The mini-budget and the current market

It's been a busy few days in the economy and financial markets so I thought I would send you an email to give you our view of the current situation.

We feel that it would be unwise to make snap decisions around macroeconomic events and the effect of cuts to payroll taxes, freezing corporation tax, ditching a cap on banker bonuses and spending billions to subsidise energy bills over the next two years is yet to be seen. Certainly the immediate reaction of market participants suggest they are largely unconvinced by the government’s actions and fear that the increase in debt will lead to unsustainable public finances and further exacerbate inflation, which I suspect will be the key driver in the short term.

Much of the attention right now is on the value of sterling which has dropped to an all-time low against the dollar, before recovering slightly. More specifically, sterling is down by 10% over the past two months and 20% since the beginning of the year against the US dollar. This is mainly a reflection of the divergence in growth rates between the two economies and the US central bank being more aggressive in terms of rate rises.

The short-term noise, and occasional panics continue to cause alarm, but the ripples are getting smaller although the remainder of 2022 is likely to remain volatile.

We still feel that active management is better placed in the current circumstances and that the focus should continue to be on returns over the medium to long term.

As always I am available to talk more specifically about your portfolio but I would still encourage you to remember that your portfolios are actively managed by expert fund managers and are diversified both geographically and across asset classes.

Below is a brief summary of the main changes announced by the Chancellor last Friday:

Income tax

Basic rate of income tax – The government will bring forward the 1 percentage point cut to the basic rate of income tax to April 2023, 12 months earlier than planned. This will apply to the basic rate of non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland; the savings basic rate which applies to savings income for taxpayers across the UK; and the default basic rate which applies to non-savings and non-dividend income of any taxpayer that is not subject to either the main rates or the Scottish rates of income tax.

The additional rate of income tax will also be removed from April 2023. This will apply to the additional rate of non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland. The additional rate for savings, dividends and the default rates will also be removed from April 2023, and this change will apply UK-wide. As the additional rate of income tax will be removed, current additional rate taxpayers will also benefit from the Personal Savings Allowance of £500 currently available to higher rate taxpayers.

National Insurance

Confirmation of the reversing of the Health and Social Care Levy – The government is reducing Class 1 and Class 4 National Insurance contributions (NICs) by 1.25 percentage points from November and cancelling the introduction of the Health and Social Care Levy as a separate tax from April 2023, applying UK-wide. This will benefit all employees earning more than the annual equivalent of £12,570 and self-employed people earning more than £11,909 in 2022-23 or £12,570 in 2023-24. The average saving is around £330 next year and an additional saving of £135 this year. Additionally, 920,000 businesses will see an average tax cut of £9,600 in 2023-24.

Dividends

The government is reversing the 1.25 percentage point increase in dividend tax rates applying UK-wide from 6 April 2023. Alongside the reversal of the Health and Social Care Levy, the ordinary and upper rates of dividend tax will be reduced to 2021-22 levels of 7.5% and 32.5% respectively. Due to the abolition of the additional rate of income tax, income that was previously charged at the additional rate, will now be charged at the upper rate of 32.5%. The reduction of all rates by 1.25 percentage points will benefit 2.6 million taxpayers with an average benefit of £345 in 2023-24; and additional rate payers will further benefit from the abolition of the additional rate of dividend tax.

Stamp Duty

From 23 September 2022, the government will increase the threshold above which Stamp Duty Land Tax (SDLT) must be paid on the purchase of residential properties in England and Northern Ireland from £125,000 to £250,000. This also includes an increase in the relief that first-time buyers can receive. From 23 September 2022, the threshold at which first-time buyers begin to pay residential SDLT will increase from £300,000 to £425,000 and the maximum value of a property on which first-time buyers relief can be claimed will also increase from £500,000 to £625,000. These changes will reduce the cost of purchasing a home and will take 200,000 homebuyers, including 60,000 first-time buyers, out of SDLT entirely. As SDLT is devolved in Scotland and Wales, the Scottish and Welsh Governments will receive funding through the agreed fiscal framework to allocate as they see fit.

If you have any questions or queries about your Investments in particular then please remember that you can contact me at any time either via email or phone.