The November budget

The problem of having a deadline for publication is that life tends to throw up some new important information just at the wrong time. The chaos of the ‘mini-budget’ resulted in a new Prime Minister and Chancellor. The Budget on 17^th November was set to herald tax rises. So, what has been announced?

NOVEMBER – INCOME TAX

Tax thresholds have been frozen, save the additional rate of tax threshold, which now begins sooner, meaning that more people will pay 45% tax, starting at £125,140 instead of £150,000. What this means in practice for someone now brought into additional rate (earning £150,000) is that they pay 5% more income tax on their earnings above £125,140. If you earn £150,000 you would pay £1,243 more income tax as a result of this change, (£11,187 as opposed to £9,944) effectively £103.58 a month more. Whilst politicians talk of short-term pain, the projections show this measure for 5 years.

NOVEMBER – CAPITAL GAINS TAX

Capital Gains allowances have been cut substantially, reducing from £12,500 to £6,000 from April 2023 and then to £3,000 from April 2024. Trusts have a CGT allowance of half the personal allowance. So realising gains this tax year will be more effective than in future years.

As a reminder, this is the permitted gains on assets being sold with a 0% tax rate before being taxed at 10% or 20%, unless that asset is a second property in which case its 18% or 28%. So if you are a landlord, sell before April 5^th to maximise your allowances.

I had expected the rates of tax to increase in line with income taxes rather than the allowance being altered and mostly scrapped entirely. In any event, capital gains tax allowance reductions makes your annual ISA, Pension, VCT, EIS allowances all even more attractive, sheltering funds from CGT in different ways.

NOVEMBER- DIVIDENDS

The Dividend allowance has also been slashed. This will mostly impact those with a small business whereby family members or staff can have a share of profits (dividends) tax free. The first £2,000 of dividends are currently tax free, this will reduce to £1,000 from the new tax year and then £500 in the next ..

NOVEMBER – PENSIONS

It would seem that there are no changes, which is frankly a bit of a surprise. The annual allowance remains at £40,000 unless you have income over £200,000 when a reduced (tapered) allowance would apply. The Lifetime Allowance has remained in place. If you are an NHS employee, I cannot find anything in the 70 page statement to help you with your annual allowance problems and there is nothing about the tapered annual allowance. So, sadly, more senior doctors will likely reduce their NHS hours or otherwise face tax charges on income that they have not had. We can help crunch the numbers, but if anyone is in a position to ‘get it’, Mr Hunt is but seems to have chosen not to.

NOVEMBER – STATE PENSIONS

If you are receiving your State Pension, it’s going to increase by 10% in April. If you haven’t started taking yours, well you are also likely to have to wait until you are much older to get one. Everyone knows this is a political ‘hot potato’ and the younger generations are unlikely to receive a State Pension until at least 68 (and this will probably be increased in the announcement in early 2023).

NOVEMBER – FEELING FROZEN?

You are going to need to ‘let it go’ … that is – hopes of seeing the end of frozen allowances ending any time soon. The personal allowance, slice of basic rate and higher rate tax tiers were all frozen anyway, but the deep freeze has been extended by two further years. Due to inflation and rising salaries, this will in itself raise more tax. This is part of what critics call ‘stealth taxes’ – the sort you don’t really register (much like inflation eroding your cash) – you only tend to notice after a few years of going backwards.

The Energy Price Guarantee will be maintained through the Winter, limiting typical energy bills to £2,500, this will increase to £3,000 from April. It is generally expected that energy prices will remain high for the next 12 months. To be blunt, nobody knows because it all rather depends on the Russians. One point to note is that the energy savings you may be making now will likely continue as the Government intend to reduce energy consumption by 15% by the end of the decade. To put that into perspective, that’s about the same as making your use of energy in 10 months last a year.

PROPERTY

The British obsession with houses continues to be supported by Government policy. The tax when buying property (Stamp Duty Land Tax) was reduced in September doubling the first tier of SDLT with a 0% tax rate from £125,000 to £250,000. For First Time Buyers this is extended from £300,000 to £425,000. These measures will end on 31^st March 2025. If you are going to move or buy your first home and want to benefit from this fully, do so before March 2025.

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

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WHAT SHALL I DO ABOUT MY SHARES?

TODAY’S BLOG

WHAT SHALL I DO WITH MY SHARES?

First, let me be clear – I am not a stockbroker, I am not licensed to provide advice on specific shares. So, I cannot and will not advise the purchase of one share over another. What I can do is provide you with some generic information.

All proper investing will invest in shares. Today I am simply discussing investing directly into shares (i.e. you hold a piece of paper – that shows you have shares in XYZ company). The other way to invest in shares is via an investment fund.

ADVANTAGES OF SHARES

You can be specific about what you invest in. There are no ongoing charges for your shares if you hold them unless you do so via a trading platform which typically has monthly fees and specific minimums. You do your research, buy the shares, sell them when you want. Some provide a dividend (which is a taxable income and out of profits), some do not.

DISADVANTAGES OF SHARES

Your money does not go very far. Today at the end of June 2020. The share price of Morrisons is £1.90, Sainsbury’s £2.09 and Tesco £2.29 to name three well known companies in the supermarket world. So you have £10,000 to invest, excluding any stockbroker charges (which there will be – for each trade (a purchase or sale of a particular share) you want to create your portfolio which you call Supermarket Sweepstake. I will not go into how or why you select shares, there are many people offering “tips” for free or at a price for rationale and research, but let me say that after 3 decades I can assure you that over the remainder of your life neither I nor anyone else will be able to successfully predict the who and what, but will also fail to consistently, repeatedly outperform the market through their research, genius and luck. Not a soul.

Anyway, back to my daft Supermarket Sweepstake, you think Sainsbury’s will outperform (over what period and why??) the other two but are not so convinced that you put all your £10,000 in just Sainsbury’s so you buy £4,000 worth of shares in Sainsbury’s and £3,000 in each of the others. This results in the following portfolio (roughly).

1913 shares in Sainsbury’s
1310 shares in Tesco
1578 shares in Morrison’s

The above could be achieved with three trades or could be more than that if shares were bought gradually across a day or any other period. Every trade has a cost (and a tax).

I HOLD LOTS OF SHARES, SO I MUST BE RICH…

You hold “a lot” of shares, but you only hold them in three companies and in my rather daft example you hold them all in the food retail sector. This is an example of extreme concentration risk – just 3 actual companies, all doing the same thing, in the same sector, in the same country. If for any reason supermarkets cannot operate as normal, you will likely see a reduction in their value – or of course other competitors make their trading life rather harder.

Income from the dividends is taxed. If you sell the shares the gains are taxed (though the gain may be within your capital gains tax allowance).

WHY A FUND?

A fund, particularly a fund made up of the entire index, will hold all the shares in the index. If that is regional or specific (i.e. FTSE 100) then it will hold some of all those companies. A global index will hold the lot (pretty much). In the case of the FTSE 100, that is 100 companies, as for a global index – well thousands of companies.

The downside of a fund is that someone is managing it, ensuring that it sticks to its mandate. The cost of management can vary enormously, part of an adviser’s job is to select funds that are suitable for you and cost is an element of the criteria used. For example a good fund we use costs about 0.22% of £10,000 that’s £22 for the year most funds however charge much more and some charge a bit less. As the size of the fund grows the investment costs are more – because they are a percentage.

That said, a comparable stockbroker service is also managing the portfolio, they many be remunerated on trades (an incentive to constantly change stuff) or performance [or both!] – in which case they may be rewarded for high returns from highly concentrated holdings, but not penalised for low or negative ones… which leads to the inevitable conclusion by the nice gent in the suit to take quite a punt with your hard earned loot, no reason not to is there old chap?

DIVERSIFICATION

The main purpose of the fund is that is provides diversification – holding hundreds or thousands of companies as shares. Some will also hold other types of assets too, depending on what the fund is attempting to achieve.

Both the funds or directly held shares are subject to taxes – on gains and on income. A sensible thing to do would be to put these into an ISA – which is really nothing more than a wrapper that makes the contents tax free.

These days most stockbrokers will need a minimum of £250,000 to build a diversified portfolio of shares, but even then, it is likely that they will use funds. That is because it is hard to get the benefits of diversification without a reasonably large amount of money.

Diversification is really shorthand for “spreading risk” – adhering to the adage – “don’t keep all your eggs in one basket”. This helps dramatically reduce the likelihood of total loss. Holding shares in just three companies that all went out of business would be a total loss, the chance of every company going out of business across global stock markets – well that’s the apocalypse and you will not be worrying about your portfolio.

FINAL NOTE

I am not against you having a small amount of money to play with, an amount that you can afford to see disappear. You can sign up for any trading platform you like, do your research. My only tip is to stick to the industry or sector you know about (your own). Muck around to your hearts content, but do not show me your numbers or genius, it will fade. Everything reverts to mean (average).

I have never watched Supermarket Sweep but I did find this rather old clip from the US show. To my strange mind it is full of metaphors about investing and the mania some display about markets. At the end of this, you need to satisfy your own goals, not those of your peers, friends, markets, media or anyone else, its your life, it needs to be your plan.

Dominic Thomas
Solomons IFA

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