Month: March 2017

Article 50 and Your Finances

Brexit Article 50

After nine months the UK has delivered. These words are what European Council President Donald Tusk posted on Twitter when he received Britain’s article 50 letter on Wednesday. We will not join the media in speculations whether the letter was “aggressive” or “positive”, or what particular UK and EU representatives’ reactions reveal about the upcoming negotiations. Instead we will focus on what we know and what it all means for your finances, now and going forward.

Article 50 Process

What exactly does “article 50” mean? It refers to article 50 of the Treaty on European Union (full text here), which regulates the process of voluntary withdrawal of a member state from the EU. It has been in force only since 2009 and is now being used for the first time in history.

The entire procedure specified (very vaguely) in article 50 is as follows:

  • A member state which has decided to leave the EU (as the UK did last year) must formally notify the European Council of its intention (as the UK did on Wednesday).
  • Following the notification, a withdrawal agreement will be negotiated. It will specify the conditions and exact date of withdrawal, as well as the leaving state’s future relationship with the EU.
  • The withdrawal agreement must be approved by the European Parliament and the European Council. The latter will act by qualified majority.

The Deadline: 29 March 2019

Importantly, article 50 specifies a deadline for the negotiations. If no agreement is reached within two years from the formal notification (i.e. 29 March 2019), the UK will cease to be a member of the EU without any trade and other deals in place. This would be the hardest Brexit possible, with disastrous effects which everyone wants to avoid. It is therefore extremely unlikely.

Article 50 contains a provision to extend the negotiations, subject to unanimous (possibly a very important detail) approval by the European Council.

Things to Watch

It is impossible to predict the outcome of the negotiations and effects on the economy. While the media have been speculating about the main topics and most likely sticking points for long time, new issues will almost certainly arise as the negotiations go forward.

Overall, future trade arrangements and access to the single market (as well as the cost the UK will have to pay for it) are the key questions with the greatest potential effect on the markets. Financial industry regulations and the ability to maintain London’s position as the financial capital of Europe will be another important topic.

Role of Individual Countries

One thing to keep in mind is that the UK won’t really be negotiating with one counterparty. Political situation in individual EU countries will certainly affect the tone and outcome of the negotiations. Therefore, some of the key things to watch are this year’s elections in France (first round 23 April, second round 7 May) and Germany (24 September).

That said, while big countries like Germany and France will definitely act as main drivers, it would be a mistake to underestimate the potential importance of smaller countries and their own particular interests. For instance, most East and South European countries will be concerned about the rights of their citizens living in the UK. Agriculture and fishing, heavily regulated by the EU, will be important topics for some countries; defence or EU budget contributions for others. There is also the very unique role of Ireland with its historical ties to the UK.

Not least, we should not forget those within our borders, particularly Scotland and Northern Ireland.

What It Means for Your Finances

If there is one word to sum up the entire Brexit story, it is uncertainty. There is very little we know. Even the people directly involved in the negotiations are unable to predict the result. Moreover, even if we knew the exact agreement coming out of the negotiations, the effects on the economy and the financial markets are impossible to forecast with any degree of accuracy. Brexit won’t be the only issue affecting the markets in the next months and years. Among other factors, developments in the US, China and other regions will be as important, if not more.

In light of the above, our recommendation is the same as it was immediately after the Brexit referendum: Stick with your strategy and don’t try to bet your savings on things you can’t predict. History has shown that consistent investing beats market timing in the long run.

We will of course continue to monitor the situation and provide updates when necessary.

Tax Year End Planning Checklist

With three weeks left until the tax year end, it’s time to review your finances and check whether there are any actions you can take to make your current and future tax position as efficient as possible. As every year the key date is 5 April, and as always we provide a tax year end planning checklist to guide you through the main optimisation opportunities, which you can find below.

Income Tax and National Insurance

If you have some control over the size and timing of your income, e.g. you are self-employed or own a company, there may be opportunities to optimise your income tax and NI bill, such as delaying an invoice or finding the right combination of salary and dividends.
The main income tax and NI figures for 2016-17 are as follows:

  • £5,824 (£112 per week, same as previous year) = Lower Earnings Limit – minimum to qualify for State Pension and other benefits
  • £8,060 (£155 per week, also unchanged) = Primary Threshold for employee’s NI (12%)
  • £8,112 (£156 per week, also unchanged) = Secondary Threshold for employer’s NI (13.8%)
  • £11,000 = Personal Allowance – basic rate income tax (20%) applies above this amount
  • £32,001 = higher rate income tax (40%) kicks in

All the various rates, thresholds and allowances for this and the next tax year are available on this page on gov.uk.

Dividends

If you have the option, make sure you use your tax-free dividend allowance, which is £5,000 for both 2016-17 and 2017-18 (it will go down to £2,000 in 2018-19, as Chancellor Philip Hammond revealed in his last week’s Budget speech).

Beyond the allowance, dividends are taxed at 7.5%, 32.5% and 38.1%, respectively, for basic, higher and additional rate taxpayers. The taxable amount includes dividends you receive from your own company, as well as any other investments you directly hold, such as shares or funds. It excludes dividends received within tax wrappers such as your pension or ISAs – powerful tax planning tools which certainly deserve your attention before tax year end.

Pension Contributions

The annual pension contribution allowance remains the same as last year at £40,000 for most taxpayers, but for high earners it is tapered at a rate of £1 for every £2 you earn above £150,000, up to £210,000 (as a result, above £210,000 the pension allowance is fixed at £10,000). HMRC provides official guidance here.

Keep in mind that you can also use any unused allowances from the three previous tax years, as long as your total contributions stay below your earned income for the current year. You should also keep an eye on the Lifetime Allowance (LTA), currently at £1 million.

5 April 2017 also marks the deadline for Individual Protection 2014, which allows you to get a higher personalised LTA as a compensation for the April 2014 LTA reduction (LTA was cut from £1.5m to £1.25 in April 2014 and further to £1m in 2016). We have covered this in detail last month.

ISAs

Besides pensions, ISAs are some of the most effective ways to save for retirement and the trend in the recent years has been towards higher allowances and more flexible rules. The range of products and investment options available under the ISA scheme has been expanding. You can invest in the traditional cash ISAs, stocks and shares ISAs and the recently introduced innovative finance ISAs.

The annual ISA allowance for 2016-17 is £15,240 (it will go up to £20,000 next year). Unlike in the past, if you have made any withdrawals during the year, it is now allowed to put money back in without reducing your allowance (provider and product specific rules may also apply).
In any case, the deposit must be made by 5 April, otherwise this year’s allowance is lost. Note that some ISA providers can take several working days to process deposits – make sure to send the final deposit at least a week before the tax year end to avoid disappointment.

Capital Gains Tax

Outside an ISA or pension, capital gains tax (CGT) normally applies when you sell an investment at a profit, with the rates being 18% and 28%, respectively, for basic and higher rate taxpayers. There is an annual CGT allowance, making the first £11,100 of capital gains tax-free. Like the dividend allowance or the ISA allowance, it is use it or lose it, and can’t be transferred to following years.

If you are holding investments with unrealised capital gains, you may want to sell and reinvest part of them in order to use the CGT allowance and reduce the tax bill in future years. You can also reinvest the proceeds in an ISA (a “Bed and ISA” transaction), which effectively earns your investments a tax-free status going forward. Of course, transaction costs apply and may outweigh the tax benefit. Taxes are only one of the many things to consider when deciding your investment strategy and actions.

Inheritance Tax and Gifts

If you have a large estate and inheritance tax (IHT) is a concern, you should also consider maximising your annual allowance for tax-free gifts (called the annual exemption). You can give up to £3,000 a year to your beneficiaries and, if you continue to live for at least seven years, the gift is out of your estate and free of IHT.

More Information and Help

Tax planning is obviously a very complex area and the above are just the main points which apply to most taxpayers. Depending on your circumstances, there may be other opportunities available to you. If you need more information concerning the above listed issues or need help with your particular situation, please do not hesitate to contact us.

Spring Budget 2017

The Rt Hon Philip Hammond MP

Spring Budget 2017

Chancellor Philip Hammond delivered his Budget speech on Wednesday 8th March 2017. It did not contain as many surprises or major changes as some of George Osborne’s Budgets in the last years, but there were a few (mostly unfavourable) points worth noting with respect to individuals and savers.

Self-Employed NICs to Rise

In spite of earlier promises by the Conservatives to not raise National Insurance Contributions (NICs), the Chancellor has announced an increase in Class 4 NICs. As a result, self-employed individuals can see their tax bill rising by several hundred pounds per year.
Currently, those who are self-employed pay two classes of NICs. Class 2 is a fixed amount (£2.80 per week in 2016-17; £2.85 in 2017-18). Class 4 is a percentage, currently 9% of profits between the Lower Profits Limit (£8,060 in 2016-17; £8,164 in 2017-18) and the Upper Profits Limit (£43,000 in 2016-17; £45,000 in 2017-18), and 2% of anything above the latter.

In April 2018 Class 2 will be abolished, as previously announced by George Osborne. This will reduce the tax bill by £146 per year. At the same time, as Philip Hammond announced today, Class 4 NICs will increase from the current 9% to 10% in April 2018 and again to 11% in April 2019. Above the Upper Profits Limit the rate will remain at 2%.

The combined result will be higher NICs for anyone earning above approximately £16,000. The increase will be greatest for those earning at or above the Upper Profits Limit, who will pay approximately £600 per year extra (the exact amounts will depend on the Lower and Upper Profits Limits, which rise every year proportionally to inflation).

Dividend Tax Allowance Cut to £2,000

Another negative surprise in the Budget is reduction of the dividend tax allowance from the current £5,000 to £2,000 per year, effective from April 2018.

Besides company owners, who are the main target of the measure, it will also affect those with larger share portfolios held outside a pension or ISA. Depending on average dividend yield, equity portfolios from about £50,000 net asset value could fall below the new reduced allowance.
Make sure you maximise the use of tax wrappers such as pensions or ISAs. If dividend tax is a concern, you may also want to consider shifting part of your equity holdings from dividend stocks to growth stocks and use the generous capital gains tax allowance to extract profits (of course, taxes are only one of the many things to consider when deciding investment strategy and portfolio structure).

Tighter Rules on Overseas Pensions

With immediate effect (from 9 March 2017) a new tax charge of 25% applies to transfers from UK pension schemes to QROPS (Qualifying Recognised Overseas Pension Schemes). The measure is aimed at those transferring their pensions overseas solely for tax optimisation purposes. Exceptions apply in cases where a “genuine need” exists, e.g. when you are moving to live and work in a different country and taking your pension pot with you.

Transfers to QROPS requested on or after 9 March 2017 will be taxed at a rate of 25% unless at least one of the following apply:

  • both the individual and the QROPS are in the same country after the transfer
  • the QROPS is in one country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA after the transfer
  • the QROPS is an occupational pension scheme sponsored by the individual’s employer
  • the QROPS is an overseas public service pension scheme as defined at regulation 3(1B) of S.I. 2006/206 and the individual is employed by one of the employer’s participating in the scheme
  • the QROPS is a pension scheme established by an international organisation as defined at regulation 2(4) of S.I. 2006/206 to provide benefits in respect of past service and the individual is employed by that international organisation

UK tax charges will apply to a tax-free transfer if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer.

UK tax will be refunded if the individual made a taxable transfer and within five tax years one of the exemptions applies to the transfer.

Overall, the new measures will make transfers to overseas pension schemes more difficult and less advantageous in some cases. Careful consideration of all tax and other consequences of such move is as important as ever.

Tax Allowances and Thresholds

Besides the main points discussed above, the Budget also confirmed tax allowances and thresholds for the next year, most of them previously known. Some of the most important figures are listed below:

  • The personal allowance rises to £11,500 in 2017-18.
  • The higher rate threshold goes up to £45,000.
  • The Chancellor has reiterated the Government’s commitment to increase the above to £12,500 and £50,000, respectively, by 2020-21.
  • The annual ISA allowance jumps to £20,000 for 2017-18.
  • Capital Gains Tax allowance rises to £11,300.

We will discuss these in greater detail, as well as possible last minute actions, in our traditional tax year end planning checklist, due next week.

Conclusion

In spite of the unfavourable changes discussed above, the Budget speech has not changed the overall course of the Government’s financial and tax policies, which in light of the upcoming Brexit negotiations can be considered good news. Here you can find the full Budget speech.