What's new bulletin July 2022

TAXATION AND TRUSTS

The 6 July National Insurance cut

(AF1, RO3)

From 6 July, the level at which people start paying National Insurance has risen from £9,880 to £12,570.

According to the Treasury, the threshold change means that 70% of UK workers will pay less in NICs, even after accounting for the 1.25% increase through the Health and Social Care Levy which came into effect on 6 April.

Workers can check their salary in the government’s online tool to estimate the amount they could save between July 2022 to July 2023.

Increase in higher rate taxpayers

(AF1, RO3)

HMRC’s latest data show over 6.1 million higher and additional rate taxpayers.

Source: HMRC

HMRC has just released its latest update of income tax statistics. The set which has predictably made its way into the headlines is the table covering the number of individual taxpayers. This shows:

• The number of income tax payers in 2022/23 is projected to be 34m, up from 30.6m ten years previously. 1.4m, nearly 40% of that increase, emerged between 2021/22 and 2022/23, because of the freezing of the personal allowance. In March 2022 the Office for Budget Responsibility (OBR) projected that by 2025/26 there would be 36.1m income tax payers, a figure that now looks an underestimate.
• The number of higher rate taxpayers in 2022/23 was 5.51m, up from 3.72m ten years previously. Once again around 40% of the rise in numbers is due to the increase (0.75m) between 2021/22 and 2022/23, driven by the frozen higher rate threshold. In March 2022, the OBR projected that by 2025/26 there would be 6.8m higher rate taxpayers, which also now looks an underestimate.
• Additional rate taxpayer numbers rose from 273,000 in 2012/13 to 629,000 in 2022/23. Viewed another way, fiscal drag – the additional rate threshold has been unmoved since 2010/11 – has increased the proportion of taxpayers in this top band from 0.75% to 1.85%.
• Combining higher and additional rate taxpayers shows the 2022/23 population to be 6.14m, 54% higher than a decade ago and nearing one in five of all income tax payers, as the graph above demonstrates.

Comment

These latest data highlight the sharp increase in the numbers paying tax at more than basic rate over the last three years. The longer that inflation continues at elevated levels.

INVESTMENT PLANNING

National Savings and Investments Annual Report

(AF4, FA7, LP2, RO2)

National Savings and Investments (NS&I) has published its Annual Report, Resource Accounts and Product Accounts 2021–22 showing how the various products have fared and the Government targets NS&I have or have not met.

Some of the main findings of the report include:

• £4.4bn of savers’ money went into NS&I in 2021/22
• Premium Bonds are the most popular accounts, with £10.3bn of net inflows
• Guaranteed Bonds and Income Bonds both saw outflows of £3.9bn each
• Green Savings Bonds only attracted £289m of money

Premium Bonds remain the jewel in NS&I’s crown, attracting more than £10bn of savers’ money in the past tax year. In total, savers put £24.7bn into the accounts, in the hope of winning big in the monthly prize draw. However, savers also withdrew more than £15.5bn from Premium Bonds in the same year.

The Green Savings Bond has not been a great success, with the low rate on offer at launch seriously hampering its appeal among investors. At launch the three-year fixed-rate bond paid 0.65%, below the rate of an easy-access account at the time, and that has deterred savers. As a comparison, in the same period, retail investors put £15.7bn into ESG funds according to data from the Investment Association.

The NS&I’s explanation for the relatively low interest rate on the Green Bonds is: "This is a new market for NS&I and the original Issue of Green Savings Bonds was priced cautiously to enable NS&I to understand the rate sensitivity of the market." The interest rate was doubled in February 2022, to 1.3%.

Withdrawals were the name of the game for NS&I in the past year, with eight of its 13 account types seeing net withdrawals. Guaranteed bonds, which are closed to new customers, saw £3.9bn of withdrawals in 2021/22. In the same period, Income Bonds, which saw their interest rates slashed, had £3.9bn of outflows.

NS&I is continuing its shift online, aiming to make 85% of customer transactions online in the next year. Now just three of its seven available account types can be opened and managed by post, potentially meaning that older people, those who aren’t digitally savvy or those who aren’t online, could find themselves unable to access the much of the Government’s savings service.

Investment trust dividend payments rose by 15.4 percent in the twelve months to the end of March 2022

(AF4, FA7, LP2, RO2)

Investment trust shareholders have benefited from the trusts’ revenue reserves and broad spread of underlying investments.

Source: Link Asset Services

Link Asset Services has published its  Investment Trust Dividend Monitor 2022, which, perhaps surprisingly, looks at investment trust dividends for the year ending 31 March 2022. It paints a different picture from Link’s usual quarterly UK Dividend Monitor, which covers companies and specifically excludes investment trusts:

• In the year to 31 March 2022, total dividends payouts from investment trusts were £5.5bn, up 15.4% on the previous 12 months and a new record. In contrast, over the same period Link’s UK dividend figures showed an annual increase of 34%.
• For investment trusts which invest in listed equities, dividend payments were flat at £1.85bn.
• The gap between £5.5bn and £1.85bn is accounted for by the growing weight of trusts that fall into the alternatives categories– property, debt, private equity. infrastructure, etc. Payouts from the alternatives categories rose by 25.1%.
• Four fifths of the increase in dividends from alternatives stemmed from VCT, property and renewable energy.
• Link rightly notes that in the context of VCTs, most dividends represent the distribution of realised capital profits rather than investment income. The last year was a good one for such payments, often made by way of special dividends. Link quotes the example of Octopus Titan, which paid dividends of £135m, over a quarter of the VCT total.

• The dividends of investment trusts invested in listed equities barely fell during the pandemic, despite the large declines. This was primarily due to the trusts drawing on their revenue reserves to support payouts, although some trusts also distributed capital gains. The run down in reserves is now coming to an end – since June 2021 (based on the latest accounts) they have fallen by 6.8%. In 2022, Link judges that trusts will begin to rebuild their reserves.

Comment

The Link data highlights the role of alternatives in dividend payments. However, trusts investing in listed equities still account for about 45% of the AIC universe.

Market performance - a lousy first half

(AF4, FA7, LP2, RO2)

Global markets had a bad first half in 2022, although for once the FTSE 100 stood out for its relative resilience. The first six months of 2022 were grim news for most investors. Consider what has happened since New Year festivities ended.

The dragon of inflation, which had shown signs of life at the end of 2021, returned with vengeance. UK CPI inflation went from 5.4% in December 2021 to 9.1% in May 2022, en route to 11% plus in Q4, according to the Bank of England’s recent Monetary Policy Committee minutes. US inflation over the same period rose from 7.0% to 8.6%. The country that made deflation a way of life, Japan, joined it with a rise from 0.8% to the dizzying heights of 2.5%, above the central bank’s target.

US and UK central banks pushed up their interest rates in a belated counterattack on inflation. The Bank of England added four increments of 0.25% in the first half of the year, but not to be outdone, the US Federal Reserve pushed through a 1.5% rise across three meetings, starting in March. A more timid European Central Bank reached the point in June where it virtually promised to start raising rates next month for the first time in eleven years.

It was not only short-term rates that headed north. Yields on long-term bonds responded to higher inflation and central bank rate action. The yield on the US ten-year Treasury bond doubled, from 1.51% to 3.02% in six months, having almost reached 3.5% in mid-June. Ten-year UK gilt yields rose even faster, going from 0.97% to 2.27% over the six months. In this area, the Eurozone was far from calm.

The German ten-year government bond switched from almost two years of negative yields (remember them?) to a yield of +1.37% on 30 June. Italian ten-year government bond yields almost tripled – from 1.19% to 3.39% across the half year. Japan, where the central bank has a yield curve control strategy, almost joined in, with ten-year yields going from 0.07% to 0.22%, close to the top end of the Bank of Japan’s 0.0%±0.25% target range.

The unwelcome cherry on this inflationary, rate-rising cake was the Russian invasion of Ukraine on February 24. What the pundits said would be a brief campaign has turned into a war of attrition, casting a long pall over global energy markets. Brent crude finished the first half of 2022 up 41% at $110 a barrel (or, in US consumer terms, over $5 a gallon). The oil price is 57% up in Sterling terms, given that the pound has dropped 10% against the greenback since the start of the year.

	31/12/2021	30/06/2022	Change in H1 2022
FTSE 100	7384.54	7169.28	-2.92%
FTSE 250	23480.81	18666.78	-20.50%
FTSE All-Share	4208.02	3974.68	-5.55%
S&P 500	4766.18	3785.38	-20.58%
Euro Stoxx 50 (€)	4298.41	3454.86	-19.62%
Nikkei 225	28791.71	26393.04	-8.33%
Shanghai Composite	3639.78	3398.62	-6.63%
MSCI Em Markets (£)	1701.873	1541.655	-9.41%
UK Bank base rate	0.25%	1.25%
US Fed funds rate	0.00%-0.25%	1.50%-1.75%
ECB base rate	0.00%	0.00%
Two year UK Gilt yield	0.68%	1.84%
Ten year UK Gilt yield	0.97%	2.27%
Two year US T-bond yield	0.73%	2.91%
Ten year US T-bond yield	1.51%	2.95%
Two year German Bund yield	-0.64%	0.63%
Ten year German Bund yield	-0.18%	1.37%
£/$	1.3544	1.2199	-9.93%
£/€	1.191	1.1602	-2.59%
£/¥	155.9711	166.2925	6.62%
Brent Crude ($)	77.94	110.33	41.56%
Gold ($)	1805.2	1817.75	0.70%
Iron Ore ($)	128.5	130	1.17%
Copper ($)	9678.5	8501	-12.17%

A few points are worth noting from this table:

• The FTSE 100 is a rare top performer among equity markets. As in Q1, that is due to its heavy exposure to once unfashionable global sectors – oil companies and miners. More domestic sectors fared less well – hence the drop of over 20% in the FTSE 250 and the corresponding 5.6% decline in the FTSE All Share (where the FTSE 100 accounts for about 82% by market value).
• Eurozone markets continued to be hard hit by the war, to which was added new concerns about the stability of the Euro’s fringe members – welcome back to the PIGS (Portugal, Italy, Greece and Spain).
• Changes in bond yields have been significant, with negative yields now almost entirely absent from a list of global government bond yields.

Comment

The first half was not a great one for most investors. Trustnet shows only seven of 57 IA sectors giving positive returns, with Commodity/Natural Resources at the top (+7.7%) followed, perhaps surprisingly, by UK Direct Property (+5.3%). At the bottom was UK Index Linked Gilts (-25.6%), a reminder that rising yields affect not only traditional fixed interest securities.

The outlook for the second half of the year is for more increases in rates from the central banks. By the end of 2022 the UK base rate may be 3% and the US, 3.5%. Beyond that apparent given, there is great uncertainty. Some commentators see a peak of inflation near or present, while others worry that recession is imminent, if not already here. At least an investor entering the market today knows that in most instances they are getting a lower price than six months ago – often 20% cheaper.

FCA proposals to improve UK equity markets

(AF4, FA7, LP2, RO2)

The FCA has published a consultation paper on proposals aimed at improving the functioning of equity secondary markets. The changes are part of the Wholesale Markets Review (WMR), which the Financial Conduct Authority (FCA) has been conducting with the Treasury to improve the UK's regulation of secondary markets.

The Treasury’s consultation response to the WMR said that the FCA would reform the parts of the regime that are set out in regulatory rules and guidance to ensure that the most burdensome and unnecessary regulatory requirements are removed as soon as possible.

The consultation takes that commitment forward by focussing on reforms that are not contingent on changes that are intended to be implemented via the Financial Services and Markets Bill that the Government has announced it will introduce.

The FCA says that, in PS21/20, it changed requirements that impose costs on firms that have not delivered material benefits. In this latest consultation the FCA proposes reforms to lower the cost of reporting for firms, improve post-trade transparency and remove some restrictions that are limiting the ability of UK trading venues to compete with other markets by improving the efficiency of consolidating trade reports from multiple sources. 

The FCA wants to improve how equity markets operate. It aims to reduce harm by amending provisions that impose compliance and operational costs on firms but do not deliver demonstrable benefits to end users or to the functioning of equity markets.

In particular, the changes the FCA is consulting on are intended to:

• Improve the content and consistency of post-trade transparency reports
• Establish a new designated reporter status for OTC trades
• Allow UK trading venues to use reference prices from overseas markets where those prices are robust, reliable, and transparent
• Permit the use of the tick size regime from overseas primary markets

The FCA is also seeking views on the structure of UK markets for retail orders, specifically, on whether improvements can be made to the way retail orders for shares are executed in the UK, and on its approach to improving UK markets’ resilience to outages, with the aim of enhancing the resilience of UK markets.

You can read the full consultation paper here. Responses are required by 16 September 2022.

The FCA says that it will consider responses and submit the relevant updated technical standards to the Treasury for approval. If the Treasury approves them, it will make and publish a policy statement and amend the technical standards. 

It intends to consult on other reforms covered in the WMR which are more closely linked to changes to legislation over the course of this year and next.

PENSIONS

New DWP guidance on underpaid State Pensions

(AF3, FA2, JO5, RO4, RO8)

The Department for Work and Pensions (DWP)'s new guidance says that it has identified that some of the following people may have been underpaid State Pension:

• people who were married, divorced or widowed when they died
• people aged 80 or over when they died

This is because they did not get the automatic increase in their pension that they were entitled to. The following applies to those who died having reached State Pension age before 6 April 2016.

If they were married

They may have been underpaid if both of the following applied:

• they got less than the lower basic State Pension (also called a Category BL State Pension)
• they did not get an increase through their husband, wife or civil partner

If they were widowed

They may have been underpaid if they did not inherit some of their husband’s, wife’s or civil partner’s State Pension.

If they were aged 80 or over

They may have been underpaid if both of the following applied:

• they did not get any State Pension or got less that the amount of the over 80 pension
• they did not get the over 80 pension (also called a Category D State Pension) when they reached 80

The following applies if the person who died reached State Pension age on or after 6 April 2016.

If they were widowed

They may have been underpaid if they did not inherit any of their husband’s, wife’s or civil partner’s State Pension they were entitled to.

How to find out if someone was underpaid

The DWP says that it is writing to people it knows may be affected to let them know how this will be put right. However, it accepts that some people will not get a letter because it does not hold all the information about every affected person. This includes where the person who has died was one of the following:

• a married woman:

• whose husband claimed his State Pension before 17 March 2008
• who reached State Pension age before her husband
• who did not make a separate claim for the lower basic State Pension (also called a Category BL State Pension)

• someone already getting State Pension who:

• got divorced or had their civil partnership dissolved
• did not tell DWP about this

• a member of a couple where:

• both had reached State Pension age
• the husband, wife or civil partner of the person who has died had not yet claimed their State Pension

The DWP is asking that if anyone thinks someone who has died may have been underpaid State Pension and they are their next of kin or executor of the estate, to contact it to request information.

The guidance adds that the following information will need to be provided about the person who has died:

• their full name
• their date of birth
• their date of death
• their last known address, including their postcode
• the full name of their husband, wife or civil partner, if they were married or in a civil partnership
• their National Insurance number (if possible)

It adds that it will deal with any enquiry as soon as possible, but this may take some time.

Pension Schemes Newsletter 140 - June 2022

(AF3, FA2, JO5, RO4, RO8)

Pensions Schemes Newsletter 140 covers the following:

• Pension scheme arrears and interest (covering equalising for GMP)
• Managing pension schemes service
• Accounting for Tax returns
• The Pensions Regulator’s blog post on pension scams
• Scheme pays reporting clarification

Areas of interest

Pension scheme arrears and interest (covering equalisation for GMP)

HMRC provide clarification on interest paid on late payment of pension arrears including payment for GMP equalisation. Where arrears are paid in connection with equalising GMP and interest is provided at 1% above base rate or at an interest rate specified in the scheme rules – the interest will be treated as a scheme administration member payment (and so as an authorised payment).

Interest payments qualify as 'savings income' and most people can earn some interest from their savings before paying tax, i.e. by using their personal allowance, the starting rate for savings 0% tax band, or the personal savings allowance.

The Pensions Regulator’s blog on pension scams

The newsletter highlights a new blog from The Pensions Regulator Jail terms alone won’t keep savers safe from scammers calling for a united effort in stopping scams.

This highlights a new paper by The Pensions Regulator and the National Fraud Intelligence Bureau into the threat of pensions scams and calls on schemes to follow a new guide on how to report concerns about scams to authorities.