Mitigating the long-term effect of inflation
With continuing inflation in the UK, many of us and our businesses have been put “off track” in the short to medium term. The Bank of England recently increased interest rates by a quarter of a percentage point to 4.25 per cent, despite the turmoil that has engulfed banking in recent weeks. The rise was as expected by economists in view of the latest data showing inflation rising to 10.4 per cent in February and annual food prices spiralling to 15 per cent last month.
Andrew Bailey, the Bank of England governor, said last week that recent financial turmoil would not stand in the way of the central bank controlling inflation with higher interest rates.
Inflation is a problem for most of us. Savers find that the value of their cash is being rapidly eroded. At 10% inflation, the £100 you save today will only buy £90 worth of goods in a year’s time. Many people find that their household budgets are stressed.
If you are struggling with your mortgage repayments and can’t get back on track, it’s important you don’t ignore the problem. There’s a lot of help available. Money Helper has a 5-step guide and a budget planner to help manage your money. See: Mortgage arrears or problems paying your mortgage | MoneyHelper
Even borrowers, who might be expected to benefit from inflation when the value of what they owe is falling, suffer when inflation triggers increases in interest rates.
So, what can you do to protect your long-term finances and combat inflation?
1. Protect your retirement income
Inflation has an enormous impact on how long retirement savings will last. The income that seems more than adequate when your start your golden years can look less than generous after 10 years of inflation, and a recipe for misery after 20. A basic level annuity will mean having the buying power of your income eroded every year. An inflation-linked annuity will start off providing a much smaller income, but one that keeps increasing over time. A drawdown pension – where your pension pot remains invested, and you draw down an income as you need it – is more flexible, but you will still need to take care to avoid running out of cash.
2. Avoid locking your cash savings away
Savers should benefit when higher inflation leads to the Bank of England increasing the Bank Rate. But beware – although the rates offered by savings providers are rising, they have not yet done so enough to come anywhere near inflation.
However, with the Bank Rate forecast to rise further and with savings deals forecast to follow, there could be better deals to be had over the next few months. Shop around for the best deal – and avoid locking your savings into a long-term deal, because it could mean missing out on much better rates in the near future.
3. Look at your investment strategy
In an inflationary world, investing – where your cash is used to buy something which could appreciate in price – could be more rewarding than saving.
While inflation erodes the value of cash savings, it actually works to boost the value of some investments. But how should you invest? Bond investment becomes less attractive in times of inflation, as the income provided by bonds is subject to inflation.
Investors can protect themselves by buying index-linked bonds, where the interest paid rises in line with inflation. Some business sectors will suffer during inflationary periods. Oil and mining companies can tend to do well as rising commodity prices are good for their bottom lines. Utility groups often pay dividends linked to inflation. However, inflation could be bad for others such as retailers and supermarkets, which may lack the ability to increase prices. Luxury goods may be shunned when households tighten their belts.
4. Secure a low-rate mortgage before rates rise
Inflation has already triggered rate rises, and mortgages are substantially more expensive than they were last year. This process could continue – the Bank of England has hinted as much. To avoid increasing interest costs which could mean that buying your home becomes difficult or even impossible, it makes sense to try and secure the lowest rate you can for your mortgage, fixed for the longest possible period.
5. Get some expert help.
Managing money in inflationary times can be challenging – but the challenges can be much more manageable if you have an expert to call on, so talk to your financial adviser. If you don’t have one then ask us for a recommendation or see: Choosing a financial adviser | MoneyHelper
UK and EU formally adopt the Windsor Framework
Last week, the Foreign Secretary, James Cleverly, and Vice President to the European Commission, Maroš Šefčovič, met to sign off the Windsor Framework at the Withdrawal Agreement Joint Committee in London.
The meeting follows the vote in the House of Commons, where MPs supported legislation on the Stormont Brake. The Brake introduces a democratic safeguard that will give Northern Ireland institutions, once restored, a role in the decision on whether significant new goods rules should apply in Northern Ireland.
The EU also formally agreed to the key elements of the Windsor Framework during a Council of the EU.
UK Employer taxes update – Online P11D reporting
As the new tax year approaches, we highlight some important employer developments and changes to legislation and allowances relating to UK employer taxes, especially about online P11D submissions.
Spring Budget 2023
On the 15 March, the Chancellor of the Exchequer, the Rt Hon Jeremy Hunt MP, made his Spring Budget announcements.
Headline tax measures announced include reforms to capital allowances, changes to the pension allowances and a series of rate changes.
Reporting expenses and benefits for the tax year ending 5 April 2023
For existing employers who already submit the original P11D and P11D(b) returns online, there is no change. For those remaining employers who have submitted paper returns in previous years, from 6 April 2023, they will need to submit their original P11D and P11D(b) returns online.
HMRC is changing legislation to mandate the submission of original P11D and P11D(b) returns online through one of the following:
HMRC will no longer accept paper P11D and P11D(b) forms. This includes lists. For employers who need to submit up to 500 P11D and P11D(b) returns, the free HMRC PAYE online services can be used. For anything more, 3rd party software is required.
HMRC will publish electronic versions of the P11D and P11D(b) forms on GOV.UK, which will enable employers and agents to submit amended forms electronically from 6 April 2023.
No software changes are required, as this electronic form is not part of the current online services.
Paper P11D and P11D(b) (original or amendment) forms submitted from 6 April 2023
If an employer submits a paper P11D or P11D(b) (original or amendment) from 6 April 2023 the form will be rejected on the basis that it has not be submitted to HMRC in the prescribed manner. The employer or agent will be notified of the rejection and sign-posted to the correct process.
Please talk to us about any of these changes to legislation and submitting your returns, we will be delighted to assist!
Sea-change in UK boardrooms as women make up nearly 40% of FTSE 100 top table roles
The UK has climbed to second in the international rankings for women’s representation on boards at FTSE 100 level, with new data being released showing that nearly 40% of UK FTSE 100 board positions are now held by women, compared with 12.5% just 10 years ago.
The data has been published in a new report by the government-backed FTSE Women Leaders Review, which monitors women’s representation in 24,000 positions on FTSE 350 Boards and in leadership teams of the UK’s biggest companies, building on the success of the previous Hampton-Alexander and Davies Reviews.
The findings demonstrate a major sea-change in attitudes to getting women leaders to the top table of business in the UK, with women’s board representation increasing in 2021 across the FTSE 100 (39.1%), FTSE 250 (36.8%) and FTSE 350 (37.6%).
The report highlights the success of the UK government’s voluntary, business-led approach to setting targets for getting more women on boards, as the UK progressed from fifth to second in the international rankings at FTSE 100 level, leapfrogging countries such as Norway, which enforces a mandatory quota system on businesses.
UK bosses join mission to get more prisoners into work
Industry chiefs from firms including the Co-op, Greggs, Iceland, and Oliver Bonas have now been appointed as Employment Advisory Board chairs in all 92 resettlement prisons, which help prepare prisoners nearing the end of their sentence for release into the community.
The Boards link prisons to leading business figures who can offer their expertise on the skills, qualifications and training needed to help prisoners re-enter the workforce.
Using these insights, prisons can tailor their training and workshops to match local labour market demands so ex-offenders are job-ready when they walk out the prison gate.
The initiative was originally launched in March 2022 and will play an important role in enhancing the UK economy while tackling the £18 billion annual cost of reoffending, with ex-prisoners in steady employment being nine percentage points less likely to reoffend.
Extending the “Income tax cash basis” for the self-employed
This HM Revenue & Customs (HMRC) consultation seeks views and feedback on proposals to increase eligibility and use of the income tax cash basis for the self-employed. These proposals aim to increase the number of businesses able to benefit from the simplifications the regime offers, making the rules easier to apply and understand, and to help businesses spend less time filing their tax returns.
What is income tax cash basis?
The cash basis is a simplified regime for calculating taxable profits for businesses with straightforward tax affairs. The regime allows businesses to calculate their taxable profit as the difference between income and expenditure when money is actually received or paid out. This eliminates accounting and tax complexities such as accruals and most capital allowances and simplifies reporting.
There are four policy proposals
The consultation will focus on the four following policy proposals, but welcomes other ideas:
- increasing the turnover thresholds for businesses to use the cash basis;
- setting the cash basis as the default, with an opt-out for accruals;
- increasing the £500 limit on interest deductions in the cash basis; and
- relaxing restrictions on using relief for losses made in the cash basis.
Who should respond to this consultation?
HMRC would like to hear from businesses, particularly self-employed businesses that use or would be eligible for the cash basis, their advisers, representative bodies, software providers, and other interested parties.
HMRC late payment interest rates to be revised after Bank of England increases base rate
The Bank of England Monetary Policy Committee announced on 23 March 2023 to increase the Bank of England base rate to 4.25% from 4%.
HMRC interest rates are set in legislation and are linked to the Bank of England base rate.
As a consequence of the change in the base rate, HMRC interest rates for late payment and repayment will increase.
These changes will come into effect on:
- 3 April 2023 for quarterly instalment payments, and
- 13 April 2023 for non-quarterly instalments payments.
Late payment interest is set at base rate plus 2.5%. Repayment interest is set at base rate minus 1%, with a lower limit – or ‘minimum floor’ – of 0.5%.
Consumer warning on pre-paid probate plans
Pre-paid probate plans are unregulated in the UK. The Financial Conduct Authority (FCA) strongly advise that you consider carefully whether these products meet your needs and offer value before buying as there are no regulatory protections in place for you.
In England, Wales and Northern Ireland, probate is the legal right to deal with someone’s property, money and possessions (their ‘estate’) when they die. It is usually required when the person who died owned property or significant assets in their own name. The equivalent in Scotland is called Confirmation.
The FCA have seen increased marketing of pre-paid probate plans in recent months, including from firms and individuals associated with funeral plan firms that they did not authorise, and whose customers lost money when they collapsed.
When designed and marketed appropriately, pre-paid probate plans could help people organise administration arrangements ahead of their death. But as the FCA do not regulate pre-paid probate firms, or the pre-payment of probate costs, there are no regulatory protections in place for you.
You should note in particular:
- Pre-paid probate plans are not protected by the Financial Services Compensation Scheme. This means that should the company fail, there is no guarantee that you will receive your money back.
- Commission is often included in the fee you pay. This increases the price of the plan. There is no commission ban on the sale of pre-paid probate plans (as there is for funeral plans).
- Your money may not be safe if the firm should fail as there are no rules requiring the money paid into plans to be held in trust or backed by insurance.
Bank Holiday Reminder – The Coronation of His Majesty The King
The UK Government has announced an additional bank holiday for 2023 in honour of the coronation of His Majesty King Charles III. The bank holiday will fall on Monday 8 May following the coronation on Saturday 6 May.