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Economic Review February 2023

Economic Review February 2023

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You can download this update here

Interest rate peak may be approaching

Last month the Bank of England (BoE) announced another hike in its benchmark interest rate but hinted that rates may now be nearing a peak, as the tide in its battle with inflation begins to turn.

Following its latest meeting held at the beginning of February, the BoE’s nine-member Monetary Policy Committee (MPC) voted by a 7–2 majority to raise Bank Rate by 0.5 percentage points to 4.0%. This was the tenth consecutive increase sanctioned by the MPC and took rates to their highest level in over 14 years.

The minutes to the meeting noted that ‘considerable uncertainties’ around the outlook remain and that risks to inflation are ‘skewed significantly to the upside.’ However, they also stated that updated MPC projections show ‘inflation falling back sharply’ from current elevated levels, with the headline rate expected to dip to around 4% towards the end of the year.

Commenting after announcing the MPC decision, BoE Governor Andrew Bailey cautiously acknowledged that price rises have begun to edge back. Mr Bailey said, “We’ve seen the first signs that inflation has turned the corner. But it’s too soon to declare victory just yet –inflationary pressures are still there.”

The latest official inflation statistics also suggest the headline rate is now on a downward path. The Consumer Prices Index (CPI) annual rate – which compares prices in the current month with the same period a year earlier – fell to 10.1% in January. This represents the third successive monthly decline since CPI inflation hit a 41-year high of 11.1% in October.

Although analysts do still typically expect the MPC to sanction at least one more hike, there does seem to be a growing consensus that the high point in the current interest rate cycle is approaching. The next MPC meeting is due to conclude on 23 March.

 

Bank of England predicts shallower recession

Updated economic forecasts published last month by the BoE suggest the UK will enter recession this year but that the downturn will be less severe than previously feared.

According to the latest economic growth figures released by the Office for National Statistics (ONS), the UK narrowly avoided entering recession at the end of 2022. Despite monthly data showing the economy shrank by 0.5% in December, growth in the previous two months resulted in an overall growth rate of zero across the final quarter of last year.

While this figure is only a first estimate and may therefore be revised, either up or down, it does currently show the UK avoided a second successive quarterly contraction which would have met the technical definition of a recession. Analysts, however, still expect further economic weakness this year – CBI Lead Economist Ben Jones, for instance, commented, “We may have avoided a technical recession late last year, but we probably won’t avoid one this year.”

The BoE’s latest economic assessment also suggests the UK will enter recession during the coming months, although their revised projections imply any downturn will be ‘much shallower’ than previously envisaged. The Bank now expects the economy to shrink by 0.5% during 2023, significantly lower than the 1.5% contraction forecast in November, with the recession expected to last five quarters rather than eight as previously predicted.

Survey data released towards the end of last month has even raised hopes that the UK might actually avoid recession altogether during the first half of this year. The preliminary headline figure from the S&P Global/CIPS UK Purchasing Managers’ Index jumped to 53.0 in February, up from 48.5 the previous month. This is the first time since July that the reading has been above 50, the threshold which indicates growth in private sector output.

 

Markets (Data compiled by TOMD)

On 27 February, Prime Minister Rishi Sunak and European Commission President Ursula von der Leyen announced a new agreement had been reached on post-Brexit trading arrangements for Northern Ireland. At month end, investors were digesting the trade deal between the UK and the European Union. 

In the UK, the FTSE 100 hit the 8,000 milestone for the first time in mid-February, as concerns of a global recession began to ease. Shares were supported by the release of better-than-expected inflation data. The blue-chip index moderated to close the month on 7,876.28, a gain of 1.35% in February. The FTSE 250 ended the month up 0.25% on 19,903.28, while the FTSE AIM closed out the month on 859.37, a small monthly loss of 0.97%.

In the US, the NASDAQ closed February on 11,455.54, a loss of 1.11%. The Dow Jones index closed the month down 4.19% on 32,656.70. In Japan, the Nikkei 225 closed February up 0.43%, on 27,445.56. Japan equities were supported at month end by gains in the Machinery, Precision Instruments and Electrical / Machinery sectors. On the continent, the Euro Stoxx 50 closed the month on 4,238.38, registering a gain of 1.80%.

On the foreign exchanges, the euro closed the month at €1.14 against sterling. The US dollar closed at $1.20 against sterling and at $1.06 against the euro.

Brent crude closed the month trading at around $83 a barrel, a loss of 1.77% over the month. Gold closed the month trading at around $1,824 a troy ounce, a monthly loss of 5.16%. The gold price has been negatively impacted in the month following the release of strong economic data, fuelling expectations of more interest rate increases.

 

Index                              Value (28/02/23)                 Movement since 31/01/23

 

FTSE 100                        7,876.28                                  +1.35%                               

FTSE 250                       19,903.28                                +0.25%                               

FTSE AIM                      859.37                                      -0.97%

Euro Stoxx 50              4,238.38                                  +1.80%                               

NASDAQ Composite  11,455.54                                -1.11%                               

Dow Jones                    32,656.70                                -4.19% 

Nikkei 225                    27,445.56                                +0.43%                                                                                           

 

Retail sales rebound unexpectedly

Official data has revealed a surprise increase in sales volumes during January, although more recent survey evidence does suggest the retail outlook remains challenging.

According to the latest ONS data, total sales volumes in January rose by 0.5%, as shoppers sought to take advantage of New Year sales promotions. ONS said discounting helped lift sales at online retailers as well as jewellers, cosmetic stores and carpet and furnishing shops, although growth was also partly driven by an increase in fuel sales as prices at the pumps continued to decline.

Data revisions, however, saw December’s figure fall more sharply than previously reported, with updated data showing a drop of 1.2% from November rather than the originally estimated 1.0% decline. Darren Morgan, Director of Economic Statistics at ONS, commented, “After December’s steep fall, retail sales picked up slightly in January, although the general trend remains one of decline.”

This challenging environment was also highlighted in the CBI’s latest Distributive Trades Survey, with retailers reporting broadly unchanged sales volumes in February while expecting sales to fall this month. CBI Principal Economist Martin Sartorius said, “Whilst retail sales volumes were largely unchanged in the year to February, firms remain pessimistic about their business outlook.”

 

Chancellor receives pre-Budget boost

The latest public sector finance statistics revealed an unexpected budget surplus giving Chancellor Jeremy Hunt a little more leeway as he prepares to deliver his Spring Budget.

Figures released by ONS showed that UK public sector net borrowing (the gap between the country’s overall income and expenditure) returned to a surplus of £5.4bn in January. This figure, which was boosted by the highest self-assessed Income Tax receipts since records began in 1999, was significantly better than economists had been expecting.

As a result, total government borrowing across the first ten months of the current fiscal year now stands at £117bn. While this does still represent a large shortfall by historic standards, the figure is just over £30bn lower than the Office for Budget Responsibility had predicted when it produced forecasts for the Chancellor’s Autumn Statement in November.

This data does therefore appear to provide the Chancellor with a little more wiggle room as he sets out the tax and spending plans he will deliver in the Spring Budget on 15 March. Mr Hunt, however, has played down any suggestions of significant tax cuts recently saying, “It is vital we stick to our plan to reduce debt over the medium term.”

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.

 

All details are correct at the time of writing (01 Mar 2023).

 

Financial health is financial wealth.

If you want to be financially healthy, please book an initial meeting and let’s discover if we can help you
Call us on 01332913006

 

Love your independent financial adviser

Love your independent financial adviser

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This Valentine’s day you may not be automatically thinking of your finances. Hopefully you have something more interesting to do on 14th February than plan your pension! But mid-February is a great time to build a relationship with an independent financial adviser. In fact we think there are 5 perfect reasons to make a date with the Sheldon Flanders team this month.

We will help you plan for your future

You may receive your state pension later than you think and it might be considerably less than you expect. So if you work with us, the first conversations we have will be about your goals and your plans. When do you want to retire and what do you want to do when you get there? Fewer and fewer of our clients are planning to go from full time work to complete retirement. The majority have some kind of plan to transition between the 2. Maybe that’s reducing from full time to part time hours. Or selling the business but staying on in a non-executive capacity for a year. All of those steps have a financial implication, and we can help you plan those out.

We will help you retire this year

Ok we may not be able to guarantee this, but if you are in your mid 50s and have been saving into a pension for some years, this may be an option. Why not have a conversation and find out if this could be a reality for you?

We’ll save you the work of researching the market

The advantage of working with an independent adviser is that we have an overview of the market. We keep up to date with the vast range of products on offer and we do the research so you don’t have to. We also keep up to date with the ever changing landscape of tax allowances, the regulations around pension contributions and inheritance tax thresholds. So you can be assured that we will find the best solution for you, whatever your circumstances.

We’ll ensure that you can make a positive impact with your money

We know that increasingly our clients are asking intelligent questions about where their money is invested. They want to know if it is making a difference in the world. Social responsibility is more important than ever to many people. For every new client when we research suitable investments for them, we recommend sustainable investments. We will explain these funds clearly to you when we present our recommendations, and are always happy to explain any aspect of the fund and their features. We can focus on investments in, for example, sustainable technology or we can ensure particular industries or countries are excluded from your portfolio.

We care about your small business and your family

We are an independent Midlands based business, and helping other independent business owners plan their wealth and ensure they can pass that wealth on to their family is what we do best.

 

So book a date with us, it may not be the most romantic, but we promise that you will definitely love the results!

 

 

 

Financial health is financial wealth.

If you want to be financially healthy, please book an initial meeting and let’s discover if we can help you
Call us on 01332913006

 

Economic Review January 2023

Economic Review January 2023

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You can download this update here

UK growth beats expectations

The latest gross domestic product (GDP) statistics show the economy unexpectedly grew in November easing fears that the UK has already slipped into recession.

Data released by the Office for National Statistics (ONS) revealed that the UK economy expanded by 0.1% in November. This figure was higher than any forecast submitted to a Reuters poll of economists with the consensus prediction suggesting the economy would shrink by 0.2% across the month.

ONS said much of the growth was linked to the football World Cup, with pubs and restaurants benefiting as people went out to watch the games. The figures were also boosted by an increase in demand for services in the tech sector.

November’s better than anticipated data makes it more likely that the UK managed to avoid entering recession during the final half of last year. Economists are now typically forecasting that GDP will have flatlined during the fourth quarter of 2022 and thereby dodged the technical definition of a recession.

However, the consensus view does still suggest the UK is likely to record two negative quarters of growth during the first half of this year as consumers continue to struggle with rising food and energy bills, and ongoing industrial action acts as a drag on growth. A recent Reuters poll puts a 75% chance on the UK slipping into recession this year, although any downturn is expected to be relatively shallow.

This view was largely supported by data from the recently released S&P Global Purchasing Managers’ Index. While the closely monitored survey recorded a sixth consecutive monthly decline in UK business activity during January, the scale of the downturn signalled by the data remains relatively modest by historic standards. There was also some positive news from forward-looking indicators, with a jump in business optimism for the year ahead.

 

Inflation expected to fall rapidly

Bank of England (BoE) Governor Andrew Bailey has suggested that a recent easing in the headline rate of inflation could be a sign that “a corner has been turned.”

Data released last month by ONS showed that the Consumer Prices Index (CPI) annual rate – which compares prices in the current month with the same period a year earlier – fell to 10.5% in December. This was the second successive monthly decline since inflation hit a 41-year high of 11.1% in October.

ONS said that easing price pressures for motor fuels and clothing had pushed down December’s headline rate. Dips in these sectors, however, were partially offset by a further sharp rise in the cost of food and non-alcoholic drinks, while restaurant and hotel prices also increased significantly.

Despite the latest fall, the annual rate of CPI inflation clearly remains well above the BoE’s 2% target level. Indeed, when releasing the data, ONS Chief Economist Grant Fitzner pointed out that, “Although we’ve seen a second consecutive easing, it is a fairly modest fall and inflation is still at a very high level with overall prices rising strongly.”

Economists and policymakers, however, are increasingly predicting that inflation has now peaked. Last month, for example, the BoE Governor said inflation looks set to fall “quite rapidly” from the spring as energy prices decrease and that the Bank was more optimistic inflation could be on an “easier path.”

Other data published last month also points to easing inflationary pressures. The latest producer prices data from ONS, for instance, unexpectedly revealed a drop in manufacturers’ input and output prices in December, with both recording the largest monthly fall since April 2020. In addition, a CBI survey found that British factories reported the slowest growth in costs for almost two years during the three months to January.

 

Markets (Data compiled by TOMD)

Major global indices closed January in positive territory. As the month drew to a close, investors were looking ahead to the Federal Reserve and Bank of England monetary policy decisions in early February.

In the UK, the FTSE 100 ended January on 7,771.70, a gain of 4.29% in the month. The domestically focused FTSE 250, more closely correlated to the UK economy, closed the month up 5.31% on 19,853.45, while the FTSE AIM closed January on 867.82, a monthly gain of 4.39%. UK markets were impacted at month end after the International Monetary Fund’s forecast detailed lagging growth versus G7 counterparts.

Across the pond, the Dow Jones index closed January up 2.83% on 34,086.04, while the NASDAQ closed the month up 10.68% on 11,584.55, amid a flurry of corporate earnings and the imminent Fed policy meeting. On the continent, the Euro Stoxx 50 closed the month on 4,163.45, registering a gain of 9.75%. In Japan, the Nikkei 225 closed January up 4.72%, on 27,327.11.                                        

On the foreign exchanges, the euro closed the month at €1.13 against sterling. The US dollar closed at $1.23 against sterling and at $1.08 against the euro.

Gold closed the month trading at around $1,923 a troy ounce, a monthly gain of around 6.0%. The gold price has risen as demand for the precious metal holds firm in the face of economic uncertainty. Brent crude closed the month trading at around $85 a barrel, a small monthly gain of 0.77%. The next OPEC+ (Organization of the Petroleum Exporting Countries and allies) producer meeting in early February will provide clarity on the trajectory of global supplies.

 

Index                              Value (31/01/23)                 Movement since 31/12/22

FTSE 100                        7,771.70                                  +4.29%                               

FTSE 250                       19,853.45                                +5.31%                               

FTSE AIM                      867.82                                      +4.39%

Euro Stoxx 50              4,163.45                                  +9.75%                               

NASDAQ Composite  11,584.55                                +10.68%                                           

Dow Jones                    34,086.04                                +2.83% 

Nikkei 225                    27,327.11                                +4.72%                                                                                           

 

Pay growth picks up pace

While the latest earnings statistics revealed that wages are now rising at their fastest rate in over 20 years, the data also showed that pay growth is still failing to keep up with the rise in prices.

According to figures released last month by ONS, average weekly earnings excluding bonuses rose at an annual rate of 6.4% in the three months to November. This figure represents the strongest growth in regular pay since records began in 2001, excluding the coronavirus period when the data was distorted by workers returning from furlough.

However, despite this historically high level of nominal earnings growth, the real value of people’s wages continues to fall, with regular pay levels actually down by 2.6% when adjusted for inflation. Although this decline is slightly smaller than the 3.0% fall in real regular pay reported in Q2 2022, it still represents one of the largest real declines in wages ever recorded.

The latest data also highlighted the wide disparity in pay growth for private sector and public sector workers. In the three months to November, private-sector regular pay levels rose by an average annual rate of 7.2% compared with 3.3% across the public sector.

 

Retail sales suffer December decline

Official data shows that sales volumes fell in December, capping a difficult year for the retail sector, while more recent survey evidence suggests conditions remain challenging.

The latest ONS retail sales statistics revealed that total sales volumes in December unexpectedly fell by 1.0% from the previous month and by a record 5.8% compared with December 2021. Across the whole year, sales volumes declined by 3.0% compared with 2021, the worst full-year performance since records began in 1997.

While rising prices did see many retailers report relatively strong festive sales figures in monetary value terms, the official data shows that high inflation has resulted in shoppers effectively getting less for their money. ONS also noted that feedback from retailers suggested consumers were “cutting back on spending because of increased prices and affordability concerns.”

Survey data suggests sales volumes continued to slide in the new year, with the CBI’s latest Distributive Trades Survey showing a net balance of retailers reporting year-on-year sales growth falling to -23% in January. CBI Principal Economist Martin Sartorius said, “Retailers began the new year with a return to falling sales volumes, as the sector continues to face the twin headwinds of rising costs and squeezed household incomes.” 

All details are correct at the time of writing (01 Feb 2023).

 

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission

 

 

 

Financial health is financial wealth.

If you want to be financially healthy, please book an initial meeting and let’s discover if we can help you
Call us on 01332913006

 

Your Finance Matters Winter 2023

Your Finance Matters Winter 2023

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You can download this update here

Investment focus for the new year

By any comparison, the past 12 months have been tough for investors with a series of shocks impacting markets and, as 2023 dawns, uncertainties remain. One constant on the investment horizon, though, is the requirement to be strategic with your portfolio. A sound strategy based on careful planning; making purposeful decisions, based on thorough research and reliable processes, will stand you in good stead.

Last year saw markets struggle with bouts of volatility as a combination of high inflation, rising interest rates and the war in Ukraine brought about challenging headwinds and markets sought a stable footing. As a result, fund inflows slowed while cash as a percentage of investors’ portfolios rose, prompting warnings that investors need to be aware of limitations to the Financial Services Compensation Scheme (FSCS) for cash balances.

Identifying opportunities

With large amounts of money on the sidelines, using our knowledge, we aim to identify opportunities and position portfolios to benefit from recession-resistant companies in which we have conviction. Those who still have the capacity to invest should consider adding back to their portfolios in order to take advantage of any potential low valuations.

Battling inflation

Investors also need to be aware of the erosive impact of inflation on cash-based savings. In the current economic climate, anyone holding a significant proportion of their assets in cash, even with savings rates improving, will inevitably see the value of their wealth decline in real terms. In essence, equities offer a better potential defence in the battle with inflation.

Trust in our process

Experienced investor or not, staying calm during periods of market turmoil is never easy but adapting your mindset and focusing on investment strategy rather than market sentiment is vital. Investing in the stock market does clearly involve a level of risk but the adoption of a carefully considered strategy based on sound financial planning principles undoubtedly offers investors the best chance of success.

Tax year end reminder

As the end of the tax year approaches, a prime consideration should be how external factors such as reduced or frozen allowances, together with high inflation, could impact your finances and what action you need to take before 5 April 2023.

If you are affected by the impending changes to Dividend Tax or Capital Gains Tax (CGT) announced in the Autumn Statement, have you considered investing up to £20,000 this tax year in a stocks and shares Individual Savings Account (ISA)? From April 2023, the Dividend Allowance will be cut from £2,000 to £1,000 and then fall further to £500 from April 2024.

In addition, the annual CGT exemption will fall from £12,300 to £6,000 next tax year and then to £3,000 the following tax year. Dividends received on shares within an ISA are tax free and won’t impact your Dividend Allowance. Also, any profit you make when selling investments in your stocks and shares ISA is free of CGT.

And don’t forget your pension

Both the Annual Allowance and Lifetime Allowance are frozen, at £40,000 and £1,073,100 respectively. As these allowances haven’t increased with inflation, it effectively means those saving to the maximum extent possible with tax concessions can save less in real terms each year.

In the news

Women hold their nerve

Recent research1 reveals women are more likely to hold their nerve and avoid crystallising a loss when the market dips. Almost half of men (48%) have sold investments at a loss when they’ve dropped in value, in an attempt to stem their losses, while just 38% of women have done the same. Such impatience could prove to be costly. The research estimates (based on £10,000 invested in 1992, adding 10% of average salary and reinvesting dividends until 2022) that the real cost of ‘impatient’ investing over 30 years could amount to nearly £200,000!

Where is the best place to retire?

Retiring abroad is a much-desired goal for many, particularly for an improved lifestyle. Croatia currently tops the list of the best countries to retire in, due to a better cost of living when compared with the UK – rent costs and the price of day-to-day living is nearly half that versus the UK2.

Croatia also scores highly due to the ease of getting there from the UK, with relatively cheap average flight costs meaning that friends and family can visit and flying back to the UK is also convenient. (Relocation to some countries may mean forgoing future annual increases to State Pension.)

1Alliance Trust, 2022

2Penfold, 2022

Global economic growth in 2023

The International Monetary Fund (IMF)3 has predicted a challenging 2023, reducing growth expectations and forecasting economic contraction in a third of the world, in its latest World Economic Outlook entitled ‘Countering the Cost-of-Living Crisis.’

With the cost-of-living crisis ‘tightening financial conditions in most regions’, the outlook suggests that in order to restore price stability, monetary policy should stay the course and fiscal policy should aim to alleviate pressures ‘while maintaining a sufficiently tight stance.’

The global growth rate for 2023 has been revised down from previous expectations to 2.7%. This reflects ‘significant slowdowns’ for the largest economies as America’s gross domestic product (GDP) contracted in the first half of 2022, followed by the Euro area’s contraction in the second half of last year, and prolonged COVID-19 outbreaks and lockdowns in China. Closer to home, the IMF predict growth of 3.6% in 2022 and 0.3% in 2023 for the UK.

3IMF, 2022

Dividend update

According to the latest Dividend Monitor4, driven by sterling weakness, 2022 headline payouts are expected to rise to £97.4bn, up 11.0% on an adjusted basis, with underlying dividends expected to rise 13.4% to £87.2bn. The provisional forecast for UK dividends in 2023 anticipates a slight drop in headline dividends but modest underlying growth.

Looking ahead, Ian Stokes, Managing Director of Corporate Markets UK and Europe at Link Group commented, “For 2023, we expect a further reduction in mining dividends and likely lower one-off special dividends but outside the mining sector there is still room for payouts to rise, even with a weakening economy. Our provisional 2023 forecast suggests a slight drop in headline dividends to £96bn and a slight increase in the underlying total to £89bn. This implies no change in our expectation that UK payouts will only regain their pre-pandemic highs some time in 2025.”

4Link Group, 2022

Giving your children a helping hand

With the current generation of graduates typically leaving university with a mountain of debt, it is perhaps unsurprising that so many parents are now looking to ease the burden by investing on their children’s behalf.

University challenge

Government statistics show the average debt accumulated by a university student is currently around £45,000. Thankfully, graduates only start repayments when their earnings hit a certain threshold and, at the moment, loans are written off after 30 years however much debt remains. As a result, some students will never pay back their loans in full.

Increasing debt burden

Many students, though, do repay a significant amount of their debt, and recent reforms to the loans system means many more will do so in the future – government forecasts suggest that, from next year, over half of students will repay their loans in full. This inevitably places an even greater burden on future graduates’ shoulders, both as they enter the world of work and, potentially, throughout their entire careers.

Saving for their future

Most parents are keen to help their children fund university and many do so by investing on their behalf through a stocks and shares Junior ISA (JISA). While there are risks with stock market investments, historically they have performed better than cash-based savings and consistently delivered above-inflation returns. The annual JISA allowance is currently £9,000 per child which, for anyone who starts saving early, can grow to a sizeable tax-free lump sum. Smaller amounts can mount up too, particularly when combined with contributions from other family members.

Peace of mind

Investing on a child’s behalf can make a huge difference to their future, whether they decide to go to university or put the money towards something else. It also provides parents with the comfort of knowing they are giving their children the best possible start to adult life.

Take control now to beat the tax chill

Following his controversial ‘stealth tax’ Statement in November, the Chancellor made a raft of key personal taxation and pension announcements.

The government pledged its commitment to the pensions Triple Lock, which will increase the State Pension in line with September’s Consumer Prices Index (CPI) rate of 10.1%. This means that the value of the basic State Pension will increase in April 2023 from £141.85 per week to £156.20 per week, while the full new State Pension will rise from £185.15 to £203.85 per week.

Then came some ‘stealth’ announcements set to pull people into paying higher rates of tax, more people paying IHT, a cut to tax-free earnings from dividends and a reduction in CGT allowances.

In addition to the Dividend Allowance and CGT allowance reductions (as per ‘Tax year end reminder’ article) and IHT freeze (see page 4), other key personal tax announcements from the Scottish

Budget included:

  • The Income Tax additional rate threshold (ART) at which 45p becomes payable will be lowered from £150,000 to £125,140 from 6 April 2023. The ART for non-savings and non-dividend income will apply to taxpayers in England, Wales and Northern Ireland. The ART for savings and dividend income will apply UK-wide. This move is set to push 250,000 more people into this band
  • The Income Tax Personal Allowance and higher rate threshold are to remain at current levels – £12,570 and £50,270 respectively – until April 2028 (rates and thresholds may differ for taxpayers in parts of the UK where Income Tax is devolved).

With an increasing number of people likely to be impacted by these changes, we can’t stress enough the importance of tax year end planning. Although some of these changes don’t come in with immediate effect, it is vital to ensure you are in the best place possible to take advantage of any allowances, exemptions and reliefs available this year and to prepare for the changes that come in over the next few years. With plenty to consider and factor into your financial plan, valuable financial advice remains central to achieving your goals and aspirations.

It pays to think about estate planning

Inheritance Tax (IHT) is once again in the spotlight following the Chancellor’s decision to freeze IHT thresholds for a further two years until April 2028. Extending the frozen thresholds, together with rising house prices and soaring inflation mean that more estates are likely to be affected.

IHT receipts on an upwards trend

The latest IHT figures released in October make interesting reading. Total HM Revenue and Customs (HMRC) receipts for April 2022 to September 2022 were £3.5bn, £0.4bn higher than in the same period last year.

Not just a tax on the very wealthy

IHT is a tax payable on all your assets when you die and potentially on some gifts you make during your lifetime. If the estate is liable for IHT, it is usually payable at 40%. These days, you don’t have to be hugely wealthy to be affected by IHT – the hated tax can cost your estate thousands of pounds when you die.

A reminder of the thresholds

An individual’s current threshold, or nil-rate band, is £325,000. A couple (married or civil partners) has £650,000. Any unused nil-rate band can be passed to the surviving spouse or civil partner on death.

In 2017 the government introduced an additional nil-rate band when a residence is passed on death to a direct descendant. The main residence nil-rate band is £175,000 and when added to the existing threshold of £325,000 could potentially give an overall allowance for individuals of £500,000.

To reduce the amount of IHT payable, many families consider giving assets away during their lifetime. Some gifts will be automatically free from IHT; for example, £3,000 each financial year, certain wedding gifts and gifts to charities.

Getting the right balance between gifting money during your lifetime and ensuring you have enough for your future years requires careful planning. Expert planning can legitimately mitigate IHT, meaning you can pass on assets to your family as you’d intended.

Time for a retirement reboot?

Nowadays there are more choices open to you than ever before. This means there are more things you need to consider and have a plan for, like how to manage your finances to provide the income you’ll need to live on, how you’ll transition into full retirement and what lifestyle you want to enjoy in your later years.

We’re all leading busy lives and with cost-of-living financial pressures intensifying, it’s understandable if retirement plans have been placed on the back burner. If you are keen to revisit your plans and get them back on track so you can relax and fully enjoy your retirement years, the new year is the perfect time to act, so please do get in touch.

 

If you would like advice or information on any of the areas highlighted in this newsletter, please get in touch, we’d be delighted to help you consider your personal financial circumstances.

 

It is important to take professional advice before making any decision relating to your personal finances. Information within this newsletter is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details.

We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.

The information contained within this newsletter is for information only purposes and does not constitute financial advice. The purpose of this newsletter is to provide technical and general guidance and should not be interpreted as a personal recommendation or advice.

The Financial Conduct Authority (FCA) does not regulate Will writing, tax and trust advice and certain forms of estate planning.

All details are correct at time of writing – December 2022.

 

Financial health is financial wealth.

If you want to be financially healthy, please book an initial meeting and let’s discover if we can help you
Call us on 01332913006

 

Economic Review – December 2022

Economic Review – December 2022

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You can download this update here

Bank Rate raised again

In mid-December, the Bank of England (BoE) announced another hike in its benchmark interest rate and warned that further increases are likely in order to sustainably return inflation to target level.

Following its latest meeting which concluded on 14 December, the BoE’s nine-member Monetary Policy Committee (MPC) voted by a 6-3 majority to raise Bank Rate by 0.5 percentage points to 3.5%. This was the ninth consecutive increase sanctioned by the MPC over the past 12-month period and took rates to their highest level since autumn 2008.

One member of the committee did vote for a more significant rise, preferring to increase Bank Rate by 0.75 percentage points in order to tackle what she viewed as heightened inflation risks since the previous meeting held in early November. The two other dissenting voices, however, each said it was now time to halt rate rises entirely, arguing that earlier policy decisions were “more than sufficient” to get inflation back to target.

While this difference in opinion does show that individual members of the committee are likely to hold differing views on the future path of interest rates, the minutes of the meeting did suggest further monetary tightening is likely. Specifically, they said, ‘The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response.’

In conclusion, the minutes stated, ‘The majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target.’ The next MPC meeting is scheduled to take place early next month with the interest rate announcement due to be made on Thursday 2 February.

Jobs market shows signs of cooling

While the latest batch of labour market statistics suggest the jobs market may be starting to soften, they also show both vacancies and the number of people classed as economically inactive remain at historically high levels.

Figures released last month by the Office for National Statistics (ONS) revealed that the unemployment rate rose to 3.7% between August and October, up from 3.6% in the previous three-month period. The release also reported a drop in the number of job vacancies, which fell by 65,000 across the September–November period, the fifth consecutive decline for this measure.

Commenting on the data, ONS Head of Economic Statistics Sam Beckett suggested the fall in vacancies was a sign that the jobs market “could be starting to soften a little.” Ms Beckett went on to say that some businesses “were starting to pull some of their vacancies because they are reducing activity”, although she also noted that vacancies remain at historically high levels, with almost 1.2 million unfilled roles.

The latest release also reported a decline in the proportion of 16 to 64-year-olds who are neither in employment nor looking for work, with the economic inactivity rate falling to 21.5% between August and October, 0.2 percentage points lower than the previous three-month period. This reduction was most notable among older people, suggesting cost-of-living pressures may be prompting some to rethink early retirement plans.

Despite this fall, the inactivity rate remains significantly higher than before the pandemic, with over 560,000 more people now classed as economically inactive. As a result, employers continue to face recruitment challenges and, according to a report in The Times, this has led the government to consider plans to coax older people back into the workforce, with suggestions that a public information campaign focusing on the over-50s could air in the spring.

Markets (Data compiled by TOMD)

Major global indices closed December in negative territory, rounding off a challenging year, impacted by the war in Ukraine, rising inflation, higher interest rates and recessionary concerns.

The UK’s benchmark index ended the year slightly higher in contrast to the sharp drop in other domestic, US and European markets. The blue-chip FTSE 100 index lost 0.81% on the last trading day of the year, to close at 7,451.74, a modest gain of 0.91% for 2022 as a whole. The domestically focused FTSE 250, more closely correlated to the UK economy, weighed down by economic and political uncertainty, closed the year 19.70% lower on 18,853.00, while the FTSE AIM closed on 831.33, a loss of over 31% in the year.

In the US, the Dow closed the year registering its biggest annual loss since the 2008 financial crisis. The Federal Reserves’ quickest succession of rate hikes in forty years taking their toll on markets. The Dow closed the year down around 8.78% on 33,147.25, while the NASDAQ closed the year down over 33% on 10,466.48. Meanwhile, the Nikkei 225 ended the year on 26,094.50, down over 9%, and the Euro Stoxx 50 closed the year over 11% lower on 3,793.62.

On the foreign exchanges, the euro closed the year at €1.12 against sterling. The US dollar closed the year at $1.20 against sterling and at $1.07 against the euro.

Brent crude closed the year trading at around $84 a barrel, an annual gain of over 8%. At the end of December, oil prices were negatively impacted as the US and UK became the latest countries to impose restrictions on travellers from China amid fears over surging COVID infection numbers. In addition, fears of recessions around the world look set to impact oil demand and prices into 2023. Gold is trading at around $1,813 a troy ounce, a small annual loss of around 0.43%.

 

Index                                 Value (30/12/22)               Movement since 30/11/22

FTSE 100                                  7,451.74                              -1.60%                                              

FTSE 250                                18,853.00                            -1.62%                               

FTSE AIM                                   831.33                               -2.03%

Euro Stoxx 50                        3,793.62                              -4.32% 

NASDAQ Composite           10,466.48                            -8.73%

Dow Jones                              33,147.25                             -4.17% 

Nikkei 225                              26,094.50                            -6.70%                

 

UK economy rebounds in October

Although official growth statistics released last month did reveal an expansion in output during October, survey evidence still suggests the UK economy is likely to have already entered recession.

According to the latest gross domestic product figures the economy grew by 0.5% in October compared to the previous month. This rebound, however, came after September’s output was negatively impacted by the additional bank holiday for Queen Elizabeth’s funeral, which resulted in reduced trading hours for many businesses.

Despite October’s bounce-back, most analysts still expect the economy to have contracted during the fourth quarter as a whole. With third quarter data revisions showing the economy shrank by 0.3% in the three months to September, if output does fall across the final quarter of the year, it will be a second successive quarterly contraction and thereby meet the technical definition of a recession.

Survey data does suggest the economy is likely to have shrunk during the final two months of the year. The headline reading of S&P Global’s Purchasing Managers’ Index, for instance, came in at 48.2 in November while December’s preliminary reading was 49.0; any value below 50 represents economic contraction with these figures pointing to a fourth quarter decline of 0.3%.

Inflation rate eases slightly

Official consumer price statistics show the UK headline rate of inflation dipped in November although the latest figure does remain more than five times above the BoE’s 2% target level.

Data released last month by ONS revealed that the Consumer Prices Index (CPI) 12-month rate – which compares prices in the current month with the same period a year earlier – stood at 10.7% in November. This was down from the previous month’s figure of 11.1% and represents a sharper fall than had been predicted in a Reuters poll of economists.

ONS said the largest downward contributions came from motor fuels, with prices easing from previous record highs, and second-hand cars. These dips, however, were partially offset by a further rise in price levels at restaurants, cafes and pubs, as well as continuing growth in food prices which increased by a 45-year high of 16.5%.

While the latest data shows the cost of living is still rising at its fastest pace in 40 years, it has raised hopes that the surge in prices may now have peaked. Although analysts expect inflation to remain at relatively elevated levels, November’s dip is forecast to be followed by further declines over the coming months.

 

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.

 

Financial health is financial wealth.

If you want to be financially healthy, please book an initial meeting and let’s discover if we can help you
Call us on 01332913006

 

Your financial resolutions for 2023

Your financial resolutions for 2023

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Have you resolved that 2023 is the year you get your financial situation organised? You may have been thinking about reviewing your pension? Or checking if you are making the most from your investments? Maybe 2023 is the year you will retire and make a start on all those big adventures you have been looking forward to.

Whatever your financial resolutions for this new year, we can help you achieve them.

Reviewing your pension

If you are running a successful business, your pension contributions should form part of your financial planning for the business. But maybe you have made changes to your business recently and you need to reassess your pension arrangements. Or perhaps your business is relatively new and you haven’t thought about your pension since leaving your corporate role. The sooner you start, the more you can save before you retire.

If you have a personal pension that you haven’t looked at for a while, it would almost certainly benefit from an independent review and potentially making changes to the investment funds.

Planning your retirement

If 2023 is your planned retirement year (lucky you!) we can help you decide what to do with your pension pot. Since pension freedoms, which give you the flexibility to withdraw income in a way you choose, the need for advice is paramount.  We can help you decide on the most appropriate course of action and draw income in the most tax efficient way.

Maybe you want to phase out of running your business and into retirement and you want some help to plan that handover successfully. We have worked with very many retiring entrepreneurs to help them take those steps into a prosperous retirement while ensuring that their business continues to run successfully.

 

I want to invest for the future

Maybe 2022 was the year you became a parent, or a grandparent and want to start a fund to help them in the future. Maybe you have inherited a significant amount and are wondering how best to invest it. Perhaps you are just looking at your bank account and wondering how to make your money work a little harder. There is a staggering array of savings and investment products on the market, and we can help tailor investments to your own needs.

Can I do good with my money?

In 2022 we made the decision as a business to focus on values led investments. With every new client when we research suitable investments for them, our focus is on sustainable investments (find out more here). We will explain these funds clearly to you when we present our recommendations, and are always happy to explain any aspect of the fund and their features. If you would like your investments to make a wider impact, we’d be delighted to explore this with you.

Whatever your financial goal we are best placed to give you totally independent advice which focusses on you and your needs. Take a look at the comments of our clients and let us see if we can help you.

Get in touch

We can help you keep your 2023 financial resolutions. Book an appointment by calling us on 01332 913006

 

Financial health is financial wealth.

If you want to be financially healthy, please book an initial meeting and let’s discover if we can help you
Call us on 01332913006

 

‘Tis the season to give gifts to your grandchildren

‘Tis the season to give gifts to your grandchildren

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If you are a grandparent, you are no doubt thinking about buying Christmas presents. Maybe your grandchildren have provided you with a helpful list. You may want to take the easy option and buy them the latest technology or toy that you know they want.

But maybe you want to think longer term and provide a gift that will benefit them for the future? You may want to enable them to buy their first car, support them through university or help them save for a house deposit. You could simply send them a sum of money, but it’s worth doing a little research before you do. The financial world has a number of ways for you to gift money to your grandchildren in a tax efficient way, either as a one off or over a period of time.

How much can you afford to gift to your grandchildren?

It’s critical to ensure that you have all your own financial needs covered as a priority. Once you have budgeted for your own short term and long term needs, you will arrive at a sum that you are happy to gift.

There are several options available, depending on whether you want to gift a one off sum or set up a more structured arrangement over several years.

One off gifts to reduce inheritance tax

If you are considering a one off gift, you will want to do this in such a way to legitimately minimise the inheritance tax liability for your family.

You may not be aware that you can gift up to £3,000 ‘annual allowance’ to whoever you like, tax-free. This amount won’t be counted as part of your estate for inheritance tax purposes. This could go to your grandchildren as a one off, or it could be something you do in each financial year.

Ways to save in the long term

There are a number of ways to save regularly over a longer term for your grandchildren.

Junior ISAs

These are a very popular product and are easy to add money to at any time.

Only a parent or direct guardian can open a junior ISA and the money is saved in your grandchild’s name. It is important to bear in mind that your money is locked away until they turn 18 – no one can access it, including you and your grandchild’s parents. However, anyone can pay into these accounts, up to a maximum of £9,000 each year. This is a very tax efficient way to save. Remember that the value of a Junior ISA or pension can fall as well as rise

Junior Pensions

You can open a Junior Self-Invested Personal Pension as soon as your grandchild is born. It’s protected from income tax and is usually exempt from inheritance tax, too.

Your grandchild won’t be able to access their pension pot until they are 10 years below the state pension age, so this is definitely only a long-term plan. As with the Junior ISA, the value of a pension can fall as well as rise.

Children’s savings accounts

For a more flexible way to save money for your grandchildren, a children’s savings account is an option. The money can be accessed at any time and the interest earned won’t be taxed as long as your grandchild doesn’t have an income of more than £12,570 in 2022/2023. However, interest rates on such accounts can be very low.

As you can see, there are very many ways for you to help your grandchildren financially, depending on your overall aims and financial situation. All of which will help them long after this year’s toys are gathering dust!

If you would like to explore some of these options, we’d love to talk to you about the best way to support your family. Please get in touch for an appointment.

 

Financial health is financial wealth.

If you want to be financially healthy, please book an initial meeting and let’s discover if we can help you
Call us on 01332913006

 

Economic Review – November 2022

Economic Review – November 2022

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You can download this update here

OBR forecasts long but shallow recession

Updated projections from the Office for Budget Responsibility (OBR) suggest the UK is facing a long but relatively shallow recession which will see households hit by a record drop in living standards.

Chancellor Jeremy Hunt unveiled the independent fiscal watchdog’s latest forecasts during his Autumn Statement delivered to the House of Commons on 17 November. Mr Hunt said the country was facing “unprecedented global headwinds” before announcing the OBR’s new figures which show the UK entered recession during the third quarter of this year.

The updated predictions suggest the UK economy will expand by 4.2% across the whole of 2022, but then shrink by 1.4% next year before returning to growth in 2024. This implies that the downturn will be relatively shallow, if long by historic standards.

Although the recession is forecast to be comparatively shallow for the economy as a whole, the household sector is expected to be hit particularly hard due to a combination of factors including soaring energy and food prices, rising interest rates and higher taxes. As a result, the OBR figures suggest households are facing the largest fall in living standards on record.

Prior to the Chancellor’s Statement, the latest gross domestic product figures from the Office for National Statistics (ONS) had revealed that the UK economy shrank in the three months to September. ONS said the economy contracted by 0.2% across the third quarter of the year driven by a decline in manufacturing which was evident ‘across most industries.’

Survey data also suggests the economy continued to shrink during the first two months of the fourth quarter. The headline reading of S&P Global’s Purchasing Managers’ Index, for instance, sank to a 21-month low of 48.2 in October and November’s preliminary reading rose only marginally to 48.3. Any value under 50 represents economic contraction.

 

Bank Rate hiked sharply

Last month, the Bank of England (BoE) sanctioned a further increase in its benchmark interest rate and said more rises were likely but not to levels that had been priced in by financial markets.

At a meeting which concluded on 2 November, the BoE’s nine-member Monetary Policy Committee (MPC) voted to raise Bank Rate by 0.75 percentage points to 3.0%. This was the eighth consecutive increase since December and the largest rate hike since 1989. In addition, minutes to the meeting stated that a majority of MPC members believe ‘further increases in Bank Rate may be required for a sustainable return of inflation to target.’

However, the minutes also pointed out that the peak in rates is expected to be lower than markets had been anticipating. Indeed, in an unusually blunt message delivered when announcing the rate decision, Bank Governor Andrew Bailey said, “We can’t make promises about future interest rates but based on where we stand today, we think Bank Rate will have to go up by less than currently priced in financial markets.”

The next interest rate announcement is due on 15 December and economists expect MPC members to sanction another increase in rates – in a recent Reuters poll, more than three-quarters of all economists surveyed predicted rates will rise by 0.5 percentage points, with all of the other respondents predicting a 0.75 percentage point increase.

Comments made during the last few weeks by a number of MPC members have also reaffirmed the need for further rises in order to return inflation to the central bank’s 2% target. Some members, however, including BoE Deputy Governor Dave Ramsden, have begun to mention the possibility of rate cuts at some point in the future, should economic conditions diverge from current expectations and “persistence in inflation stops being a concern.”

Markets (Data compiled by TOMD)

Global indices largely closed November in positive territory. In the UK the FTSE 100 advanced, ending the month at its highest closing level for five months, supported by commodity and energy stocks. The blue-chip index closed the month up 6.74% to 7,573.05, while the mid-cap FTSE 250 gained 7.12% and the FTSE AIM ended the month up 5.27%.

On Wall Street, markets closed sharply higher following Federal Reserve Chair Jerome Powell’s speech on 30 November, indicating the central bank might scale back the pace of its interest rate hikes as soon as December. The Dow closed the month up 5.67% on 34,589.77, while the Nasdaq closed November on 11,468.00, up 4.37%.

At the end of November, European Central Bank President Christine Lagarde said that a more hawkish line on rising inflation was needed on the continent, suggesting that more rate hikes are likely in the coming months. The Euro Stoxx 50 closed the month up 9.60%. In Japan, the Nikkei 225 closed November up 1.38%.

On the foreign exchanges, the euro closed at €1.15 against sterling. The US dollar closed the month at $1.19 against sterling and at $1.03 against the euro.

Brent Crude closed the month trading at around $86 a barrel, a loss of 5.32%. Signs of an oversupplied market earlier on in the month pushed prices lower but it recovered in recent days as discussions on a Russian price cap continue and government data showed US stockpiles plunging, while traders accelerated buying amid optimism that China will soon loosen restrictions. Gold is currently trading at around $1,753 a troy ounce, a gain of 6.99% on the month.

Index                                Value (30/11/22)      Movement since 31/10/22

FTSE 100                         7,573.05                                 +6.74%                               

FTSE 250                         19,163.33                               +7.12%                               

FTSE AIM                        848.59                                    +5.27%                

Euro Stoxx 50                3,964.72                                 +9.60%                

NASDAQ Composite   11,468.00                              +4.37%                

Dow Jones                      34,589.77                               +5.67%                

Nikkei 225                      27,968.99                               +1.38%

Record pay growth still lags inflation

While the latest earnings statistics revealed regular pay is now rising at a record level, the data also showed wage growth is still failing to keep up with the rapidly rising cost of living.

ONS figures released last month showed average weekly earnings excluding bonuses rose at an annual rate of 5.7% in the three months to September. This was the strongest recorded growth in regular pay witnessed outside of the pandemic when the data was distorted by workers returning from furlough.

However, although the rate of pay growth is currently high by historic standards, wage increases are still being outpaced by spiralling inflation – in real terms, regular pay actually fell by 2.7% over the year to September. This represents a slightly smaller decline than the record fall recorded three months ago but is still among the largest falls since comparable records began in 2001.

The latest official inflation statistics also revealed a further jump in price growth during October, with soaring energy bills and food prices pushing the annual figure to a 41-year high. The headline rate of Consumer Price Inflation rose to 11.1% in the 12 months to October, a big jump from September’s rate of 10.1%.

 

Retail sales rise in October

Official data shows that retail sales staged a partial recovery in October although more recent survey evidence suggests retailers remain relatively pessimistic about future trading prospects.

The latest ONS retail sales statistics revealed that total sales volumes rose by 0.6% in October, following a 1.5% decline during the previous month when shops closed for the Queen’s funeral. Despite this partial rebound, ONS said the broader picture was that sales are still on a downward trend that has been evident since summer 2021 and that volumes remain below pre-pandemic levels.

Survey evidence also highlights the current difficulties facing the retail sector, with the latest Distributive Trades Survey from the CBI showing the net balance of retailers reporting year-on-year sales growth falling from +18% in October to -19% in November. A similar proportion also said they expect sales to fall this month suggesting most firms anticipate little festive cheer this December.

Commenting on the findings, CBI Principal Economist Martin Sartorius said, “It’s not surprising that retailers are feeling the chill as the UK continues to be buffeted by economic headwinds. Sales volumes fell at a firm pace in the year to November, and retailers remain notably downbeat about their future business prospects.”

 

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.

 

Financial health is financial wealth.

If you want to be financially healthy, please book an initial meeting and let’s discover if we can help you
Call us on 01332913006

 

Autumn Statement 2022

Autumn Statement 2022

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You can download this update here

 

“We will face into the storm”

On 17 November, Chancellor of the Exchequer Jeremy Hunt delivered his fiscal plan to “tackle the cost-of-living crisis and rebuild our economy” stating that the government’s three priorities are “stability, growth and public services.” The Chancellor struck a defiant tone during the key fiscal event, saying he was “taking difficult decisions” that would deliver a “balanced path to stability” before outlining a package of measures equating to a consolidated total of around £55bn in spending cuts and tax rises.

Economic forecasts

Mr Hunt began his statement by stressing that the country is facing “unprecedented global headwinds” before unveiling updated economic projections from the Office for Budget Responsibility (OBR) which confirm the UK is now officially in recession. The Chancellor did, however, point out that the independent public finance analyst believes the downturn will be relatively shallow, if comparatively long. The revised GDP figures suggest the UK economy will grow by 4.2% this year, but then shrink by 1.4% next year before returning to growth in 2024.

The Chancellor also announced revised OBR forecasts which suggest inflation will peak in the current quarter and then drop sharply over the course of next year. The OBR’s updated forecast though does suggest the eroding impact of inflation will reduce living standards by 7% in total over the two financial years to 2023-24, wiping out the previous eight years’ growth, while unemployment is expected to rise from 3.6% today to 4.9% by 2024.

Public finances

During his speech, Mr Hunt announced he was introducing two new fiscal rules and that the plan he was announcing met both of them. His first rule states that underlying debt must fall as a percentage of GDP by the fifth year of a rolling five-year period, while the second states that annual public sector borrowing, over the same time period, must be below 3% of GDP.

The Chancellor went on to reveal updated public finance forecasts, which predict government borrowing in the current fiscal year will rise to £177bn before falling back to £69bn (2.4% of GDP) in 2027-28. This means the medium-term fiscal outlook has materially worsened since the previous OBR forecast produced in March, which had predicted borrowing of £32bn by 2026-27. The OBR said this deterioration in the public finances was due to a weaker economy, higher interest rates and higher inflation.

Personal taxation, wages and pensions

The Chancellor went on to make a raft of key personal taxation, wages and pension announcements.

The government will increase the National Living Wage for individuals aged 23 and over by 9.7% from £9.50 to £10.42 an hour, effective from 1 April 2023.

The commitment to the pensions Triple Lock remains, which will increase the State Pension in line with September’s Consumer Prices Index (CPI) rate of 10.1%. This means that the value of the basic State Pension will increase in April 2023 from £141.85 per week to £156.20 per week, while the full new State Pension will rise from £185.15 to £203.85 per week. The standard minimum income guarantee in Pension Credit will also increase in line with inflation from April 2023 (rather than in line with average earnings growth).

The Income Tax additional rate threshold (ART) at which 45p becomes payable will be lowered from £150,000 to £125,140 from 6 April 2023. The ART for non-savings and non-dividend income will apply to taxpayers in England, Wales and Northern Ireland. The ART for savings and dividend income will apply UK-wide.

The Dividend Allowance will be reduced from £2,000 to £1,000 from April 2023, and to £500 from April 2024.

The annual Capital Gains Tax exemption will be reduced from £12,300 to £6,000 from April 2023 and then to £3,000 from April 2024.

The change to Stamp Duty Land Tax threshold for England and Northern Ireland, which was announced on 23 September 2022, remains in place until 31 March 2025. The nil rate threshold is £250,000 for all purchasers and £425,000 for first-time buyers.

In addition:

  • The Income Tax Personal Allowance and higher rate threshold are to remain at current levels – £12,570 and £50,270 respectively – until April 2028 (rates and thresholds may differ for taxpayers in parts of the UK where Income Tax is devolved)
  • Inheritance Tax nil-rate bands remain at £325,000 nil-rate band, £175,000 residence nil-rate band, with taper starting at £2m – fixed at these levels for a further two years until April 2028
  • National Insurance contributions (NICs) Upper Earnings Limit (UEL) and Upper Profits Limit (UPL) frozen for a further two years until April 2028
  • The 2022-23 tax year ISA (Individual Savings Account) allowance remains at £20,000 and the JISA (Junior Individual Savings Account) allowance and Child Trust Fund annual subscription limits remain at £9,000
  • The Lifetime Allowance for pensions remains at its current level of £1,073,100 until April 2026.

Business measures

  • The National Insurance Secondary Threshold is frozen at £9,100 until April 2028
  • The VAT registration threshold is fixed at £85,000 for two years from April 2024
  • R&D tax credits to be reformed to ensure public money is spent effectively and best supports innovation
  • Businesses making extraordinary profits due to external factors are required to contribute more, including those in the oil and gas sector – the Energy Profits Levy is now extended to the end of March 2028, and the rate is increased by 10 percentage points to 35% from 1 January 2023
  • A new temporary 45% levy will be introduced for electricity generators from 1 January 2023
  • A package of targeted support to help with business rates costs worth £13.6bn over the next five years
  • The Annual Investment Allowance (AIA) is to be set at its highest ever permanent level of £1m from 1 April 2023.

Cost-of-living support

The Energy Price Guarantee (EPG) per unit will be maintained through the winter, in effect limiting typical energy bills to £2,500 per year. From April 2023 the EPG will rise to £3,000 per year, ending March 2024. The government will double to £200 the level of support for households that use alternative fuels, such as heating oil, liquefied petroleum gas, coal or biomass.

The Chancellor announced that there will be targeted cost-of-living support measures for those on low incomes, disability benefits and pensions. In 2023-24 an additional Cost of Living Payment of £900 will be provided to households on means-tested benefits, £300 to pensioner households and £150 to individuals on disability benefits. Rent increases in the social housing sector will be capped at 7% in the next financial year.

Education, health and social care

To promote education and boost the UK’s health and social care system, Mr Hunt announced:

  • An additional £3.3bn per year for the NHS in the 2023-24 and 2024-25 tax years
  • Up to £2.8bn in 2023-24 and £4.7bn in 2024-25 for the social care sector
  • An additional £2.3bn per year for England’s core schools budget in 2023-24 and 2024-25
  • An extra £1.5bn, £1.2bn and £650m have been pledged for hospitals and schools in Scotland, Wales and Northern Ireland, respectively.

Priorities for growth

Next, the Chancellor moved on to outline his three priorities for economic growth: energy, infrastructure and innovation. Key announcements included:

  • A new Sizewell C nuclear power plant in Suffolk
  • New funding of £6bn from 2025 to meet the government’s objective to reduce energy consumption from buildings and industry by 15% by 2030
  • Northern Powerhouse Rail and HS2 to go ahead as planned
  • A commitment to proceed with round two of the levelling up fund, at least matching the £1.7bn value of round one
  • The removal of import tariffs on over 100 goods used by UK businesses
  • An increase in public funding for R&D to £20bn by 2024-25.

Other key points

  • Vehicle Excise Duty chargeable on electric cars, vans and motorcycles from April 2025
  • Local authorities in England given additional Council Tax flexibility by modifying the referendum limit for increases
  • Review of the Energy Bill Relief Scheme, findings to be published by 31 December 2022
  • The Secretary of State for Work and Pensions will publish the government’s Review of the State Pension Age in early 2023
  • Defence spending to be at least 2% of national income
  • Overseas aid spending to be kept at 0.5% for next five years.

Closing comments

Jeremy Hunt signed off his announcement saying, “There is a global energy crisis, a global inflation crisis and a global economic crisis, but the British people are tough, inventive and resourceful. We have risen to bigger challenges before. We aren’t immune to these headwinds but with this plan for stability, growth and public services, we will face into the storm… I commend this statement to the House.”

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.

All details are believed to be correct at the time of writing (17 November 2022)

 

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Economic Review October

Economic Review October

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You can read a pdf version of this update here

Chancellor’s fiscal statement delayed

The government has pushed back the date of its much-anticipated Medium-Term Fiscal Plan in order to ensure it is based on the “most accurate” economic forecasts available.

Chancellor Jeremy Hunt had been due to deliver his first fiscal statement detailing how the government plans to repair the country’s public finances on 31 October, but following Rishi Sunak’s appointment as Prime Minister, it was decided to move the announcement back by two-and-a-half weeks.

The fiscal event, which will now be delivered on 17 November, has also been upgraded to a full Autumn Statement, paving the way for wider taxation policies to be announced. The Chancellor’s tax and spending plans will also be accompanied by updated economic growth and borrowing forecasts produced by the independent Office for Budget Responsibility (OBR).

When announcing the postponement, Mr Hunt said, “Our number one priority is economic stability and restoring confidence that the United Kingdom is a country that pays its way. I’m willing to make choices that are politically embarrassing if they’re the right thing to do for the country, if they’re in the national interest.”

Financial markets were relatively calm after the news broke with analysts describing the delay as understandable, and both sterling and government bond prices were little changed by the announcement. The International Monetary Fund, which had criticised the previous Chancellor’s unfunded tax cuts, offered support to the incoming Prime Minister, with the organisation’s Chief Kristalina Georgieva suggesting Rishi Sunak will bring “fiscal discipline” to the UK.

The Chancellor has been keen to demonstrate his fiscal credentials, reiterating his commitment to “debt falling over the medium term.” This suggests the government will have some tough tax and spending decisions to make in order to fill the budget black hole, with Treasury officials warning people “should not underestimate the scale of this challenge.”

Inflation back at 40-year high

Soaring food prices have pushed the UK inflation rate back to a four-decade high, fuelling expectations of a sharp interest rate hike at the next Bank of England (BoE) Monetary Policy Committee (MPC) meeting in early November.

Data released last month by the Office for National Statistics (ONS) showed that the headline rate of inflation rose to 10.1% in September after dipping to 9.9% in August. This was slightly above analysts’ expectations and took consumer price inflation back to a 40-year high previously hit in July.

The food and non-alcoholic drinks sector was the biggest upward contributor to September’s rise, with prices in this category recording their biggest jump since April 1980. ONS said the price of most key items in an average household’s food basket rose, including fish, sugar, fruit and rice, as the war in Ukraine and recent weakness in the pound made both food products and ingredients more expensive.

This further jump in inflation has placed additional pressure on the BoE to raise interest rates when its next MPC meeting concludes on 3 November. Speaking at a G30 event in Washington in mid-October, Bank Governor Andrew Bailey acknowledged rates may need to rise by more than the BoE had previously envisaged. The Governor said, “We will not hesitate to raise interest rates to meet the inflation target. And, as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”

While the Chancellor’s decision to delay his fiscal statement until after the Bank’s November meeting will make policymakers’ deliberations more difficult, analysts still expect them to take decisive action. Indeed, over half of respondents in a recent Reuters poll of economists expect rates to rise by 0.75% in November, with most of the others predicting a 1% increase.

Markets (Data compiled by TOMD)

As October drew to a close, UK stock markets benefited from a Halloween rebound. The blue-chip FTSE 100 index closed the month at a five-week high, up 2.91% to 7,094.53, buoyed by gains across Britain’s high street banks, amid expectations of an imminent Bank Rate rise. The FTSE 250 registered a gain of 4.20%, while the FTSE AIM ended October with a small loss of 0.03%.

On the continent, the Euro Stoxx 50 closed the month up 9.02%. Eurozone annual inflation reached a record high of 10.7% in October, ahead of analyst expectations of 10.3%. In Japan, the Nikkei 225 closed October on 27,587.46, up 6.36%. The Bank of Japan has chosen to maintain ultra-low interest rates, bucking the tightening trend among global central banks.

Across the pond, earnings season is in full swing and US markets are awaiting the highly anticipated Federal Reserve rates meeting in early November. Following a challenging September, markets made a comeback in October, with the Dow closing the month up 13.95% on 32,732.95, its best monthly advance since January 1976. Meanwhile the tech-orientated Nasdaq closed October on 10,988.15, up 3.90%.

On the foreign exchanges, the euro closed at €1.16 against sterling. The US dollar closed the month at $1.14 against sterling and at $0.98 against the euro.

Gold is currently trading at around $1,639 a troy ounce, a loss of 1.96% on the month. Pressure from anticipated rate hikes, rising yields and the relative strength of the dollar are weighing on the precious metal. Brent Crude closed the month trading at around $91 a barrel, a gain of 7.05%, following a decision by the Organization of the Petroleum Exporting Countries (OPEC+) alliance to make sizable cuts to output from November.

Index                                   Value (31/10/22)                           Movement since 30/09/22

FTSE 100                             7,094.53                                             +2.91%                               

FTSE 250                             17,889.93                                           +4.20%                

FTSE AIM                           806.13                                                  -0.03%                

Euro Stoxx 50                   3,617.54                                               +9.02%                

NASDAQ Composite       10,988.15                                            +3.90%                

Dow Jones                         32,732.95                                             +13.95%                            

Nikkei 225                         27,587.46                                              +6.36%

 

UK economy unexpectedly shrinks

Growth statistics released by ONS show the economy unexpectedly contracted in August while forward-looking indicators point to further deterioration following the country’s recent political and market turmoil.

According to the latest gross domestic product (GDP) figures the UK economy shrank by 0.3% in August with output in both the production and services sectors falling back. ONS noted that a number of customer-facing businesses, including retail, hairdressers and hotels, had all fared ‘relatively poorly’ during the month.

August’s figure was significantly weaker than analysts’ expectations, with the consensus from a Reuters poll of economists pointing to zero growth. July’s GDP figure was also revised down to 0.1% from a previous estimate of 0.2%; as a result, output across the three months to August as a whole fell by 0.3%.

Analysts have warned that September could see an even sharper decline, partly due to the extra Bank Holiday to mark the Queen’s funeral and reduction in business opening hours during the period of mourning. Recent survey evidence also suggests the downturn is set to intensify, with October’s preliminary headline reading of S&P Global’s Purchasing Managers’ Index showing the pace of economic decline ‘gathered momentum after the recent political and financial market upheavals.’               

Unemployment rate falls again

The latest labour market statistics showed that the rate of unemployment in the UK declined to its lowest level in nearly 50 years, driven by an increase in the number of people leaving the workforce.

ONS figures showed the unemployment rate fell to 3.5% in the three months to August, its lowest level since December to February 1974. This decline, however, was due to an increase in the number of working-age adults who are neither working nor looking for work.

The economic inactivity rate, which measures the proportion of 16 to 64-year-olds who are not in the labour force, rose to 21.7% in the June to August period, an increase of 0.6 percentage points from the previous quarter. This rise was partly driven by an increase in student numbers, as well as a rise in the number of people suffering with a long-term illness, which rose to a record high.

This resulted in the ratio of unemployed people to job vacancies dropping to a record low, despite the latest data revealing a decline in the total number of vacancies. ONS noted that the fall in vacancies was due to a number of employers reducing recruitment ‘due to a variety of economic pressures.’

All details are correct at the time of writing (01 Nov 2022).

Contact us to talk about how this announcement affects your investments

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.

 

Financial health is financial wealth.

If you want to be financially healthy, please book an initial meeting and let’s discover if we can help you
Call us on 01332913006

 

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