (Class 2 or 3) National Insurance Contributions (NICs) to fill in gaps as far back as 6 April 2006.

The extension was initially due to end on 5 April 2023, but due to the volume of applications, this was extended to 31 July 2023. The Government have now issued a further extension to 5 April 2025.

Furthermore, they have announced that all relevant voluntary NIC payments will be accepted at the 2022-23 rates, right up until 5 April 2025.

You will no doubt have seen mention of this in the media over the last 12-18 months, with some articles claiming you can boost your pension by up to £50,000. This is, of course, the best case scenario, for someone topping-up ten years of NICs.

Should I do this?
The first step is to request a State Pension forecast and your National Insurance payment history. Both of which are available to download online, via your Government Gateway login. This will enable you to check that your NIC history is correct and that no eligible years have been mis-recorded.

If your State Pension forecast shows that you are already on track to claim £203.85 per week, this is the maximum or ‘full’ pension for 2023/24. You cannot increase your State Pension above the current ‘full’ pension of £203.85 per week.

The HMRC helpline (0800 731 0175 if you are not yet State Pension age, and 0800 731 0469 if you are already at State Pension age) has also proven to be very useful for several of our clients already, but do be prepared for a long wait to get through! The process has rightly proven very popular.

How much will I get?
This depends on your personal situation. However, in our experience the State Pension top-ups offer a very good, secure return. It’s always worth checking to see if you can increase your pension, and by how much, so that you can make an informed decision.

Things to consider before proceeding:

  • You may be able to claim NIC credits
    Some people may be able to claim credits, rather than buy them. For example, time spent as a carer, or if you’re on certain benefits.
  • Not all NIC years need the same amount of money to complete them, some will be cheaper
    For example, where you have worked a part year, and paid some NI in that year, the top-up required to complete that year will likely be lower than for a year where you didn’t pay any NIC at all.

     
    This is where the HMRC helpline can come in handy, advising you of how much a top up of a particular year will affect your pension.

  • Some years won’t count
    This is particularly relevant for years prior to 2016 and if you were a member of a ‘Contracted Out’ pension scheme, and already gained 30 years by April 2016. Again, the helpline will be able to tell you if this is the case.
  • If you’re self-employed, you could pay less to top-up
    The current self-employed rate of Voluntary contributions is £163.80 per year, where Class 3 is £824.20 per year. The rates for 2023/24 are higher, but, remember, the Government have confirmed the 2022/23 rates will apply for gap filling.
  • Not everyone will be better off by topping up
    If the additional State Pension from topping-up pushes you into higher rate tax, the benefit from the top-up will be reduced. Your pension will still be higher, but it will take you longer to break even.

If you are expecting to receive certain benefits in retirement, this may be reduced by increasing your State Pension, so you may not end up better off.

Invitation

The best place to start with this particular decision is with the Future Pensions helpline as mentioned above.

If you’d like to discuss this in context to your wider financial planning, get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.

You can call us on 01869 331469

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

Happy New Year!

By | Financial Planning, Tax Planning

Well, Tax Year anyway!

Following the recent Budget there are some changes to allowances and pension funding rules, which have now come into effect. Here, we provide a summary overview of the allowances and reliefs available this tax year.
 

Income tax

  • Most people are entitled to a personal allowance of £12,570.

    If your income is over £100,000 then you will see your allowance reduced by £1 for every £2 of income over £100,000. This means the allowance is lost completely lost once your total income is £125,140 or more.

    Put another way, for every £100 of income between £100,000 and £125,140, you only get to take £40 home – £40 is deducted in income tax, while another £20 is lost by the tapering of the personal allowance which effectively amounts to a 60% tax rate on income within this range.
  • The additional rate threshold has been reduced to £125,140. This means that more people will find themselves paying more income tax as a result. However there are ways to reduce your income tax, for example, making pension contributions, making charitable donations or investing in investments which provide income tax relief. The right combination will depend on your personal circumstances.
  • Marriage allowance – If you are a basic rate taxpayer and you’re married or in a civil partnership, you can transfer 10% of your personal allowance to your spouse or civil partner. When combined between a couple, this unused allowance offers an overall tax saving. However, there is a limit to how much can be transferred – this is currently £1,260.
  • Dividend allowance – The annual dividend allowance has reduced to £1,000. This will be further reduced to £500 in April 2024. There are no changes to the dividend tax rates.

Regardless of your employment position, it is important to ensure that you are on the correct tax code, otherwise you could be paying too much tax (or not enough). You can contact HMRC or your accountant to doublecheck.
 

Tax efficient investments

  • Individual Savings Accounts (ISAs) – ISAs are exempt from income and capital gains tax, which means they are a tax-efficient way to save. There are four types of ISAs available – cash ISA, stocks & shares ISA, innovative finance ISA and lifetime ISA. The annual subscription limit (for all ISA types combined) is £20,000.

    A few providers offer ‘flexible ISAs’ which allow you to replace withdrawals within the same tax year, in addition to your standard annual ISA allowance.

  • Growth-oriented unit trusts/OEICs –income tax rates are higher than the current rates of CGT, so it can be advisable, from a tax perspective for a higher/additional rate taxpayer, to invest in collectives geared towards capital growth as opposed to income.
  • Single premium investment bonds – Bonds (onshore or offshore) are non-income producing investments, so are useful investments to defer tax payable by use of the 5% cumulative allowance, ignoring any charges. This may appeal to you if you are a higher/additional rate taxpayer now, but you are likely to pay tax at a lower rate in the future, due to how the gains are taxed.
  • Enterprise Investment Scheme – an investment of up to £1 million (or £2 million provided anything above £1 million is in knowledge-intensive companies) can be made to secure income tax relief at 30%, with tax relief being restricted to the amount of income tax otherwise payable by the investor in that tax year. The relief can be carried back to the previous tax year. In addition, unlimited CGT deferral relief is available provided some of the EIS investment potentially qualifies for income tax relief.
  • Venture Capital Trust – offers income tax relief at 30% for an investment of up to £200,000 in new shares, again with tax relief restricted to the amount of income tax otherwise payable by the investor in that year. Dividends and capital gains generated on amounts invested within the annual subscription limit are tax free, so, again, these investments may appeal to higher/additional rate taxpayers.

EISs and VCTs are high risk, illiquid investments and may not be suitable for everyone. It’s therefore important to take advice from a fully qualified financial planner with experience in these areas before investing.
 

Capital gains tax

  • The Capital Gains Tax (CGT) annual exemption has reduced to £6,000, and will reduce again to £3,000 in April 2024. This will effectively mean that more people will find themselves paying CGT on their capital gains, making careful financial planning more important than ever.
  • If you have made capital losses in previous tax years, to carry forward against future gains, you should make sure you report them to HMRC – you have up to 4 years after the end of the tax year that you disposed of the asset to report the loss. This can either be done via self-assessment or by writing to HMRC.

Corporation tax

  • The 19% rate applies to the first £50,000 of profits and a marginal rate of 26.5% applies to any excess up to £250,000 (£50,000 @ 19% + £200,000 @ 26.5% = £62,500 = £250,000 @ 25%). The 19% rate does not apply to close investment-holding companies. So, for close investment-holding companies and companies with profits of more than £250,000, the rate of corporation tax is 25%. (Note, however, that the 19% rate can apply to a property letting company with profits of up to £50,000.)

    Your financial planner and/or accountant will be able to offer advice on tax-efficient ways to extract your company profits.

Pensions

  • The Annual Allowance has increased to £60,000 for most individuals and you can use carry forward for up to three years of any unused allowances.
  • For high earners the minimum tapered allowance has increased from £4,000 to £10,000, along with an increase in the assessment thresholds.
  • Similarly, the Money Purchase Annual Allowance has also increased from £4,000 to £10,000 providing scope for further savings if you have flexibly accessed your pension benefits.
  • Lifetime allowance – the Lifetime Allowance (LTA) charges have now been removed. This provides opportunities for those previously restricted by the LTA to recommence or increase their contributions. Those with Fixed or Enhanced protection can now make further contributions without impacting any tax-free entitlements.

    However, it has already been well publicised that a different future government may well attempt to reintroduce lifetime restrictions.

Inheritance tax

  • The freeze on the Inheritance Tax (IHT) thresholds remains in place and is expected to stay until 2028.
  • The current nil rate band threshold is £325,000 and the residence nil rate band is £175,000.
  • The residence nil rate band is tapered by £1 for every £2 where the total estate exceeds £2 million. If you are in this position, you might consider options to reduce your estate during your lifetime in order to reclaim at least some of the allowance.

Invitation

Interested in finding out how we can optimise your financial plan? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.

You can call us on 01869 331469.

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

Source: Knowledge: Year End Tax Planning (techlink.co.uk)