A new tax year brings with it all its usual thrills and spills for personal finance junkies:
- Replenished annual ISA allowances to lock and load with your favourite asset allocation.
- A reset capital gains tax allowance, to enable another round of helpful defusing for those with unsheltered gains.
- Lowered rates of capital gains tax.
- A new £5,000 dividend tax allowance and a new savings allowance of up to £1,000. (Hurrah!)
- Higher tax rates for unsheltered dividends outside the allowance. (Boo!)
- Higher stamp duty rates for BTL purchasers. (Hurrah or boo, depending in most cases on whether you’re over 45…)
- Slightly higher personal allowances for income, including the long-awaited 0% on the first £11,000.
And that’s just the mainstream stuff. The UK tax code is around 10 million words long, so expect lots of hidden twists and turns.
(And you thought Game of Thrones
What about the Innovative Finance ISA?
Conspicuously stuck on the starting grid however like a Force India with an engine problem is the Innovative Finance ISA.
Back in the March 2014 Budget, the chancellor announced that peer-to-peer lending was to become permitted within ISAs.
By the Summer 2015 Budget this still wasn’t possible, but we now had a name for the vehicle that would eventually make it so – the Innovative Finance ISA.
The relevant Budget text read:
2.77 Extending ISA eligibility
The government will introduce the Innovative Finance ISA, for loans arranged via a P2P platform, from 6 April 2016.
Well, here we are in April 2016, and it’s still not possible to shield income in an ISA with the mainstream peer-to-peer lenders, although a few tiddlers have got their products away.
RateSetter warned customers of delays on April 1st in an email:
There has been a fair amount of press coverage about the “Innovative Finance ISA” launching in the 2016/17 tax year and as you know we are preparing to launch a RateSetter ISA so that you can enjoy the same interest rates and protection you achieve on RateSetter but in a completely tax free wrapper.
It is testament to the government’s enthusiasm for our product that they created this third ISA specifically to accommodate peer-to-peer lending.
Before a peer-to-peer platform can offer its own ISA, it must first become fully authorised by the Financial Conduct Authority (FCA) and also it needs to comply with rules set out by HMRC.
As you may know, RateSetter, as well as other peer to peer platforms, are in advanced stages of obtaining full authorisation – we cannot confirm a date yet but can confirm that it is progressing well.
A few days later I heard the same thing from Zopa:
In September 2015, we submitted our application for full authorisation to the FCA and have been working closely with them to progress our application. We will only be able to offer the Innovative Finance ISA after we have gained full authorisation.
Given the volume of P2P platforms requesting authorisation and a number of recent legislation changes, the majority of P2P platforms, including Zopa, will not complete the process before April 6th.
We are working with the FCA to be fully approved and ready to launch ISAs in the next few months. We’ll let you know as soon as we have further news around the date of our ISA launch.
Subsequent press reporting does indeed suggest that none of the major peer-to-peer lenders has yet been given the go-ahead.
According to ThisIsMoney, as of April 1st there were 86 firms still awaiting authorisation. Eight had received authorisation, of which four had revealed the details of their products:
Abundance, which specialises in renewable and ethical peer-to-peer loans for social and environmental projects, will provide a wrapper that lenders can put new investments into. They will at first receive 2 per cent for six months in a holding account until October when money can then be invested and could earn between 6 per cent and 9 per cent depending on the projects backed.
Crowd2Fund lets businesses seek equity, loans or issue bonds of between £10,000 and £1million, offering investors average returns of 8.7 per cent.
Crowdstacker, which handpicks small businesses looking for finance, will also offer a wrapper-style product. It offers lenders rates up to 6.8 per cent.
Funding Tree helps provide loans of between £10,000 and £1million. It hasn’t given an indication of the rate or type of product it will offer but previous loans have offered rates up to 17 per cent.
I can’t help noticing an alphabetical gist to the firms that have won approval. It seems crazy to speculate that the FCA is still working through their list alphabetically, but, well, on this (tongue in cheek) evidence I wouldn’t hold my breath if you’re waiting on Zopa…
Quite a few readers have asked for an article about Innovative Finance ISAs, and I know some were waiting on the vehicles before dipping a toe in the P2P water.
But given how this government seems to hold its focus group tests in public – only to alter or even reverse policy later – I’m going to hold off on saying more about Innovative Finance ISAs until they are fully out there in the wild.
True, from the emails above it seems pretty clear these new ISAs are coming – it appears to be just a matter of getting the paperwork done.
But I do wonder if there are any last minute hitches that might also be behind the delays. Let’s wait and see.
Stop or go?
The good news is that even after taking tax into account, the rates on offer at the likes of Zopa and RateSetter are much higher than you’ll get on cash – as of course you should demand, because the risks are much greater (and different) than with cash, too.
(Read my recent RateSetter article for a primer).
In particular, if you’ve already decided the risk/reward ratio is right for you, then I wouldn’t hang around waiting for the Innovative Finance ISA before picking up the £100 bonus that RateSetter is currently offering new customers1 – because who knows how long that bonus will last for, or how long the wait for the Innovative Finance ISA could be.
At least the new savings allowance should help shield your peer-to-peer income, depending on how much you’ve got saved in cash and other interest-paying assets outside of existing ISAs.
Beyond that it’s a case of watch this space.
- With a bonus paid to me, too, by the companies not by you, if you follow these links. [↩]
I hold corporate bonds but haven’t dabbled with P2P as the risk seems opaque. Maybe this will change but property yields and bond yields make sense, but P2P not so much.
On the plus side, my wife’s CGT allowance for the shiny new FY has now been used, and this funds 2/3rds of our new ISA allowances, so now I face the “drip feed or all at once” debate with myself, which is going to be even more lively given how Brexit could upset apple carts.
Gadgetmind I guess you’re trading the interest rate risk of bonds for credit risk of P2P. Corporate bonds – or indeed gilts -might not default but still lose money over a period if rates rise. P2P might outperform most corporate bonds even if a small enough % of them default, as long as the product is sufficiently diversified.
Will be interested to see if any P2P products are launched within a SIPP wrapper.
Although could be trickier to implement.
Lending money to people who you have never met who’ve filled in a form online and passed an online credit check with the loan administered by a private company with limited skin in the game themselves
What could possibly go wrong?
Neverland summarizes P2P very nicely.
Also P2P has limited upside, but high downside if defaulters snowball.
The more interesting points are how to adapt to the new tax rules. Previously I was deliberately putting dividend payers in my ISA and trying to make full use of my CGT allowance in the non-ISA trading accounts. However, as on average I should hope to now max out the CGT allowance, I need to put some dividend payers into the trading account as well to use the dividend tax allowance.
At the end of the year, if I am crystalizing gains to use the CGT, any stock I sell, but actually prefer to hold onto can be subject to Bed & ISA or Bed & Sipp.
On P2P, I have been using these platforms since before the financial crisis and have been making on average I’d estimate 300-500bp over cash for an asset that has been in practice extremely cash-like. (Caveat: I’m typing this on the tube after a wine enlivened evening out. So I may regret any detail in the morning!)
Over nearly a decade, that’s hugely significant.
On the other hand as I’ve said above and before and most of us appreciate, p2p is not cash. It has different and higher risks.
For me personally that’s best mitigated by limiting my total exposure to very low single digits per platform, though I’m comfortable with my gross exposure rising over time as the platforms prove themselves out.
If they were equal to “cash” with an FSCS guarantee they’d be paying far less over High Street banks. Risk. Reward. I have a half written post on this I should finish. 🙂
Regarding tax optimisation, yes, it’s getting harder than ever to suggest one size that fits all, or even 2-3 that fits most. I read an editorial a while ago by someone — Merryn SW perhaps — who quoted high net worth individuals saying they sincerely felt it was complicated because the authorities want it to be gamed (by the few I suppose). It’s getting ever harder to disagree.
Our 10% cash allocation is split between NS&I linkers (a couple each as we’re greedy!), a Santander 123 account, and a Barclays mortgage offset account that’s there for a teeny mortgage we took out to loan daughter money to buy her first house. None of it is doing anything special, but it’s all matching or beating inflation, and all is 100% backed by HMG. This cash is there to cover situations where markets take a huge dive and we decide to take nothing more than natural yield from other investments for a few years. In this role, the cash would last 5-6 years, which will bridge most bad periods. I wouldn’t trust P2P in this scenario.
Hmm, I have to decide what to do about my NS&I Linkers in a few weeks time.
The new certificates are “index-linking +0.01% (tax free)”. Sigh. Given you can’t even get them unless you’re rolling over existing certificates I’ll probably subscribe but ouch that’s miserable.
I’d take just the index linking TBH given it’s close to zero risk and is tax free. Index linked gilts are currently on negative yields to maturity, so you’re effectively paying HMG to index link most of your money.
Daughter OTOH is in her early 20s, and has just bought and rennovated a property, so doesn’t now really need much cash to hand. When her NS&I linker matures in May, I’m going to have to chat to her about where to go next with it. Ditto the LLPC she holds, which has done well regards both capital and income, but isn’t really that suitable going forwards given her age.
Yes, I think I agree. It’s not much of the portfolio and it’s wonderful from a diversification POV. Daughter — emerging market tracker? 🙂
Yes, I’m thinking of something racy for daughter, but she’ll need a lesson on risk first. Either that or I continue with the current system I use for wife and daughter of me handling their trading accounts as they forgot the passwords almost immediately after being told them. 🙂
Daughter should soon be a junior doctor (poor thing!) so won’t need to worry too much about pension, but I’ll encourage her to start S&S ISAs alongside. She did have cash ISAs in the past, but when the allowance went up to £15kpa, I wasn’t too bothered about letting the wrappers lapse.
Index Linked Saving Certificates still deliver more than the current Consumer Price Inflation measure even at “inflation” plus 0.01%
This is because they are linked to the old Retail Price Index inflation measure which produces an inflation measure reliably always 0.3-0.5% above CPI
This level of interest and inflation protection is simply not available on the open market
They used to be issued with annual premiums to RPI at about 1% a decade ago
When you compare this yield compression to the compression on savings accounts (c. 5-7% gross interest to 2%) its a no brainer to roll over to me
There was a brief re-introduction in 2011 which never re-appeared. If you redeem your index linked certificates its quite possible you might never get a chance to subscribe for them again
We “filled our boots” during the 2011 opportunity with five of them between three of us. Of course, in retrospect, we’d have been better in equities, but we did that too. 🙂
I put money into index linkers, about a dozen of varying amounts, when they were available and with annual RPI increases the total value should go over £100k sometime this year.
Every time one comes up to rollover time I look at the paltry interest element and think should I cash in. But then I think that even if RPI is only running at 1% I would find it hard to do much better elsewhere after tax as I already have Santander 123 accounts and I want to use my ISA allowance for equities.
And then there’s the peace of mind of knowing that when inflation eventually gets going again at least this part of my wealth won’t get hurt.
So I continue to stick with them.
My NS&I index linked certificate is earmarked as the cash element of my retirement portfolio. When it comes up for renewal I could cash it in and pay the lot into my SIPP, claiming tax relief at 40%. I’m anticipating rising inflation but that seems like a decent immediate return, even if I then bought index linked bonds in the SIPP. Am I missing anything obvious?
@TI said “Regarding tax optimisation, yes, it’s getting harder than ever to suggest one size that fits all, or even 2-3 that fits most.”
There has been a fundamental change in the past 6 years.
I think the real differentiator – particularly in the accumulation phase – is now down to understanding the UK tax code, anticipating change, then optimising for your circumstances.
Active vs passive investing (active effort does not equal incremental returns).
Active vs passive understanding of UK tax code (active effort = incremental returns).
I’ve just dropped down to a 4 day week due to changes to tax and pensions. My take home is slightly less, but more can go into my pension, and I save £20k (yes!) pa in tax.
Basically the extra day was pretty much going straight to the tax man, so sod them, the Laffer Curve is alive and well so someone else can pay off the deficit.
@gadgetmind — Well, as you know from my post at the time of the dividend tax hikes, I don’t blame you. I’ve just spent the bulk of the afternoon faffing around with accounting / VAT type stuff, utterly unpaid for doing so and so forth, while my PAYE friends in the offices while away the afternoon watching the new Star Wars trailer and swapping cat photos on Facebook. Okay, I exaggerate but you know what I mean. There *is* a difference, for non-personal service companies at least. And the recognition is getting whittled away in the tax code.
@JonWB — Interesting way of putting it. (I corrected your comment for you btw).
@nevermind — Ah, I’d temporarily forgotten about the RPI use benefit. Marginal but worthwhile and another tick in the box.
Very long-time readers might recall me suggesting they “run, don’t walk” to buy that last tranche of NS&I certificates back in 2011. I can’t get as excited about them here, in today’s different world, but not everything in investing is about excitement as we all know. (In fact very little should be). Scarcity value and their unique properties means as I say I’m virtually certain to roll my relatively small allocation, but I won’t be whistling a hearty tune as I do so. Like @Gadgetmind I’d have done *far* better in shares — and I expect the same will be the same for the next five years — but insurance isn’t a waste just because it doesn’t pay out.
Perhaps I’ll do a post on the whole conundrum, seems lots of people like discussing them. 🙂
I’m a big fan of Zopa (bias: I know many of the team there) and they have recently split their offering into three levels — a riskier Ratesetter-alike where you get all the bad debt exposure, a safer bank-a-like where access is instant and free and the middle ground which is 1% to sell but with the safety fund behind it.
I like this approach which has made it easier to stash the cash once you’ve filled up all the Santander you can eat. In particular I use it in a decumulation portfolio as the “final approach” to spending cash.
I remain, after a another solid year for gilts, firmly out of any other bonds.
Confession 1: I’m a “PAYE” person nowadays. The big change that flipped me to a 4 day week was the new pension taper that would have nobbled my pensions saving and forced me deep into 60%+ and 45% tax. With a 4 day week, I get to put the full £40k into my pension and get my full personal allowance.
Confession 2: I also watched the new Star Wars trailer at work this afternoon!
Yes, I’ll also roll over our NS&I linkers as I know they’ll be there when I need them. Or I might spunk them on a Tesla Model S with all the toys. One or the other!
Re the NS&I IL Certs :-
The Office for Budget Responsibility (OBR) towards the end of last year, estimated that RPI inflation will average 2.1% in 2016 and 2.8% in 2017. Since the forecast was made commodities have dropped further, which raises a slight doubt over those figures.
Seems difficult to believe in the present climate!
The CPI seems to be chosen as the headline figure to lull us all into complacency?
Interest rates generally are unlikely to rise as quickly as the OBR suggested figures, so we are hanging on to ours for now as inflation protection plus!
@gadgetmind — Haha, fair enough. Must admit I’m tempted by 6 weeks paid holidays and so forth, after this dividend tax hike. I just watched and enjoyed the SW trailer!
@Mathmo — Zopa seems to have thrown in the towel and followed Ratesetter to be honest. First the Safeguard fund, and now these accessible money options (a bit like Ratesetter’s monthly market) and of course no seeing your customers anymore and reading about how they’re going to spend the money you lend them on a motorbike. It’s the platform I’ve the most experience with, and I’ve still got money there. I may increase it with this instant access option. (I should finish my half-written post on their revamp, too! Basically I had a frenzy where I half wrote a bunch of P2P posts as I was going to do a special Innovative Finance ISA week. But events intervened, and only my recent RateSetter post got completed.)
@magento — I think you don’t really have NS&I linkers (or similar) because you’re trying to play the inflation forecast. You have them because they can protect you if *unexpected* things happen. They’re an insurance policy. 🙂
From memory CPI is structurally lower than RPI because of how the maths works as well as the components of the basket. On a train right now, but perhaps I’ll look into that in this NS&I article of the future I am drafting in my head all of a sudden. 😉
@Investor, Gadgetmind
The tax perks of a limited company versus being on PAYE are still huge once your revenue gets into the top 20% of earners and if you intend to retire before 55/58
Corporation tax = 20% and falling
Income tax = 40/45% + cliff edges for loss of child benefit/personal allowance/pension tax relief
Once you have enough in your pension such that the lifetime allowance becomes an issue, a limited company can be used to defer and lower overall income tax rates in the period before the pension is available if you keep it going with a bit of part time work
You can even claim corporation tax already paid back against losses in future years for a limited time period
Being on PAYE is like being a cow on a conveyor belt in a meat processing plant on its way to being a burger
Well, I reckon I’m in the top 1% of UK earners (and lifetime allowance will likely be an issue real soon) but I have no choice other than to be on PAYE as that’s how my FTSE listed employer works.
I don’t feel much like a cow, and I’ve run my own companies before (real ones, no tax avoiding service companies) and I’m sure I will again. PAYE certainly limits your options for tax avoidance, but we’re seeing more and more action being taken to equalise things.
@gadgetmind: I think the question in situations like that is whether it would have been logical to work the extra day any way even if the tax on the additional income was lower? Would getting to take home an additional, for example, 10% of additional pay that you don’t need really make it a better decision to work the day instead.
@JohnG – the problem is that my salary sacrifice is very tax efficient as my employer throws in the lion’s share of the NI saving, so hitting the pensions taper lost me a lot of that plus took away my personal allowance.. Not nice.
I’m not sure where my personal tipping point was, but see my pension nobbled and my tax bill soaring by £20k certainly did it for me.
I will be paying less tax this year than last because of the tax rises. This is how it usually works but HMG have to play politics rather than economics.
@TI and gadgetmind. Thanks for good discussion. On seeking EM exposure if your investment horizon is very long-term (say 30yr), would you then diversify away from it at a later stage? E.g. put a lump sum in EM now, then leave it and start feeding other portfolio buckets over time, say in a SIPP? With P/E around 11 EM has looked attractive, so this is the strategy I have embarked on. Europe at 17 and US at 26 seem overpriced and so I am very slowly feeding those without a lump sum base to start form, holding quite a bit of cash to increase regular contributions as and when prices come down a bit. How worried should I be about adverse selection in the EM index and poor corporate governance etc? Sorry for incoherence, writing this from quick tube ride, would welcome your thoughts
@gadgetmind
I seem to remember you are planning to retire in a couple of years at 55, so I think your tax planning considerations are pretty straightforward compared to people planning to retire earlier as you don’t have the issue of not being able to access a pension for several years to consider
40% of my investments are outside of pensions (ISAs, NS&I linkers, cash, unwrapped shares) so I could “bridge the gap”. However, I’m not in any great rush and would like to get another few more years of pension+ISA under my belt first. I also find my work challenging, and need to get structures in place to actually let me leave!
As for not being able to access the pension, we have another two years of rule changes to come …
@Gadgetmind
I think you actually just really like your job, which I envy you for
You don’t seem to like your country, your government or have a high opinion of much of the UK population, but you do seem to have a very high regard for the organisation you work for
Personally I’m so lazy that when I have enough money I will just turn stuff down en masse
No one ever died wishing they had spent more time in the office
Yes, I like my job, but I also like my days off and hobbies.
I like my country, just not in a jingoistic way, and I’m not blind to our issues and challenges. I also think the British are great as a people, but a huge swathe of us clearly didn’t pay much attention at school, haven’t gained any skills of any note since then, but want the moon on a stick.
And the problem with our government is that they have zero understanding of science and engineering, and do a good job of showing that their ignorance also extends to economics.
Or maybe I’m just a grumpy old man.
@William III
” On seeking EM exposure if your investment horizon is very long-term (say 30yr), would you then diversify away from it at a later stage?”
If it helps in any way, (forgive chipping in!)
We retired in 1992 and hold EM at about 8% of stocks. Have no intention of changing this exposure at any time. It has been a rocky ride, but we believe in diversification (fixed %s) and rebalancing through thick and thin.
We do however invest in EM through Investment Trusts which are income focused (useful in retirement when one cannot wait unduly long for capital gains to appear or not to appear).
One wrinkle : our exposure to stocks in total is value driven and will fluctuate as stock valuations fluctuate, so EM target in terms of total portfolio % , repeat portfolio %, will vary over time.
Trust that illuminates!
All Best
Me to young chum: “You seem to be doing well in this contracting lark. Why do you want to revert to being an employee?”
She: “Paid maternity leave.”
@William III – You write:
I wouldn’t be especially worried about this as an index fund investor. Emerging markets have delivered high returns in the past, and those problems were worse in theory then. You take the rough with the smooth and get the average return, as you know, with an index fund. Of course there will be some companies — or even countries — that you’ll wish hadn’t been in the index if you look at your returns in a few years, but that’s the price of massive diversification. I don’t believe that EM stocks are systematically rotten or that the indexes are fatally flawed. (And EM trackers beat most EM active stock pickers).
There are issues with EM though, which aren’t so different from our own more developed markets, just more extreme. For one, developing nations have hitherto managed to capture an additional share of the wealth generated by the growing GDP in the form of taxation, infrastructure costs, and cronymism, versus the returns that go to providers of capital like us. This seems to be some sort of ‘phase’ developing markets go through. It doesn’t impair returns to the point of unattractiveness, but it does make your returns lower than you might expect from say two decades of very fast GDP growth.
The other issue is people do systematically overpay for faster GDP growth in EMs. They then get lower returns, because other investors have already bid up the price. Getting in when sentiment is in the dumpster is helpful if you have a tactical bent to your investing, because of this.
Or else just average in over a couple of decades into a broad passive allocation (world equities, EM, government bonds etc) and don’t try to be too clever. That often can prove the smartest decision for many. 🙂
@TI & magneto: very useful thoughts, thank you. I’m conscious that there’s a strong case against timing the market, but at current prices on developed markets and the meagre forecast returns by Shiller, Bogle (not to speak of GMO) etc I’m tempted to stick with a significant stack of cash and only build the EM allocation for now. When prices become more reasonable I will complement with developed markets. The question is whether inflation will eat too much of my cash holdings in the meantime, although that currently doesn’t seem too much of an issue.
@william iii
I have a lot of sympathy for your arguments on valuations but there is rarely a good time to invest the market without the benefit of hindsight
The only *good* times to buy I can remember are when the *end of capitalism as we know it* was predicted
I would suggest just adopting a 50:50 bonds+cash : equity asset mix to reflect the reality of meagre returns and concentrate on earning more and spending less
@ William III
“I’m tempted to stick with a significant stack of cash and only build the EM allocation for now. When prices become more reasonable I will complement with developed markets.”
Deciding between different geographical regions by stock valuations is way outside the competence of this investor.
And raises some questions .
If we start with the Gordon Equation :-
DR (Market Return) = Dividend Yield + Dividend Growth
1. What DG do we assume for EM in general and for the other regions outside of EM?
Taking the equation a little further as per John Bogle et al :-
DR = DY + DG + PE changes + Currency Swings
2. PE changes if they mean revert, then only someone like author Meb Faber is likely to be able to provide a view! And is that reliable?
3. Currency Swings are surely usually unpredictable?
While happy to take a view on the absolute and relative valuations of the four main income producing Asset Classes (stocks/bonds/cash/real estate) over time, going a step further and varying the geographical allocations based on valuations is way beyond this investor!
You may well be right William about EM for no other reason than being overdue for it’s day in the sun. Who knows?
My vote use VWRL (Global) as a stocks core, then maybe add some regions as a little spice.
Cash is certainly very under-rated in this loose monetary uncertain world. The traditional solely Stocks + Bonds allocations may come in for tough times. Again who knows?
Good Luck
You live in a country where it rains a lot. You own an umbrella which has kept you dry in the rain for many years. There is a ten week dry spell. You know that umbrellas are no longer being manufactured and cannot be bought second hand.
Do you sell the umbrella because of the dry spell?