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What caught my eye this week.

I am not holding my breath for the Spring Budget on Wednesday. The current occupants of Downing Street may be intellectual giants versus the LEGO figures that preceded them. But low expectations can’t work miracles in the real world.

The UK economy is stagnant. The lunatic solution to our national woes has made things worse. The populace is still under the cosh from the cost of living squeeze at the low-end and a growing tax burden for the rest of us. I guess the richest are alright – with interest rates plateauing and markets bouncing back – but there’s a limit to how much a wealthy elite can pay for everyone else.

Some of this is cyclical. Things aren’t much better elsewhere, outside of the US. Perhaps the best thing chancellor Jeremy Hunt could do is sit on his hands and tell us to hang on in there. We’re too frazzled for more drama on the economic front. And I’d prefer they stopped fiddling with ISAs and pensions.

It seems I’m not alone in craving some stability. As Chris Giles wrote in the FT this week [search result] Hunt inherited political as well as fiscal handcuffs from his bungling predecessors:

The irony is that Truss’s most concrete economic legacy is to give economic radicalism a bad name.

Languishing with just 1% average annual economic growth since 2007 compared with 2.5% in the previous 17 years, the economy is crying out for reform, starting with this Budget.

[But…]

Were a government to show radicalism here, opponents would soon raise the ghost of Liz Truss as a weapon against it. UK taxes are not only rising but becoming more complicated, with tapers leading to extreme rates as child benefit, childcare subsidies and personal allowances are removed from the rich. Many of these have arisen because of the focus on whether changes are progressive or regressive.

Truss was right to attack knee-jerk thinking along these lines in September 2022 — what matters is the overall impact of redistribution, not individual effects. But her incompetence in voicing a sensible economic argument prevents other politicians from taking a similar stance. None could withstand the association of those ideas with Truss.

Her failure, and her naive policy positions, will undermine sensible budgetary reform in the UK for years to come.

I suppose something must be done, though. Hunt can’t just whip out a copy of Piketty from of his dispatch box and put his feet up.

Don’t panic!

To that end Simon Lambert offers a wish list in This Is Money on sorting out the UK’s messy tax system.

Abolish the personal allowance taper above £100,000 and the Child Benefit tax trap. Scrap stamp duty or cut it to a flat 1%. Peg student loans to a proper measure of inflation. Unfreeze the tax thresholds.

It’ll all cost money, but I agree it’s more sensible than knocking 1% off income tax or national insurance.

You probably do too. But that’s why we’re not politicians, I suppose.

If we were politicians then we’d read headlines like Britain For Sale: The country’s biggest firms are being picked off ‘one by one’ as foreign predators pounce – and we’d see not a symptom but an opportunity.

As I wrote on X, UK companies aren’t going cheap because of the lack of extra tax breaks.

Listed British companies are cheap and vulnerable to overseas takeovers than they were because the pound is still down eight years after the Referendum, global fund managers rightly decided the UK was going through a political moment of madness and stepped aside, and our domestic economy hasn’t done anything good to change their minds.

We were promised Singapore on the Thames. They gave us Walmington-on-Sea.

And instead of putting their hands up and admitting we made a terrible mistake, we get renewed talk of a Dad’s Army ISA.

This is all as predictable as it is ill-conceived.

Never mind that a Great British ISA would encourage a home bias that UK investors have only just shaken off. Or that it would enshrine another no-no – encouraging the tax tail to wag the investment dog, as the saying goes.

I don’t think it’ll actually happen, though the chance to slap the Union Jack on something can never be discounted these days.

Even the platforms have warned against it. They’d normally welcome all the sweeteners they can get.

But if we must must have more ISA complications, then it had better be an additional ISA. Not an unhelpful disincentive on private investors putting their money into global markets, by restricting how they can invest the existing £20,000 ISA allowance.

Put that light out!

What we really need is for these tax wrappers to be set in stone, and the annual limits indexed to inflation.

Perhaps they might be usefully reviewed once every 5-10 years. But not every six months! We are trying to plan for our lifetimes with our personal finances. Not for the electoral cycle.

The uncertainty around the Lifetime Pensions Allowance is a case in point. Hunt sensibly scrapped it last year. But Labour – presumed to be the government in waiting – says it’ll bring it back.

How are people supposed to make life-changing decisions about their pensions in this light?

Returning again to the FT:

…some advisers are recommending their clients crystallise excess funds to protect against a future tax charge, but with no guarantees. Wealth manager Tideway Wealth is advising clients […] to crystallise ahead of any election and ideally before April 5. After that date there are some changes to pension death benefits which you may want to avoid by doing the crystallisation before then.

Or then again, maybe they shouldn’t? The article is full of caveats and on the other hands and rightly so.

Pension are complicated enough, without adding a Wheel of Fortune angle to the legislation.

Remember these are savings amassed over 30-40 years that are meant to last for decades more to come. They should not be subject to the last-minute whims of politicians of any stripe.

Ho hum. For a more sober roundup of the announcements Hunt could make next week, head over to Which.

Let’s see where we stand by the end of play Wednesday.

[continue reading…]

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Augmented reality [Members]

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A recurring theme of my Monevator missives is investing is as fickle as fashion, rock and roll, and the wavering appeal of the mullet haircut.

Of course it’s easier to see causation in stock market trends than in music – or even economic cycles.

This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.
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UK tax deadline: how to make use of all your tax allowances post image

The tax year runs from 6 April to 5 April the next year. This means the most crucial UK tax deadline occurs in April.

That’s because there are various annual allowances and tax reliefs you need to make the best of to legally mitigate your income tax bill and to stop excessive taxes sapping your investment returns.

And most of these run on the basis of ‘use it or lose it’ by 5 April.

No good moping in June that you should have filled your 2023-2024 ISA allocation by 5 April, but you were too preoccupied by the Six Nations rugby!

No point cursing when you pay £500 in capital gains tax in July because you didn’t defuse it in March!

Of course you know this. You’re the sort who reads Monevator.

But it’s all too easy to overlook something.

We’re all only human. For now at least.

So while we wait for our A.I. overlords to steal this job from us too, here’s a checklist of what you need to think about as the UK tax deadline draws near.

Follow the links in each section to go deeper.

ISA allowance

ISAs shelter investments from tax.

The annual ISA allowance is the maximum amount of new money you can put each year into the range of tax-free savings and investment accounts that comprise the ISA family.

The ISA allowance for the current tax year to 5 April is £20,000.

You cannot carry forward or rollback this ISA allowance. What you don’t use in the tax year is lost forever.

ISAs are a superb vehicle for growing your wealth tax-free. But the rules are fiddly – seemingly made up by a bureaucrat with a grudge against mankind.

My co-blogger wrote the definitive guide to the ISA allowance.

Pension contributions annual allowance

There is a limit to how much money you can contribute to your pension in a given tax year while still receiving tax relief on those contributions.

This is currently £60,000. It is sometimes referred to as the pension annual allowance.1

Saving into a pension is mostly a tax-deferral strategy. That’s because you’re eventually taxed on pension withdrawals, unlike money you take out of an ISA tax-free.

In theory this makes ISAs and pensions equivalent from the perspective of tax.

In practice though, the fact that you can also draw a special lump sum from your pension tax-free gives pensions an edge in tax-terms – albeit at the cost of locking away your money for years.

Weigh up the pros and cons of each tax wrapper. We think most people should do a bit of both.

You can reduce your marginal tax rate by making pension contributions, if you can afford to go without the money today. Those on higher rate tax bands in particular should do the maths.

Personal savings allowance

Under the personal savings allowance:

  • Basic-rate taxpayers can earn £1,000 per year in savings interest without having to pay tax.
  • Higher-rate taxpayers can earn £500 per year.
  • Additional rate taxpayers don’t get any personal savings allowance.

Back when interest rates were very low, these savings allowances seemed quite generous.

But rising rates have changed everything. Even interest on unsheltered emergency funds might take you over the personal savings allowance and see some of your interest being taxed.

Redo your sums. Higher rate tax payers might look into holding low-coupon short duration gilts instead. Recently these have offered a lower-taxed alternative to savings interest.

Dividend allowance

As of 6 April 2023, the annual tax-free dividend allowance was reduced to £1,000.

It’ll halve again from 6 April 2024 to £500 for the next tax year.

Dividends you receive within the tax-free dividend allowance are not taxed. But breach the allowance and you’ll pay a special dividend tax rate on the rest, according to your income tax band.

You can avoid the whole palaver by investing inside an ISA or pension.

Capital gains tax allowance

Everyone has an annual capital gains tax allowance, or ‘annual exempt amount’ in the lingo of HMRC.

This allowance is £6,000 until 5 April 2024.

Alas the allowance will then be halved to £3,000 from 6 April 2024. After that it will be frozen.

Capital gains tax is levied on the profits you make when you sell or transfer most assets. These assets include everything from shares and buy-to-let properties to antiques and gold bars.

You can shield your gains from capital gains tax by investing within ISAs and pensions. Go re-read the relevant bits above if you skimmed them!

EIS and VCT investments

You can also reduce your taxes by investing in Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS).

These vehicles are mostly marketed at wealthy high-earners for whom the large income tax breaks are attractive.

But be aware that these tax reliefs come with all kinds of risks, rules, and regulations.

VCTs

VCTs are venture capital funds run by professional managers who make investments into startup companies.

Somewhat quixotically, however, VCTs don’t even pretend to be trying to deliver high venture-style returns for investors.

Instead they aim to return cash via steadier tax-free dividends.

You can invest up to £200,000 a year into VCTs. You must hold them for at least five years to keep your 30% income tax relief.

Fund charges are invariably expensive, and the returns mostly mediocre – especially if you back out the tax reliefs.

EIS

EIS investing is even riskier. Qualifying companies are usually very young, and many investors buy into them via crowdfunding platforms rather than professional fund managers.

The quality of these EIS opportunities is extremely variable, and information usually scanty.

And while there have been a few big crowdfunded winners, the majority do poorly and often go to zero.

If you’re a captain of finance who buys Lamborghinis before breakfast, you may already know you can put up to £2m a year into EIS investments.

Again, you can knock 30% of your EIS investment amount from your income tax bill – and there are other reliefs too should things go wrong.

You must hold EIS investments for three years to qualify for the tax relief.

Most people shouldn’t put more than fun money into EIS or even VCT schemes, in our opinion. Certainly not unless they’re very sophisticated investors or getting excellent financial advice.

Check in on your tax band and personal allowances

The rate of income tax you pay depends on your total income from all sources. This includes salary, interest, dividends, pensions, property letting, and so on.

You add up all this income to get your total income figure.

You then subtract your personal allowance from the total to see which tax bracket you fit into.

Everyone starts with the same personal allowance, regardless of age:

  • For 2023/24, the personal allowance is £12,570.

Your personal allowance may be bigger if you qualify for Married Couple’s Allowance or Blind Person’s Allowance. But it’s smaller if your income is over £100,000. 

For England, Wales, and Northern Ireland, the income bands after deducting allowances are currently:

Income Tax Rate 2023/2024 2024/2025
Starting rate for savings: 0% £0-£5,000 £0- £5,000
Basic rate: 20% £0- £37,700 £0- £37,700
Higher rate: 40% £37,701-£125,140 £37,701-£125,140
Additional 45% rate £125,141 and above  £125,141 and above

Source: HMRC

Note: If your non-savings taxable income is above the starting rate limit, then the starting savings rate does not apply to your savings income.

Scotland has its own income tax rates.

As we’ve seen above, there are further allowances and reliefs for income from certain sources – such as dividends and savings – that can reduce how much of that particular income is taxable.

You can also take steps such as making additional pension contributions or having a spouse hold certain assets to further reduce your taxable income or the highest rate of tax you pay.

Don’t make the UK tax deadline into a crisis

Scrambling around to exploit these allowances before the tax year ends is not only stressful – it’s also financially suboptimal.

If you had cash lying around that you might have put into an ISA earlier in the year, for example, then it could have been earning a tax-free return for months already.

But don’t blush too hard if you find yourself in this position.

Most of us are similar, which is why we wrote this article – and why the financial services industry bombards us with ISA promotions every March.

Try to automate your finances to invest smoothly and intentionally over the year.

And remember that April also brings warmer weather and longer days. Life is about much more than money and taxes!

Save and invest hard, take sensible steps to mitigate your tax bill, and enjoy life like a billionaire on whatever you’ve got leftover.

  1. Very high-earners are subject to a much-fiddled with taper that reduces their allowance. It is reduced by £1 for every £2 someone earns over £260,000, including pension contributions. []
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Our Weekend Reading logo

What caught my eye this week.

Exciting news! Well, exciting as measured on our patented Government Bond Excitement Scale, anyway.1

The Financial Times reports that retail investors can now buy brand new gilt issues on the primary market, thanks to an initiative between government-appointed dealer Winterflood Securities and two online retail platforms – Interactive Investor and Hargreaves Lansdown.

The FT says that:

The platforms have started accepting orders for a seven-year gilt that will be issued on Wednesday 28 February with a coupon of 4 per cent. Retail investors will be given the average price of the auction and will not have to pay any dealing fees, unlike for gilts bought through platforms in the secondary market.

Some sites are saying this is the first-time that ordinary oiks like us have been able to buy gilts direct, but I don’t think that’s correct.

You definitely used to be able to buy gilts from the Government’s Debt Management Office. And I’m sure I recall reading that you could also once get them from other places too, from NS&I to the Bank of England – and even the Post Office?

Could any readers even more ancient than me confirm (Increasingly hapless Google isn’t showing me anything about buying gilts from Ye Olden Times of more than a few years ago.)

Soft launch

I haven’t seen anything on the two platforms themselves about how direct gilt buying will work.

An article from FI Desk quotes Hargreaves Lansdown outlining a summary of the process. But I can’t find the same on the site itself.

I’m sure the FT isn’t hallucinating, Chatbot AI style, so again, if you did put an order in please tell us all how it went in the comments below.

Assuming everything works fine, then buying gilts direct will hopefully become just another standard bit of kit in our investing armoury.

There are circumstances where buying gilts new and holding them until they mature is just the ticket. Being able to do so without fees would be welcome.

Shouting “buy, buy, buy!” as you rub shoulders with the big, swinging bond dealers in the primary market will remain purely optional.

Membership update

The Monevator membership massive continues to swell. We’re now within a dozen sign-ups of our initial target!

Hopefully waverers will join us soon. I think we’ve proven we’re sticking around, nearly a year in…

On that note, a reminder members can read all of our previous Mavens and Moguls missives via the ‘tagged’ archives:

Having recurring membership revenue at our backs makes it so much easier to commit to Monevator for the long-term. That’s especially true as our churn rate (cancellations) is very low.

Thank you for that too! I know this is partly because you’re signing up to support all our work on Monevator, not just for the premium articles. It’s appreciated.

The other relief is the technology – Stripe payments, subscription handling, and premium site access – has gone extremely smoothly.

However I am still occasionally donning my customer support hat:

  • Cookie monsters: If you log-in as a member but still can’t access members articles, try deleting your cookies. Also turn off ad blockers for Monevator (the site is ad-free for members anyway). And maybe try clearing your cache.
  • Premium emails: The numbers tell me a very few members are not email subscribers. In most cases this happens because you previously cancelled a Monevator email subscription. If you would like to get member posts by email and you don’t, try resubscribing. Be sure to look out for the system’s opt-in confirmation email.
  • Bug busting: Finally, at least one member did that but a glitch meant they were only getting the free emails, not the members-only ones. If that’s happening to you, let me know by replying to this email or via the contact form. We can get it sorted.

Again, huge thanks to the several hundred of you supporting this site as members.

It’s the only long-term sustainable future for Monevator, and I believe for most other quality niche media. Every member counts.

Besides, we don’t want my FIRE-d co-blogger The Accumulator’s Werther’s Originals budget to be entirely at the mercy of sequence of returns risk, do we?

Have a great weekend!

[continue reading…]

  1. This scale runs from ZIRP-ishly somnolent at the low end to Mini Budget Mayhem at the peak. []
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