Time to get ahead?
Looking forward to the new tax year and a potentially volatile summer in the run-up to the EU referendum
As we near the end of the tax year, now is the time to consider not only year-end planning, but also planning for the new tax year and the threat of a potentially volatile summer for share markets in the run-up to the EU referendum.
It is one of the features of the political cycle that the more difficult and less palatable legislation tends to come at the start of a parliamentary term rather than as an election nears. Tax changes are very much a case in point: the rises come soon after an election, the cuts shortly before the election. When 2016/17 starts there will be a number of important tax changes scheduled to take effect which need to be built into your financial planning.
The lifetime allowance effectively sets the maximum tax-efficient value of all your pension benefits. It started life in 2006 at £1.5m, reached a maximum of £1.8m and will be cut from £1.25m to £1m on 6 April 2016. It will be possible to claim some transitional protection, although the final details are still awaited.
The annual allowance effectively sets the maximum tax-efficient annual input to all your pension benefits, regardless of source. It started life in 2006 at £215,000, reached a maximum of £255,000 and is now £40,000. From 6 April 2016, a new tapered annual allowance will be introduced, which may affect you if your total income (not just earnings) exceeds £110,000. The taper will mean that your annual allowance could be as low as £10,000.
The new tax rules for dividends begin on 6 April. If your dividend income is less than £5,000 you will have no tax to pay, but if you have substantial dividend income – perhaps from a shareholding in a private company – then your dividend tax bill will increase.
The new personal savings allowance will mean that if you are a basic rate taxpayer you have no tax to pay on the first £1,000 of interest, while if you are a higher rate taxpayer, then £500 will suffer no tax. In line with these new allowances, interest from banks and building societies will be paid without deduction of tax (but it will still be taxable).
Turning now to the question of EU in or EU out?
February was the month that Brexit (UK exit from the EU) started to hit the headlines in a big way. The Prime Minister finished his negotiations after the traditional late- night arguments and confirmed that the remain-or-leave question would be asked on Thursday 23 June.
One measure of global investors’ concern about the impending vote can be seen in the performance of sterling. Shortly before Christmas it was trading at more than $1.50 to the US dollar. By the end of February, it had sunk below $1.40. It was a similar story for the pound against the euro: having started December at over €1.40, by the end of February the rate had fallen to about around €1.27.
The currency’s performance is a reflection of the uncertainty felt by global investors about the UK’s future and is not directly related to the volatility seen in share markets. For many of the constituents of the FTSE 100, the fate of sterling is largely irrelevant. It is just one of many currencies for the multinationals and a distinctly foreign currency for most mining and resource companies. A fall in sterling is therefore no reason to avoid share-based investment. It could even be argued that it might be a reason for increasing exposure to UK exporters, who generally benefit from a weaker pound.
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The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. This is based on our understanding of current HMRC rules and guidance which may be subject to change. Tax advice, will writing and Powers of Attorney are not regulated by the Financial Conduct Authority. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. Martin Aitken Financial Services Limited is authorised and regulated by the Financial Conduct Authority.
About the author
Alasdair MacDougall is a director at Martin Aitken Financial Services Ltd. To contact Alasdair, email amd@maco.co.uk
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