Commentary

This is my second article in a week long series on the key personal tax changes that came into affect in April 2008. For the others, please see the introduction to 2008 tax changes.

10% tax rate abolished

Sunday saw the scrapping of the 10 per cent starter rate (also called the 10p rate) for the first £2,230 of taxable income. The move was introduced in conjunction with a reduction from 22 per cent to 20 per cent on the basic rate of tax on income of up to £36,000 a year.

While everyone with taxable income will be due to pay more tax on the lower portion of their earnings because of the 10% band’s abolition, those on better salaries won’t notice because they’ll gain more from the cut from 22% to 20% than they’ll lose on the 10% band scrapping.

The lower-paid will notice, however. The Institute for Fiscal Studies has said a total of 5.3 million households will see their take-home pay fall as a result of the change, particularly people earning between £5,200 and £18,500. (When your earnings are greater you’ll start to benefit more from the basic rate cut to 20% than you’ll lose on the abolishing of the lower 10% band, while those earning less than £5,435 don’t pay income tax at all).

You can see the Goverment’s website for a detailed picture of personal tax allowances and rates.

Why is a Labour Government taxing the poor?

The Government argues it will make up the shortfall for the lowest paid and vulnerable with child tax credits and other state handouts; people over 65 get higher personal allowances, for instance.

That’s done nothing to stop a row erupting, driven by an unlikely alliance between David Cameron and the more right-wing media, and Labour MPs and other leftwingers who baulk at tax hikes for the poorest workers. There is even confident talk of getting the abolition overturned.

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In gloomy accord with Nationwide seeing UK house prices falling across every single region for the first time in 30 years, Halifax has now released monthly figures for March estimating UK house prices have dropped 2.5%. Some areas are down twice that.

House prices have now fallen year on year. In March 2007, Halifax had the average UK house price at £194,094. For March 2008 it’s down to £191, 556. (Halifax doesn’t highlight the fact, instead focusing on three month rolling averages to record a small year on year gain.)

Key data from the Halifax report

• House prices fell by 2.5% in March. Prices in Quarter 1 were 1.0% lower than in 2007 Quarter 4. House prices in March were 1.1% higher than a year earlier.
• The biggest rises were in Greater London (1.6%), East Anglia (1.4%) and East Midlands (2.2%).
• There were price falls in a number of regions, with the biggest falls in West Midlands (-5.0%) and Wales (-4.7%).

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This is the first in my special five-part series entitled Five big boring tax changes that will make you richer or poorer in 2008/09. For the others, please see the introduction to the series.

From April 6th 2008, ISA rules for UK residents change as follows:

• Your annual total ISA allowance rises to £7,200, and the stupid ‘maxi’ and ‘mini’ ISA distinction is abolished.
• Instead, you can get a cash ISA and/or a Stocks & Shares ISA.
• You can invest from £0 to £3,600 in a cash ISA during the year, and the balance (up to your total of £7,200) into a Stocks & Shares ISA.
• Personal Equity Plans (PEPs) held from the 1990s are reclassified as Stocks & Shares ISAs.
• You will be able to convert cash ISAs into Stocks & Shares ISAs in the future, but not vice-versa.

Why you should use ISAs to save tax

ISAs (Individual Savings Accounts) are a UK investor’s best friend – arguably better than personal pensions. You can hold loads of different types of assets in them, including shares, cash, investment trusts, unit trusts, and bond funds, and you don’t have to pay extra tax on the income you receive in them. Nor do you pay on capital gains on investments held in an ISA when you sell.

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Today is the last day of the UK tax year. Hurrah!

Fair enough, the end of the tax year can’t really compete with this afternoon’s Grand National, the 172-year old steeplechase that will be watched by 600million viewers worldwide. But paying closer attention to your taxes will almost certainly leave you richer than betting on Shed a Tear for Gordon at 100-1.

I admit I took far too long to get interested in tax, in as much as I am ‘interested’ now, which isn’t very. But I belatedly realised that it’s pointless spending hours on my investing, let alone working hard for a wage, only to give away lots of my earnings through paying needlessly large amounts of tax.

Some of the tax-related moves I’ve made since that lightbulb moment include:

• Being sure to use my full ISA allowance each year (I wish I could go back to the early years of ISAs and PEPS when I didn’t do this!)
• Favouring dividend income over cash savings, except for my emergency funds (dividends are taxed more favourably than cash in the UK)
• Buying AIM shares, which attracted a lower-rate of tax if held for two years
• Trying to use at least some of my Capital Gains Allowance each year, to ‘defuse’ long-term tax bills
• Investing in VCTs, which give an income tax rebate and tax free dividends
• Putting my freelance earnings through a properly organised Limited Company

Tax changes in 2008/9

If you’re looking to begin planning your finances more tax efficiently, you’ve picked an interesting year to start; there are some reasonably big changes to look out for in this new tax year.

To mark this, I’ll be looking at UK tax changes over five articles.

My ‘Five big boring tax changes that will make you richer or poorer in 2008′ series will start with a summary of the newly revised ISA rules. If you don’t think ISAs are for you, make sure you read this article since nearly every saver in the UK should use ISAs.

In full, the exciting schedule of posts will cover the following major changes to the UK tax regime:

1. Annual ISA allowance rising to £7,200 a year
2. Scrapping of the 10% starting rate of income tax
3. Reduction of basic income tax rate from 22% to 20%
4. Capital Gains Tax to be charged at a flat 18%
5. AIM shares’ tax advantage being effectively abolished

Each post will link to at least two off-site resources, so you can read up further if you want to.

Those are the main changes coming in with this new tax year that I think UK-based Monevator readers should look out for, but there are lots of fiddly adjustments, too, such as the usual annual raising of the higher-rate tax band to compensate for inflation and so on. The Government’s own tax information page looks pretty comprehensive if you want to research further.

This series is a bit of an experiment for Monevator, so it’ll be interesting to see how many of you splendid folk tune in every day to read the posts. To help you remember, please consider subscribing via RSS or email.

More evidence that house prices are really falling comes from the Nationwide building society, in its latest official house price index.

While it tries to draw attention more to annual figures in the accompanying commentary, which are still very much up, the quarterly figures for January to March 2008 are dreadful. House prices haven’t fallen across every region of the UK like this since the early 1970s:

A few points:

• The negative spin would be that just as the bubble had spread out across the whole of the UK (instead of it being only London and the South East that went crazed, as in previous years), this time it’s bursting everywhere.
• If you were more bullish, you might say the uniformity of the falls reflects the impact of lenders making mortgages more expensive, rather than any particular changes in demand…
• …but still, doesn’t that drop in Northern Ireland of 10% have all the hallmarks of a bubble bursting?

You can download the first quarter 2008 figures from Nationwide as a PDF, or just the figures for March.

Stock markets have been falling for months, led by a collapse in confidence in the financial system and plunging bank stocks. In the UK we’ve seen Northern Rock crumble, while in the US the investment bank Bear Stearns lived up to its name after jitters led to rumours which led to a run on its assets, ultimately forcing it towards bankruptcy and into the arms of JP Morgan.

I happened to watch some of Washington’s investigations into the Fed-backed buy-up of Bear Sterns on Bloomberg yesterday. The CEOs of both Bear and JP Morgan were there to account for themselves, sitting side-by-side as if in some slow bit of a Shakespearian tragedy. (You can read JP Morgan’s testimony over on Forbes).

I’ve also watched Fed chairman giving evidence in recent months defending his attempts to alleviate the blockage in the credit markets, and his deep cuts in interest rates.

What’s all this mean, apart from that I need to get out more?

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If you invest in the stock markets and recently you’ve had to check your portfolio with a stiff drink, at least you’re not alone. According to the FT:

Stock markets finished their worst quarter in more than five years on Monday with further losses as investors continued to favour less risky assets.

The losses have seen many equity markets enter bear market territory – a fall of 20 per cent from recent peaks – over the last three months as a result of deepening fears about a US recession and continued tensions in credit markets.

For the UK’s FTSE 100, the S&P 500 index in the US and the pan-European FTSE Eurofirst 300, this was the worst quarterly performance since the third quarter of 2002, when accounting scandals at Enron and WorldCom sparked a global equity sell-off.

Of course, if you’re buying shares for the long-term than this is good news, although I agree it doesn’t always feel like it. Cheaper is better, remember?

In particular, Japan now looks seriously under-valued. The Nikkei 225 Average lost 2.3 per cent on the day, and finished at 12,525.54, down 17.4 per cent on the quarter. It was up at 18,000 just a year or two ago, and around 40,000 at its late 1980s peak.

The trouble with Japan is companies pay very low dividends, which makes it impossible to construct a dividend-based portfolio. This means you have to sit around hoping the index goes up again, with no income in-between. An expensive waste of time, recently.

Ireland is falling. The US is plunging. After 15 years of house price growth and five years of house price bubble, is the UK housing market aksi turning downwards? Will Elvis finally be spotted on the moon?

Prices are certainly stalling, with a drop of 0.4% in London last month according to the Land Registry. Not much after the stupid and socially divisive rises of recent years, but a start for those who’ve been astonished by their resilience.

Property indices never plunge suddenly in the UK; in previous downturns at least, they’ve more been chipped away at, like rental tenants wearing down a once-pristine buy-to-let flat. If prices do fall substantially, it’ll be through 0.5-1% a years (and with some positive months), not via a quick plunge back to sanity levels. (If you want to see the last five year crash in slow motion for yourself, you can download full house price data going back decades from HBOS.)

What’s more significant I think than the slight price wobble is that mortgage lending is being reigned in. If a banker is somebody who will lend you an umbrella when it’s sunny and then ask for it back when it rains, our banks see a monsoon ahead.

Now, a reduction in mortgage lending has previously been a great indicator of UK house price falls. But previously, such as in the late ’80s crash, that’s been because demand has dropped as people don’t want to buy houses any more. This time, mortgage supply is being constrained by banks trying to cut back on lending, either because of the risk or because of a lack of finance, even as they’re overrun by new customers who would have previously gone to the effectively neutered Northern Rock. So who knows how it will play out.

A further interesting new bear point concerns remortgaging. Nobody thinks about this in normal times as anything other than a formality and a chance to cut costs. But this time around, some buyers coming off very keen fixed or discount rate deals who have little cash are finding they are unattractive to the lenders offering lower rates. As a result, the rate they can remortgage is a sharp step upwards.

In extreme cases, the more unappealing mortgage holders might struggle to find a mortgage at all, or at least not one without punitive and unaffordable interest payments, which would then mean they’d have to sell their homes at the prevailing market price.

You don’t need to be the Governor of the Bank of England for the words ‘vicious circle’ to spring to mind.

House price falls are now the consensus view

When even an estate agent starts predicting 15% falls, we’re in new territory. After years of calling the market wrong and looking like a Wally (it was a word fashionable back when I first turned bearish on property… ok, slight exaggeration!) I’m wary of putting my cojones on the line, even now. But it really does look like the fat lady might be loosening up for a bit of shrieking.

How far will they fall? By my reckoning London house prices are 40-50% overvalued. Nominal falls might be partially masked by inflation over a period of years, but 25% or so lower from here by the time we reach the trough would seem entirely possible.

A quick update to my post of last week discussing Zopa rates rising because of the credit crisis. Rates have now come down - my main lending offer to A* customers is now out of the ‘Zone of Possible Agreement’ (ZOPA), which in English means people can get such better rates from other Zopa lenders that they’re unlikely to call on my money.

I would have to drop my rates down to around 8.25% to re-enter the ZOPA, which I’ve decided not to do for now. In these riskier times, I want some extra security from this sort of peer-to-peer lending, so I’m going to leave my money offered at that current rate and hope for another cut in supply in the weeks ahead.

Zopa sensibly pays you an okay interest rate on money sitting in your account, so you don’t have to rush. It’s a lot less than what I could get from actual Zopa borrowers, but this isn’t the time for hasty moves I feel.

So there you go. Gold has fallen, the stock market is up, and Zopa is possibly signaling the credit crisis is abating. It’s certainly proving an interesting new barometer to keep an eye on.

Apparently there’s still £30 up for grabs through Zopa’s affiliate scheme for new members, but do check if you decide to sign up, as the small print would seem to contradict this. If anyone from Zopa is reading, you might like to update those details?