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  1. 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

  2. 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.

  3. 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.

  4. 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.


  5. Wants, Needs and Happiness

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    We live in a culture of wants and needs and we’ve been conditioned from an early age to place enormous value on material items — the fancy car, the big house, the designer clothing. It’s the brass ring many of us are constantly striving to attain and we often convince ourselves that once we get these things we will be happy.

    Short Term Satisfaction

    Think of the last exciting purchase you made, how long did that excitement last? A day, a week, a month? Odds are your zeal faded relatively quickly because the pleasure we get from most of our purchases is only temporary. When it goes away it is eventually replaced with a new want or need, which kickstarts the cycle back up again.

    This is the very reason you hear people say, “How come I have everything I ever wanted and I’m miserable?” It all comes down to one very simple fact: getting what you want may give you pleasure, but it doesn’t make you happy.

    Now this doesn’t mean you shouldn’t spend your money. Living a life of deprivation or becoming stingy with your finances is not the answer but you should be conscious and careful about where your pounds go.

    Building Blocks

    Every pound that you spend can be seen one of two ways. You can see it as just a small portion of your income that you are spending today or you can see it as a small step towards building something great for tomorrow. Just one pound a day saved in only 50 years will grow to be £500,000 at a 10% average return!

    The Little Things Add Up

    Consider how you spend your money on a daily basis. Do you make a routine trip to your local coffee shop? How often are you going out to lunch? Do you make a habit out after work?

    What value are these spending patterns bringing to your life? Odds are, not a lot, but by trimming wasteful spending you will find that you are in a position to make a significant shift in your financial health. The value derived from a more secure future can be substantially more rewarding.

    Big-Ticket Items

    Now consider the types of purchases you make on luxury items. How often do you shop online? Are you always after the latest and greatest piece of technology? What about the amount you are spending on clothes?

    To make these types of cuts, it’s imperative to be aware of why you are making any given purchase. Understanding where your needs and wants come from will allow you to exert more control over your emotions, and will ultimately help you make more conscious decisions of where to spend your money.

    Where’s the Value?

    When we make these kinds of decisions unconsciously we end up with lives, like the majority of people, who try to find fulfillment in all the wrong places while neglecting what really matters — your relationships, your health and your emotions. Not to mention, we often end up financially stressed, continually pouring money into items that add no real value to our lives.

    Before you make a purchase, it’s important to check in with yourself to see what you are truly after — a sense of joy, freedom, security or love — or to assess whether you have simply developed a habit of frivolous spending that needs to be scaled back.

    Measuring True Wealth

    Each of us finds a pathway we believe will lead to happiness, fulfillment or meaning and there are countless paths you can go down, but true wealth cannot be measured by how much money you have or the number of things you own, it comes from creating an extraordinary quality of life and only you can determine how much and what type of value a purchase will add to your life.

    So start to get smart about how you are spending your money, realign your habits with the goal of creating real value in your life. You may just be surprised by what happens.

  6. Unhealthy Attachments

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    Have you ever made yourself suffer through a bad movie because, having paid for the cinema ticket, you felt you had to get your money’s worth? Some people treat investment the same way.

    Behavioural economists have a name for this tendency of people and organisations to stick with a losing strategy purely on the basis that they have put so much time and money into it already. It’s called the “sunk cost fallacy”.

    Let’s say a couple buy a property next to a freeway, believing that planting trees and double-glazing will block out the noise. Thousands of dollars later the place is still unliveable, but they won’t sell because “that would be a waste of money”.

    This is an example of a sunk cost. Despite the strong likelihood that you’ll never get your money back, regardless of outcomes, you are reluctant to cut your losses and sell because that would involve an admission of defeat.

    It works like this in the equity market too. People will often speculate on a particular stock on the basis of newspaper articles about prospects for the company or industry. When those forecasts don’t come to pass, they hold on regardless.

    It might be a mining stock that is hyped based on bullish projections for a new tenement. Later, when it becomes clear the prospect is not what its promoters claimed, some investors will still hold on, based on the erroneous view that they can make their money back.

    The motivations behind the sunk cost fallacy are understandable. We want our investments to do well and we don’t want to believe our efforts have been in vain. But there are ways of dealing with this challenge. Here are seven simple rules:

    • Accept that not every investment will be a winner. Stocks rise and fall based on news and on the markets’ collective view of their prospects. That there is risk around outcomes is why there is the prospect of a return.
    • While risk and return are related, not every risk is worth taking. Taking big bets on individual stocks or industries leaves you open to idiosyncratic influences like changing technology. Think about what happened to Kodak.
    • Diversification can help wash away these individual influences. Over time, we know there is a capital market rate of return. But it is not divided equally among stocks or uniformly across time. So spread your risk.
    • Understand how markets work. If you hear on the news about the great prospects for a particular company or sector, the chances are the market already knows that and has priced the security accordingly.
    • Look to the future, not to the past. The financial news is interesting, but it is about what has already happened and there is nothing much you can do about that. Investment is about what happens next.
    • Don’t fall in love with your investments. People often go wrong by sinking emotional capital into a losing stock that they just can’t let go. It’s easier to maintain discipline if you maintain a little distance from your portfolio.
    • Rebalance regularly. This is another way of staying disciplined. If the equity part of your portfolio has risen in value, you might sell down the winners and put the money into bonds to maintain your desired allocation.

    These are simple rules. But they are all practical ways of taking your ego out of the investment process and avoiding the sunk cost fallacy.

    There is no single perfect portfolio, by the way. There are in fact an infinite number of possibilities, but based on the needs and risk profile of each individual, not on “hot tips” or the views of high-profile financial commentators.

    This approach may not be as interesting. But by keeping an emotional distance between yourself and your portfolio, you can avoid some unhealthy attachments.


  7. The Patient Principal

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    Global markets are providing investors a rough ride at the moment, as the focus turns to China’s economic outlook. But while falling markets can be worrisome, maintaining a longer-term perspective makes the volatility easier to handle.

    A typical response to unsettling markets is an emotional one. We quit risky assets when prices are down and wait for more “certainty”.

    These timing strategies can take a few forms. One is to use forecasting to get out when the market is judged as “over-bought” and then to buy back in when the signals tell you it is “over-sold”.

    A second strategy might be to undertake a comprehensive macro-economic analysis of the Chinese economy, its monetary policy, global trade and investment linkages and how the various scenarios around these issues might play out in global markets.

    In the first instance, there is very little evidence that these forecast-based timing decisions work with any consistency. And even if people manage to luck their way out of the market at the right time, they still have to decide when to get back in.

    In the second instance, you can be the world’s best economist and make an accurate assessment of the growth trajectory of China, together with the policy response. But that still doesn’t mean the markets will react as you assume.

    A third way is to reflect on how markets price risk. Over the long term, we know there is a return on capital. But those returns are rarely delivered in an even pattern. There are periods when markets fall precipitously and others where they rise inexorably.

    The only way of getting that “average” return is to go with the flow. Think about it this way. A sign at the river’s edge reads: “Average depth: three feet”. Reading the sign, the hiker thinks: “OK, I can wade across”. But he soon discovers the “average” masks a range of everything from 6 inches to 15 feet.

    Likewise, financial products are frequently advertised as offering “average” returns of, say, 8%, without the promoters acknowledging in a prominent way that individual year returns can be many multiples of that average in either direction.

    Now there may be nothing wrong with that sort of volatility if the individual can stomach it. But others can feel uncomfortable. And that’s OK too. The important point is being prepared about possible outcomes from your investment choices.

    Markets rarely move in one direction for long. If they did, there would be little risk in investing. And in the absence of risk, there would be no return. One element of risk, although not the whole story, is the volatility of an investment.

    Look at a world share market benchmark such as the MSCI World Index, in US dollars. In the 45 years from 1970 to 2014, the index has registered annual gains of as high as 41.9% (in 1986) and losses of as much as 40.7% (2008).

    But over that full period, the index delivered an annualised rate of return of 8.9%. To earn that return, you had to remain fully invested, taking the unsettling down periods with the heartening up markets, but also rebalancing each year to return your desired asset allocation back to where you want it to be.

    Timing your exit and entry successfully is a tough ask. Look at 2008, the year of the global financial crisis and the worst single year in our sample. Yet, the MSCI World index in the following year registered one of its best-ever gains.

    Now, none of this is to imply that the market is due for a rebound anytime soon. It might. It might not. The fact is no-one can be sure. But we do know that whenever there is a great deal of uncertainty, there will be a great deal of volatility.

    Second-guessing markets means second-guessing news. What has happened is already priced in. What happens next is what we don’t know, so we diversify and spread our risk to match our own appetite and expectations.

    Spreading risk can mean diversifying within equities across different stocks, sectors, industries and countries. It also means diversifying across asset classes. For instance, while shares have been performing poorly, bonds have been doing well.

    Markets are constantly adjusting to news. A fall in prices means investors are collectively demanding an additional return for the risk of owning equities. But for the individual investor, the price decline only matters if they need the money today.

    If your horizon is five, 10, 15 or 20 years, the uncertainty will soon fade and the markets will go onto worrying about something else. Ultimately what drives your return is how you allocate your capital across different assets, how much you invest over time and the power of compounding.

    But in the short-term, the greatest contribution you can make to your long-term wealth is exercising patience. And that’s where your adviser comes in.

  8. The Hedge Fund vs Warren

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    OK, we have all heard of hedge funds, but do we know what they are?  They are supposed to be the holy grail of investment success, where the best of the best managers mange money for the super wealthy? 

    Well, Warren Buffett the renowned Billionaire investor and CEO of Berkshire Hathaway, he believes that the investors would do better, just buying the market and not using active funds of any kind, here’s what he said in his 1996 shareholder letter:

    “Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net results [after fees and expenses] delivered by the great majority of investment professionals.” Warren Buffett 1996 – Shareholder Letter

    Warren believes this so much that, in 2007 he personally placed a very large $1 Million bet against a New York money manager Protege Partners, LLC.  The bet;

    “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.” 

    So, after 7 years of performance data, where do we stand in the race?

    Through the seven years, the S&P 500 index fund, is up 63.5%. That’s the portfolio carrying Buffett’s colours. Protégé’s five hedge funds of funds are, on the average—the marker the bet uses—up an estimated 19.6%. (The “estimated” takes into account that not all of the five funds have final figures for 2014).

    So, 70% of the way through this experience Buffett looks like he’s made the right choice, so if the best New York money managers can’t choose from all of the worlds best funds to beat the market, can you beat it, with the funds you have available to you?

    This was the sixth straight year that the contest has tilted in Buffett’s direction: Buffet’s shares were up 13.6% in 2014 and the average gain for the funds of funds was 5.6%. Only in the first year of the bet—which began in 2008, a year that was a train wreck for both the economy and the stock market—did the funds of funds win, so to speak. They were down, on average, only 24%. The S&P 500 plummeted by 37% that year!

    But, Buffett has, over the years learned to remove his emotion from investing, he stayed with the program, and didn’t try and time the market, or bail out in 2008.

    So, we’ll have to see how this concludes over the remaining 3 years, we’ll keep you updated.

    But, what about LEXO, how has Lexo compared to these results? 

    Well, it’s only fair to compare similar risk rated portfolios.  The S&P 500 is a 100% equity index, so this would be comparable to the Lexo 100 which is 100% equity – shown below at 100% Simulated, this is what we have.  Remember when looking at the below, the S&P 500 is an index, not a fund, so not fees/fund management charges have been deducted.

    Lexo vs S&P