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  1. June Interest Rate Decision

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    An increase in interest rates could be nearer than anyone thought!

    Thursday’s meeting of the Monetary Policy Committee (MPC) of the Bank of England was expected to be a non-event. A Reuters poll of economists revealed that not one expected a move in base rates from the 0.25% set in the wake of the Brexit vote last year. They were all proved right, but…

    Of the eight MPC members, three external members voted for a rate increase. It was the first time since 2011 that there had been three votes for a rate rise – and that was when the MPC had nine members. The 3-5 vote was a shock to the market and gave a brief boost to sterling.

    The Bank’s statement noted that “CPI inflation has been pushed above the 2% target by the impact of last year’s sterling depreciation.  It reached 2.9% in May, above the MPC’s expectation.  Inflation could rise above 3% by the autumn, and is likely to remain above the target for an extended period as sterling’s depreciation continues to feed through into the prices of consumer goods and services.  The 2½% fall in the exchange rate since the May Inflation Report, if sustained, will add to that imported inflationary impetus.” That concern about over-target inflation seems to have been the reason why the trio voted for a 0.25% rate increase, despite recent evidence that growth is slowing.

    One of those voting for the increase, Kristin Forbes, was attending her last MPC meeting. The election hiatus means that her replacement has not yet been chosen. Neither has a replacement been named for Charlotte Hogg, the deputy governor who resigned in the wake of a grilling from the Treasury Select Committee. In theory Mr Hammond could name two new members in time for 3 August’s MPC meeting, changing the voting mix significantly. Even so, yesterday’s general assumption among commentators that rates would not rise until 2019 is now probably consigned to history.

    Across the pond, the US Federal Reserve increased its main short term rate by another 0.25% on Wednesday, taking it to a 1.00%-1.25% range. The Fed also set out the first steps to unwinding its bloated $4.2trn balance sheet, the result of its quantitative easing programme. The Bank of England still looks a long way behind…

  2. Marriage Tax Allowance – What Is It?

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    As you may be aware the Government has introduced a tax break called the Marriage Tax Allowance.

    The allowance, which came into effect from 6 April 2015, is available to couples who are married or in a civil partnership and enables a transfer of a proportion of their tax free personal allowance between them.

    The transferable amount for 2016/17 is set at £1,100 (10% of the personal allowance) and will change each year as the personal allowance increases.

    To be eligible to claim you must:

    • Be married or in a civil partnership,
    • One of you needs to be a non-taxpayer (which usually means earning less than the personal allowance),
    • The other person needs to be a basic rate (20%) taxpayer, and
    • You must both have been born after 6 April 1935 as there is a different tax allowance for couples where one partner is born before this date

    HMRC have stated, however, that to date fewer than 1 in 10 eligible couples have applied for the tax break. It is thought that this might be because many people simply aren’t aware of the new allowance or that it can be quite time consuming to claim for the tax break, which is worth £220.

    An application for the Marriage Tax Allowance is a straightforward process and once in place the election will remain until one of you cancels the election or your circumstances change e.g. because of divorce or you become a higher rate taxpayer.

    Where both partners have already filed a self assessment tax return, the claim to transfer can be made when completing their self assessment tax returns.

    Alternatively the non-taxpayer can apply online to transfer their allowance and HMRC will include the additional personal allowance in the partner’s tax code. Where the partner does not have a tax code, i.e. where they are self employed, the additional personal allowance can be included in their self assessment tax return for the year to reduce their tax liability.

    Should you wish to take advantage of this tax break go to https://www.gov.uk/marriage-allowance

  3. Care and the Conservatives – General Election 2017

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    With the General Election looming over us and the election polls ever-shifting, nobody knows which way the scales will tip on 8th June.  However, there have been some interesting topics for discussion raised in the recent weeks. As many will have seen in the recent press, care and the ‘capping’ of care costs is a hot topic for discussion on the Tories manifesto, not without the controversy to ensue, naturally. In this post, we will look at exactly what has been discussed, and what it may mean for us.

    What are the proposals?

    Our PM, Theresa May, has promised that her party will embed an absolute limit on the amount of personal savings that will be protected for individuals in receipt of care services. Theresa’s proposal is set to guarantee that each person in receipt of care will have, in her words, ‘the confidence to pass £100,000 of savings to their children’. The current limit being merely £23,250. As attractive as this sounds, the people were somewhat confused as to what exactly happened to the previously proposed £72,000 cap on care spends. This would have meant that the maximum an individual could have spent on social care in their lifetime was £72,000, had it not been scrapped.

    Following a dip in the polls, leaving the Tories only single figures over Labour, Theresa announced on Monday that there will again also be a cap on the amount of money an individual will pay for social care, with the intention that they will not end up spending ‘hundreds of thousands’. The figure on this cap remains undecided.

    Another key point to the Tories social care manifesto is that there will be a change to the way that domiciliary care is means-tested. The house will become an assessable asset and the payment calculation for people in receipt of care in their own home will consider this. The people who fall into this category will still receive the aforementioned benefit of retaining £100,000 of savings, and the spend cap. Although this means that more people being cared for in their homes will pay for their care, it is a promise of the PM that they will never be asked to move from their home, should it be over £100,000 and a debt raised against it. The home will, however have to be sold after the death of the owner to release the care debt, much the same as it is now.

    If you have any questions about this or other posts, please get in touch.

  4. Personal Allowance – Do I lose it if I earn over £100k?

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    The Personal Allowance is the amount of income an individual can earn before they start to pay Income Tax but it will be reduced and potentially lost altogether for those whose total income exceeds £100,000. The Personal Allowance (under age 65) is currently £11,000 but you will lose £1 of Personal Allowance for every £2 of Income over £100,000. Anyone with income over the £122,000 (£11,000 x 2) will lose their entire allowance.

    As a consequence the Marginal Rate of Tax for someone with income between £100,000 and £122,000 will be 60% (Tax at 40% on income over £100,000 up to £122,000 PLUS Tax at 40% on the loss of Personal Allowance up to £11,000). You can recover the Personal Allowance by reducing your income below the £100,000 limit. Apart from asking your employer to pay you less (not a sensible or popular decision, it may save Tax at 60% but you still lose out on the remaining 40%) the only viable option to consider is a Pension Contribution. Your Total Income is expected to be £112,000 i.e. you have £12,000 of income over the £100,000 and in effect you are losing £6,000 of your Personal Allowance.

    If however you invested a gross amount of £12,000 into a pension it would reduce your income to £100,000, thus restoring your Personal Allowance. The pension investment will qualify for Basic Rate Relief at source and so to invest a gross amount of £12,000 a pension would only cost you £9,600. You would then be eligible for a further 20% Tax Relief (representing the Higher Rate Tax Relief). This is claimed via your Self-Assessment Tax Return and you would end up with a Tax Rebate of £2,400. Overall it has cost you £7,200 to invest £12,000 into the pension. But in addition you will regain the lost £6,000 of Personal Allowance which gives you a further Tax Saving of £2,400 (£6,000 x 40%). It could therefore be argued that the cost of the £12,000 gross pension contribution is £4,800 (£7,200 – £2,400).

    Please contact us if you would like further information regarding the above.

  5. The New £1 Coin

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    With the excitement surrounding the issue of the new one pound coin, I wondered how much I would have today, if I had invested 10,000 of them into the FTSE All Share index when the pound coin was first launched.

    The one pound was introduced on 23 April 1983, when Lady Thatcher was Prime Minister, seat belts became mandatory for drivers and front seat passengers and the first episode of Blackadder was broadcast on BBC One.

    The FTSE All Share has returned a whopping 3000 per cent over this period, averaging 11 per cent a year, now considering this period covered the ‘dot-com bubble’ in 2000 and the Financial Crisis in 2007/8, it’s been a roller coaster of a ride for most investors, but a return you would ultimately be pleased with.

    Not all years have been great during this period, although the average return was 11 per cent, the worst one year return was almost minus 33 percent in February 2009 and the best was 47 percent in February 2010.

    After all the ups and downs in the market, how much would my £10,000 would be worth today?  £340,000 a very nice return for those who remained invested.

    What investor lessons can we take away from this?  Markets rise and markets fall, they repeat this again and again.  Investors are rewarded for their participation in the markets and the wise investor buckles up and sits tight.

  6. How much can I pay into my pension?

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    The maximum you can personally invest into a pension and receive Tax Relief on, is 100% of your salary subject to an Annual Allowance limit which is currently £40,000. Please note dividends are not classed as salary. If, as an example, you have a salary of £8,000 and dividends of £45,000 the maximum you can personally Invest is £8,000.

                 

    However, contributions that are made by your company into a pension for you are NOT restricted by your salary; your company can Invest the full Annual Allowance maximum of £40,000 and potentially more than this using Carry Forward (more on this later). Please note, you will need to satisfy what is called a ‘Wholly & Exclusively’ requirement, but as a Shareholding Director this should not be a problem.                                                                                                                                                                                 

    From a tax perspective, personal contributions into a pension (ignoring the contribution limits) would be made from your after tax income. The contribution would then qualify for Basic Rate Tax Relief at source and Higher Rate Tax Relief, if applicable, could be claimed via your Self-Assessment Tax Form. The deadline for a personal investment tax-wise is the end of the tax year.  Company contributions into a pension will be a tax deductible business expense and so reduce the amount of Corporation Tax your company pays. Such a contribution is also NOT subject to National Insurance. The deadline for a company investment tax-wise is your Company’s Year End which is likely to be different to the tax year. As mentioned earlier, your company can possibly invest more than £40,000 as you can Carry Forward any unused Annual Allowances from the three previous tax years. To be eligible for Carry Forward you must have been a member of a Pension Scheme during the Carry Forward years, although you do not actually need to have been making contributions. Before making any investment I would suggest that you get specific advice.

  7. Missing the online Self Assessment deadline could be costly!

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    Each year HMRC receives a number of unusual excuses from Self Assessment customers who didn’t complete their tax return on time. Below are the top ten excuses received for the 2014/15 tax year.

    1. “My tax return was on my yacht…which caught fire”
    2. “A wasp in my car caused me to have an accident and my tax return, which was inside, was destroyed”
    3. “My wife helps me with my tax return, but she had a headache for ten days”
    4. “My dog ate my tax return…and all of the reminders”
    5. “I couldn’t complete my tax return, because my husband left me and took our accountant with him. I am currently trying to find a new accountant”
    6. “My child scribbled all over the tax return, so I wasn’t able to send it back”
    7. “I work for myself, but a colleague borrowed my tax return to photocopy it and lost it”
    8. “My husband told me the deadline was the 31 March”
    9. “My internet connection failed”
    10. “The postman doesn’t deliver to my house”

    HMRC will accept reasonable excuses although may require evidence to support the excuse.

    Failing to submit and pay the tax owed will result in penalties. The penalties for late tax returns are: an initial £100 fixed penalty, which applies even if there is no tax to pay, or if the tax due is paid on time after three months, additional daily penalties of £10 per day, up to a maximum of £900 after six months, a further penalty of 5% of the tax due or £300, whichever is greater after 12 months, another 5% or £300 charge, whichever is greater.

    Note there are also additional penalties for paying tax late which is broadly, 5% of the tax unpaid at 30 days, six months and 12 months.

    Those who are submitting their 2015/16 Self Assessment return online for the first time will need to register for Self Assessment Online. Registering for online filing is simple, please see here.

    Alternatively, customers can now also submit their return via their Personal Tax Account – it only takes five minutes to sign up for an account.

  8. State Pension top up – Six Months Left to Apply

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    The Department of Work and Pensions (DWP) has recently issued a reminder to all those who have expressed an interest in topping up their Additional State Pension by up to £25 per week. The option to make Class 3A Voluntary Contributions applies to individuals who attained their State Pension Age (SPA) on or before 5th April 2016, i.e. individuals who receive, or will receive, their State Pension under the old rules.

    Why It Might Be Worth Considering

    It has been possible to make the Class 3A Voluntary National Insurance Contribution (NIC) payment since October last year. When the Government announced the details of these earlier, they stated that the rate offered would be in line with the market. However, even when they became available it was not possible for a healthy individual to secure a pension annuity paying the same level of income as achieved from paying Class 3A NICs. However, since then, annuity rates have been falling and then, post BREXIT, nose-dived.

    So, for an individual aged 66, to secure an income of £1,300 p.a. with a 50% spouse’s pension that is index-linked would cost over £46,900, according to the MAS site on 28th October 2016.

    To obtain the same level of income a Class 3 would cost £21,775 based upon the DWP calculator run on the same date.

    In simple terms, the Government offer, which was generous when it was launched has, due to the changes in the annuity market, become very attractive.

    It should be noted that securing a taxable pension of £1,300pa or £1,040 after 20% income tax would take almost 21 years to break even, taking the 66 year old to 87 – this exclude the indexation of the pension income and also the loss of growth on the £21,775 investment.  This represents an annuity income of almost 4.8%.

    However, it’s worthy of consideration!

  9. Donald Trump and the market reaction

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    In one of the biggest surprises in modern election history, Donald Trump has emerged as the President-elect and will take office in January. While some are overjoyed and some are dismayed, the markets are decidedly unhappy.

    As of this writing, the markets are reacting negatively to a new president that ran on a pro-business, low regulation platform (among many other things). The reason is quite simple. The market first and foremost wants a stable environment and greatly dislikes uncertainty. Love him or hate him, Trump is bringing considerable uncertainly to the table.

    As the numbers came in and it appeared Trump may win, the DOW futures, which provide an indication of where the market may open, were down over 800 points. As of this writing, the pull back was paired to approximately 400 points, indicating a more than 2% drop at the market open. In the short run, we expect the futures to pull back to more modest losses as reason sets in. A market drop of a few percentage points is likely. We expect volatility will rule the day and likely go on for a few weeks as President-elect Trump begins to articulate his priorities, build and announce his team, and set an agenda for his first hundred days.  Should the market drop more than a few percentage points, we expect to be aggressive buyers and will be looking for opportunities across all markets.

    Over the long run, we expect the markets to become indifferent to a Trump presidency. History has made it clear that market performance is not correlated to which party is in power.

     

    The bottom line is that the markets care about only one thing, and that is earnings. Every stock is priced to reflect its potential future earnings. If a company has a good earnings outlook, its stock will reflect the earnings potential. If a company’s earnings are expected to decline, the stock price will adjust downward. Now, many things impact future earnings. Let’s take McDonald’s as an example. If McDonald’s sets the expectation that same-store sales and profits will rise because of a popular new menu being tested in small markets, the stock price will likely increase to reflect the expectation of higher future profits. If, instead, McDonald’s looks like it may lose sales because consumers trend towards other new fast food and fast casual restaurant concepts, then we would expect its stock price to decline to reflect the new outlook.

    Many other things impact earnings. If interest rates are higher, then the borrowing costs of corporations are higher, cutting into their profits. High energy prices can be bad news for some companies like the airlines, and good for others like drillers. And on and on and on.

    Presidents exert far less influence over markets than most believe. Yes, things like unemployment, tax policy and regulations can impact corporate earnings and therefore stock prices, but they are pieces to a much bigger puzzle. In the end, they are greatly outweighed by the success of the company itself and by far bigger issues such as interest rates.

    The most important takeaway is that over the long run the stock market cares about only one thing — expected earnings. And the good news is, we all happen to be living in a time where our global markets are made up of the greatest companies to ever exist. There is more innovation and technological advancement taking shape now than at any time in our history, and that has a positive impact on earnings. As a group, over time, these great companies have really only done one thing — go up. Some presidents give it a nudge up, others a nudge down, but at the end of the day, earnings prevail and the world’s greatest companies have found a way to persistently earn larger profits. That leads us to the most important chart of all. The market doesn’t really see blue or red, only green. Regardless of your political persuasion, corporate earnings have only gone up over time, and the market has followed.

  10. Dividends Vs Salary

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    In light of the 2016/7 dividend tax changes, business owners are to reconsider the detail of their dividend v salary choices. If we look at the situation where the income in question falls above the upper earnings limit/higher rate threshold, the advantage of dividends remains, but is reduced (as the Chancellor intended):

                                                                   Salary                    Dividend
    Gross profit                                         £1,000.00                       £1,000.00
    Corporation tax @ 20%                               N/A                        (£200.00)
    Dividend payable                                          N/A                          £800.00
    Employer’ NIC @ 13.8%                    (£121.27)                                N/A
    Salary                                                      £878.73                                 N/A
    Employer’ NIC @ 2.0%                       (£17.57)                                 N/A
    Pre-tax amount                                     £861.16                         £800.00
    Net to 40%/32.5% taxpayer                £509.67                         £540.00
    Net to 45%/38.1% taxpayer                £465.73                         £495.20

    However, remember that to reach this stage, at least £4,193 of employee NICs will have been paid.

    The abolition of the 10% tax credit gives dividends another advantage over salary/bonus in that gross income is kept down as the table shows:However, remember that to reach this stage, at least £4,193 of employee National Insurance Contributions (NICs) will have been paid.

    Gross income and gross profit cost to produce £1,000 net of tax and employee NIC income

    Tax rate + NIC                           Salary                                  Dividend
    Salary/Dividend                Income   Profit Cost           Income     Profit Cost 
    (above allowance)                 £                 £                          £                £
    20%+12%/7.5%                   1,470.59    1,673.42               1,081.08     1,351.35
    40%+2%/32.5%                   1,724.14    1,962.07               1,481.48     1,851.85
    45%+2%/38.1%                   1,886.79    2,147.17               1,615.51     2,019.39

    The smaller gross equivalent achieved by paying dividends is of increased importance when the (unindexed) thresholds for child benefit tax, phasing out of personal allowance, tapered annual allowance, etc are considered. Also significant is that the gross profits cost of the dividend route is less than the salary alternative for each tax rate.

    As a general rule, dividend payments are directly proportionate to shareholdings, which means the dividend or salary choice can become impossible to make when there is a mix of shareholdings and total remuneration targets.

    Dividend payments rather than salary may have adverse effects where tests are generally salary-related, eg mortgage borrowing capacity. However, the issue of lost S2P no longer arises in the world of the single-tier state pension.

    When considering the alternative of a pension contribution, of course, this is only feasible if the individual does not need the money for expenditure. If this test is passed, then the next question is whether a contribution with full tax relief is possible in the light of the tapered annual allowance, reduced lifetime allowance and any transitional protections in place. If none of these are a constraint, then the pension contribution is a completely tax-free exercise at the point of employer payment of the contribution.

    The simplest way to consider the end value is to ignore any investment return and assume a full pension is drawn, ie 75% of the contribution attracts (retirement) marginal rate tax and the other 25% is tax free. Thus, for example, a higher rate taxpayer receives a net £700 (.75 x £1,000 x .6 + .25 x £1,000) per £1,000 of contribution. The corresponding figures for basic and additional rates are £850 and £662.50.

    Comparing numbers at this stage starts to get complicated because of the dividend allowance and assumptions about how any dividend drawn would be invested (remember there is a £20,000 ISA limit from 2017/18). For a basic rate taxpayer, there is only limited advantage (via the 25% tax-free element) until the dividend allowance is exhausted. Higher and additional rate taxpayers will see more benefit, particularly if their marginal rate falls in retirement.

    For those aged 55 and over, there is another avenue to consider in terms of drawing pension benefits rather than dividend/salary as a source of income and making employer pension contributions to ‘compensate’ the pension fund for the drawn benefits.

     

With investment, your capital is at risk. The value of your portfolio with Lexo can go down as well as up and you may get back less than you invest. It is important that you understand the risks. Lexo aims to provide information to help you make your own informed decision. It does not provide personal advice based on your circumstances. If you are unsure, please seek personal advice from Lexington Wealth.

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