Following the recent ‘mini budget’ from the new Chancellor, Kwasi Kwarteng, there has been significant disruption to the global markets which will inevitably have knock-on effects to your investments. In this month’s market update, I summarise the recent changes and how this may affect you. As always, please get in touch to discuss your investment portfolio any concerns or questions you may have.
The key findings from the Chancellor’s statement
In a nutshell, the Chancellor announced the following:
- Basic rate income tax to be reduced to 19% from April 2023
- 45% higher rate of income tax to be abolished
- Reverse the recent rise in National Insurance from 6th November 2022
- Cancel the increase in Corporation Tax which was due to increase from 19% to 25% in April 2023
- No Stamp Duty on first £250,000 and none for first time buyers up to £425,000
- Freeze on energy bills
- Limits on bankers bonuses to be scrapped
The market response
The reaction in the markets to this statement was swift and negative. The pound fell to record lows against the dollar, and the global investment markets also reacted negatively. The Chancellor is convinced these measures are needed to stimulate growth in our economy, but this clearly was not the markets initial reaction. They looked more at the level of government borrowing that will be needed to fund these cuts.
What will happen next?
There is now intense pressure on the Bank of England to raise interest rates at a higher level than was expected, to prop up Sterling in the currency markets, as well as quell the inflationary pressures.
Both the Treasury and Bank of England released statements to try and reassure the markets. The Treasury advised that it would produce a plan that would show how the debt would be managed. In their statement, the Bank of England said they were "monitoring developments closely" and would make a decision on any action in November.
Interest rate rises
It is now expected that the Bank of England will raise interest rates at a sharper level than previously expected, which will in turn cause mortgage costs to dramatically increase. Previously, it was expected that interest rates would increase to 2.75% to 3% next year. Currently, this prediction has risen to just below 6%. Although by historical standards this rate isn’t that high, the impact this could have on UK households in today’s terms could be considerable.
It should be said that currently the dollar is strong against many of the global currencies at the moment, but there is no doubt that the Chancellor’s statement accelerated the weakness of Sterling. The pound has risen slightly from its lowest point, although I have a feeling this is based on how the markets think the Bank of England will have to react.
What this means for you and your finances
Pensions
By cutting income tax, this will also see a reduction in the basic rate tax relief from 20% to 19% given on contributions. Currently, someone wishing to make a £100 gross contribution will actually pay £80 with the tax relief. This will increase to £81 with the cut in income tax.
Of course, the flip side of this, is for someone in receipt of a pension and paying basic rate tax on the income. With the cut in income tax, they will pay less in tax, which is certainly welcome news.
Savings
Savers benefit from a personal savings allowance (PSA). Currently, non-taxpayers and basic rate taxpayers’ allowance is £1,000, higher rate taxpayers see this allowance reduce to £500 and additional rate taxpayers have a zero allowance. So, additional rate taxpayers will now become higher rate taxpayers and will benefit from the £500 allowance.
The cut in basic rate tax could be beneficial to savers earning interest on savings over the PSA, which is outside a pension or ISA. This is because they will pay tax on the excess at their marginal rate and could now have a lower tax bill due to the reduction in basic rate.
As interest rates have been low for a considerable length of time, savers have largely benefited from the PSA. However, with rising interest rates, savers may need to consider whether this will push them over the PSA. The use of Cash ISA’s may be a useful investment vehicle to consider, if you feel your interest savings could be pushed above the PSA.
Property
The other significant tax cut that was announced was regarding stamp duty. The threshold was increased from £125,000 to £250,000, and first-time buyers saw their threshold raised to £425,000.
On the face of it this seems like good news for house buyers. However, my concern is that with the dramatic rise in mortgage rates and the cost of living, will these cuts benefit buyers in the long term.
It remains to be seen what impact the mini budget will have on the housing market. The sector has remained remarkably buoyant over the last few years, but this could be a tipping point, with rising mortgage costs and the ever-increasing cost of living.
From an investment perspective, I hope that over the coming days and weeks the markets settle down, from what has already been a volatile few months. The Bank of England have reiterated that their focus is to curb inflation and bring this back from the 40-year highs we are seeing currently. When the Treasury sets out in detail how the cuts will be funded, I hope that this will provide the reassurance the markets are wanting.
As ever, if you have any concerns regarding your investments, please do not hesitate to contact us by calling +44 (0) 29 2067 5204/ +44 (0) 7917 390 344 or emailing me at richard.brazier@hanoverfm.co.uk and we will be happy to talk to you.