Inflation is it persistent?

The US consumer price index (CPI) jumped 0.9% in October, well above consensus expectations of around 0.6%. The increase brought the year-over-year CPI increase to 6.2%, the highest since December 1990. The U.S. Producer Price Index (PPI) also came in up 8.6%, year-over-year.

Outside the U.S., the latest inflation data paint a similar picture. Eurozone PPI inflation is running at 16%. Japan’s PPI clocked in at 8%, yet another 40-year high, and China’s at 13.5%, a level last seen in the mid-1990s. South Korea’s import prices are rising at 35.8%, the fastest rate since 2008.

In short, current inflation increasingly appears neither transitory nor local.

Autumn Budget 2021

The chancellor focused on the post covid recovery and did not tinker much with pensions and investments.

The key measure that we already knew about was the 1.25% increase to National Insurance and Dividend rates which will come into effect in April 2022. Due to Government IT constraints it will initially be collected via NI and in April 2023 it will be a separate tax called the ‘health and social care Levy’.

This Levy will be applied if your pay is above the primary earnings threshold of £9,568. You are caught if you pay yourself dividends above £2,000, and if you are working above the State Pension age.

Therefore the dividend ordinary rate, upper rate and additional rate will increase to 8.75%, 33.75% and 39.35% respectively.

For business owners the employer NI will also rise 1.25% to 15.05%. As corporation tax will rise in April 2023 it would be prudent to talk to your accountant to bring forward profits if possible.

Key allowances have not changed:

  • High rate income tax band starts at £37,700 + £12,570 = £50,270
  • Capital Gains Tax annual exempt amount is £12,300
  • ISA annual subscription limit is maintained at £20,000 and JISAs £9,000

UK Inflation jumps

Inflation in the UK jumped to 3.2% in August from 2%, its highest level in more than nine years. The Office for National Statistics said that much of the spike was due to a substantial drop in restaurant and café prices last year and meaningful increases this year. The RPI which includes housing costs also jumped to 4.8% from 3.8%.

Inflation fears

Last month America’s consumer prices inflation rate rose to 4.2% from 2.6% and this is before the full effects of the Biden stimulus plans take affect. Eurozone inflation accelerated to 1.6% year-on-year in April, up from 1.3% in March, following a sharp rise in the cost of energy compared to the height of the pandemic. UK annual inflation meanwhile more than doubled in April to 1.5% from 0.7% in March, although both remain below central bank target rates of 2% for now.  

Budget 2021 – details

The Chancellor of the Exchequer Rishi Sunak has announced that the bill for addressing the coronavirus pandemic is currently £407bn, which is equivalent to 10x HS2 projects or 20 Crossrail’s.
 
Tax thresholds

The key financial changes announced in the budget are as follows: 
The basic rate income tax threshold has been slightly increased from April 2021 to £12,570 from £12,500 and the high rate threshold to £50,270 from £50,000. The thresholds will then stay at these levels for the following 5 years.
 
The inheritance tax nil-rate band will remain at the existing level of £325,000 and also the residence nil-rate band of £175,000 until at least 2026. The residence nil-rate band taper will continue to start at £2 million.
 
The capital gains annual exempt amount has also been frozen at £12,300 until 2026.
 
Dividends also escaped. The tax-free dividend allowance has been kept at £2,000.
 
Pensions
 
The pension lifetime allowance has also been frozen at £1,073,100 until 2026.
 
The state pension will however rise by 2.5% next tax year and the triple lock will remain in place.
 
Property
 
The 0% stamp duty land tax holiday on the first £500,000 has been extended until 30 June 2021. The threshold will then be reduced down to £250,000 for a further 3 months and then return back to £125,000 from October.
 
Lenders have been withdrawing from providing low-deposit mortgages. Therefore to help first time buyers the government is guaranteeing 95% loan-to-value mortgages up to £600,000.
 
Companies
 
From April 2023 corporation tax will increase for companies with profits above £50,000. Tapering from 19% up to 25% above £250,000. This will affect the UK companies, but as it is progressive and can be offset by ‘super deduction’ on business investment as companies investing can benefit from a 130% first-year capital allowance.
 
IR35 changes delayed from last year will go ahead in April 2021. Companies must now collect income tax and NIC from the contractor’s fee and pay it over to HMRC.
 
The furlough scheme will be extended until October 2021. However, employers will be asked to contribute 10% in July and increased to 20% in August.
 
The trading loss carry-back rule has also been extended from the existing one year to three years.
 
The VAT reduction for the UK’s tourism and hospitality sector has been extended until October 2021 and reduced rate of 12.5% will then be applied until April 2022.
 
Business rate reliefs have also been extended to July 2021 and then a reduced rate of 66% until April 2022.

Chancellor splashes another £30b

UK Chancellor of the Exchequer Rishi Sunak pledged an additional GBP 30 billion to support employment, on top of the GBP 133 billion in coronavirus measures he has already unveiled. The money includes over GBP 5 billion in accelerated infrastructure spending, about GBP 9 billion for employers to retain workers through the end of January, funds for home insulation, and help for homebuyers and for hospitality firms.

Budget 2020

We have summarised Mr Sunak the new Chancellor’s 2020 budget for you.

  • National Insurance (NI) threshold raised to £9,500 up from £8,632
  • Pension taper increased to £200,000 from £110,000 – this helps pension funding restrictions
  • Junior ISA annual limits increased to £9,000 from £4,368. Adult limit remains at £20,000.
  • In the UK the income tax rates and allowances remain at £12,500 for the personal allowance and £50,000 the higher rate threshold
  • The Capital Gains Tax (CGT) allowance has increased to £12,300 for individuals
  • The Inheritance Tax (IHT)  residence nil rate band increases to £175,000 taking the overall IHT allowance up to potentially £500,000 per person
  • Entrepreneurs Relief lifetime allowance reduced to £1million
  • Off-payroll working rules (IR35) reform still scheduled for April 2020
  • Corporation tax rate to remain at 19%

Interest-only Mortgages

Yorkshire Building Society has become the latest big name to launch an interest-only mortgage. If you have a reasonable deposit saved up please give us a call.

Interest-only mortgages were once common but virtually disappeared after the financial crisis, amid fears that many borrowers were not setting aside enough money to repay their debt. Borrowers do not repay any capital during the course of the loan, so when their mortgage term ends they need to pay back their equity.

Under new lending criteria, borrowers have to show lenders that they have a repayment strategy in place.

There were twice as many interest-only products on the market earlier this month as there were six years ago, according to Moneyfacts.

Do you have any NI gaps?

Paying out for voluntary National Insurance contributions now could improve your state pension by up to £4,000 – but it’ll cost more if you wait until after 5 April 2019.

Anyone who reaches state pension age after 5 April 2016 and has a gap in their NI payments between the 2006-07 to 2015-16 tax years has until April 2023 to ‘plug’ the holes by making voluntary contributions. In the new tax year, the amount you pay for voluntary National Insurance (NI) will increase to a more expensive flat rate for all tax years. But, if you pay between £600 and £700 – the equivalent of £100 a week between now and April – you could pay off a missing year in your NI record and secure thousands of pounds of state pension when you retire.

Help for new mothers

From April, the government will rewrite child benefit forms to highlight the risks to stay-at-home parents’ retirement income if they fail to register for child benefit. The forms are available online and given to new mothers in hospitals.

Registering for child benefit allows parents with children under 12 to build up their entitlement to state pensions, even if they do not pay national insurance (NI) contributions.

However, a tax on child benefit for higher earners, introduced in 2013, has discouraged hundreds of thousands from claiming the perk. Since 2013, 516,000 parents have opted out of child benefit — 84% of them women.

About 1.1m families are affected by the tax charge on child benefit, which reduces payments when one parent earns £50,000 or more and wipes out the benefit for those who earn £60,000 and above. The rule applies to married and cohabiting couples.

Families with a higher earner can opt not to receive any child benefit. However, they still need to register and opt out. Parents who fail to do so miss out on the NI credits.