Tax, investments and pension rules can change over time so the information below may not be current. This article was correct at the time of publishing, however, it may no longer reflect our views on this topic.
Tax attacks and ISA ideas
13 March 2023
In this podcast, Susannah & Sarah explore what the latest tax increases could mean for you and ideas to shelter your money ahead of tax year end.
This podcast isn’t personal advice. If you’re not sure what’s right for you, seek advice. Tax rules can change and benefits depend on personal circumstances.
Susannah Streeter: Hello and welcome to the Switch Your Money ON podcast. I am Susannah Streeter, Head of Money and Markets here at Hargreaves Lansdown and, as usual, I am with Sarah Coles our Head of Personal Finance. And we’re going to have a whole host of other people joining us but first Sarah, it’s a good time isn’t it to sit down and chat, because for us this is an incredibly busy time of the year – the end of the tax year. Now, it’s always hectic, but this year is especially so, isn’t it?
Sarah Coles: Yes, thanks to a number of pretty horrible tax changes on the way from 6 April, it could be the most significant end of the tax year in a generation for investors who need to act fast if they’re going to protect themselves from the tax grab.
Susannah Streeter: And of course, there’s another Budget in the works between now and then, which could mean even more upheaval. So, we’re going to devote a bit of time to all the issues we face as the end of the tax year approaches, plus some investment options, in an episode we’re calling ‘Tax Attacks and ISA Ideas’. So, we’ll be running through some of the changes, and what they mean. And in doing that, we’ll be talking to Helen Morrissey, Head of Pensions Analysis, about the role pensions can play in combating these tax attacks. So, Helen, we’re always keen to highlight that we shouldn’t let tax considerations dictate our financial plans, pensions can be a useful answer, can’t they, to tax headaches?
Helen Morrissey: They absolutely can Susannah, yes. Pensions are an extremely tax efficient way of preparing for your future. And I’m looking forward to talking about that in a bit more detail later on.
Sarah Coles: We’ll also be speaking to Anne Fairweather, our Head of Government Affairs and Public Policy, about why these tax changes are on the table right now, and the kinds of things we might see in the Budget. Hi Anne. It’s the crystal ball gazing time of year, but do we have any idea what Jeremy Hunt might be tackling in the Budget?
Anne Fairweather: Hi Sarah. Well, there’s a lot going on, both politically and economically, at the moment. The chancellor is certainly under a lot of pressure and I look forward to discussing his options in a bit.
Susannah Streeter: Great, thanks Anne, lots to chat about as far as the political side of all this is concerned. We’ll also hear from Sophie Lund-Yates, our Lead Equity Analyst, who has been putting together a list of share ideas for an ISA. So Sophie, you’ve got a fair mix for us this time, haven’t you?
Sophie Lund-Yates: Hi Susannah. I certainly do. I’ve got a really exciting mix of names. Everything from infrastructure, tech and luxury.
Susannah Streeter: And, as usual, we’ll hear from Emma Wall, our Head of Investment Research and Analysis, who has been considering fund ideas for an ISA. So, Emma, it is a really interesting time, isn’t it, to be choosing funds?
Emma Wall: Hi Susannah. It certainly is. Markets are never exactly certain, but I’d say, at the moment, there is quite a lot of uncertainty around. It is a difficult end to the tax year.
Sarah Coles: Thanks Emma, so there’s plenty to look forward to, but we should start with a quick look at what’s on the way in April. So, in the Budget last autumn, Jeremy Hunt announced two tax changes which are horrible news for investors. From 6 April, this year the annual capital gains tax allowance, so that’s the profit you make on things like investments and second homes, and it’s the amount you make before you have to pay tax on it. And that will slashed from £12,300 to £6,000. Then it will be cut again the following April to just £3,000. The capital gains tax allowance hasn’t been down at £3,000 for more than 25 years and inflation in the interim means £3,000 back then had the buying power of almost £13,000 today. For investors who have invested diligently for the long term to build their financial resilience, it’s going to feel particularly unfair to be trapped by this allowance-cutting pincer movement. The annual dividend allowance also falls in April from £2,000 to £1,000 and will halve again the following April. This is going to hit anyone earning dividends on investments held outside of a tax wrapper as soon as they exceed the new smaller allowance.
Susannah Streeter: But this isn’t all. We’re also going to feel the impact of the freeze in income tax thresholds. With regular wages rising an average of 6.7% over 2022, the frozen thresholds mean that, as wages rise, more people will cross these chilly thresholds to pay a higher rate of tax. Income tax isn’t just levied on your income, but on any interest from savings above the personal savings allowance. So, any income from bonds too. ISAs can protect both from this eye-wateringly expensive tax, and you can squirrel away up to £20,000 in the current tax year. ISAs can save dividend tax and capital gains tax too. If you’ve yet to use your ISA allowance this year, by far the easiest way to save tax is to use the Bed and ISA process to sell assets outside an ISA and then use the proceeds to pay into the ISA wrapper, in which you can repurchase them. When you sell up, you need to be careful how much of profit you’re realising, because anything above your £12,300 capital gains tax allowance is taxable. And, of course, you don’t need to rush into making investment decisions at the same time as paying into an ISA or a pension, you can add money to secure your allowance and then take time to pick the investments that are right for you. You can invest up to £20,000 in an ISA in the current tax year. Now with that way, you don’t have to worry about dividend tax or capital gains tax on these investments in future. Before using the Bed and ISA process compare the charges of an ISA with your investment account and check for any Bed and ISA charges.
Sarah Coles: And, of course then, planning as a family can offer up some useful potential, because if you’re married or in a civil partnership you can both make use of your ISAs, and there’s usually no tax when you hand over any assets. Plus, there’s the separate £9,000 Junior ISA allowance for your children. But, of course, ISAs aren’t the only thing to be thinking about at the end of the tax year, there are also pensions. So, let’s bring in Helen Morrissey, our Head of Pensions Analysis. So, Helen, what do people preparing for retirement need to be aware of when coming up to tax year end?
Helen Morrissey: Well, there’s a whole variety of opportunities as well as potential pitfalls when it comes to pensions. The most important thing is that you are preparing for the retirement you want. So, make sure you are making as much use of your various allowances as you can realistically afford as they can have a significant impact on how much you end up with in retirement. For instance, most UK residents under the age of 75 can contribute up to £40,000 per year into their pension and benefit from tax relief. This is called the annual allowance. If you have any leftover allowances from the previous three tax years, then you can use them to further boost your pension contribution up to a maximum of £160,000 through a process called Carry Forward.
Sarah Coles: Sounds good, but there are some important caveats to that though, aren’t there?
Helen Morrissey: Yes, there certainly are. For instance, if you earn less than £40,000 per year then you are limited to the amount of your annual earnings as your personal pension contribution. So, if you earn £30,000 per year, for instance, then the limit that you can put into your pension is £30,000 per year. In addition, if you are a very high earner, you could also be hit by what’s called the tapered annual allowance and this can reduce your annual allowance to as little as £4,000 per year.
Susannah Streeter: So, how does that work? It sounds pretty complicated.
Helen Morrissey: It is all really quite complex. Basically, what you need to do is work out what your threshold and adjusted incomes are. Your threshold income is your annual income minus any pension expenses, such as pension contributions or the value of any lump sum death benefits that you may have received. Now, your adjusted income is your net income plus things like pension contributions from your employer. Now if your adjusted income is more than £240,000 and your threshold income is more than £200,000 per year then you will be hit by the tapered annual allowance. If this is the case then for every £2 your adjusted income goes above that £240,000, your annual allowance for that current tax year reduces by £1. The minimum reduced annual allowance you can have in the current tax year is £4,000. So, it is quite complicated.
Sarah Coles: I don’t envy the higher earners for the maths they’re going to have to do working that one out. Is there anything else people need to be aware of?
Helen Morrissey: Yes, as a further complication, we’ve got the Money Purchase Annual Allowance which people do need to be aware of. If you have flexibly accessed your money purchase pension, then you are restricted to annual contributions of just £4,000 per year. This is particularly timely to mention now, given that many older workers could have accessed their pensions during the pandemic and the current cost of living crisis to top up their income without realising they will now be subject to the Money Purchase Annual Allowance when they start to rebuild their pensions.
Susannah Streeter: So, what happens if you trigger the Money Purchase Annual Allowance? Just how do you find out?
Helen Morrissey: So, your provider will tell you if you have triggered the Money Purchase Annual Allowance and that you will need to repay any overpaid tax relief, and you need to do this via self-assessment. But can I also add that, on top of all these allowances, people also need to be aware of the lifetime allowance as well. So, if you have pension savings worth more than £1,073,100, very precise, then you will be taxed on the excess and that’s 55% on any lump sum you take or 25% if you take an income.
Sarah Coles: It does sound a little bit like a minefield. Is there anything else people can do?
Helen Morrissey: So, you can also contribute to someone else’s pension. So, if you have a child or a non-earning spouse you can contribute up to £2,880 per year and the government will top that up to £3,600 with tax relief. This can have a huge impact on how much they end up with in retirement. Now, if you have a loved one who’s saving for retirement, or even for their first home via a Lifetime ISA, then you can also contribute to that so long as total payments stay within the overall £4,000 annual limit. And that will help them to achieve their financial aims that bit quicker.
Susannah Streeter: Thanks Helen, plenty of opportunities for people this side of the deadline. Keep in mind that typically you can’t access your pension until age 55 (57 from 2028). But of course, between now and then we have a Budget to think about, so to help us explore a bit about how politics affects the end of the tax year, we have Anne Fairweather, our Head of Government Affairs and Public Policy, who is steeped in the political world. So, Anne, can you give us a bit of background into why those tax allowances were slashed in the Autumn statement.
Anne Fairweather: Well, I mean, that’s quite a question. You really need to cast your mind back to what seems like a bit of a lifetime ago but, in reality, was only a few months back. After that mini-Budget in September when Kwasi Kwarteng promised to slash the top rate of tax, in addition to not raising corporation tax, the markets were more than a little unsettled. These plans were not budgeted for and the independent Office of Budget Responsibility had not done their usual run down of where the money was coming from. The gaps, coupled with the energy price guarantee and political rhetoric suggesting that more change was in the pipeline, the Chancellor at the time claimed that this was just the beginning, this resulted in gilt prices rising. And I guess the rest in history. Prime Minister Truss, as it was back then, she started to row back from these commitments and eventually she sacked her Chancellor, in order to re-set her premiership. However, in the end, it wasn’t enough and she had to resign as well. So, Jeremy Hunt, who was her new Chancellor, now began life as the chancellor under the new prime minister, Rishi Sunak. I know, it’s pretty difficult to keep up with all of this. He had, basically one big mission and that was to steady the markets and also the public finances. So, he declared in the Government’s Autumn statement in November that his priorities were “stability, growth, and public services.” Whilst the top rate of tax was retained, so too was the removal of the National Insurance increase, known as the Health and Social Care Levy. So, that was the one reduction that stayed from the Liz Truss regime part of the Budget era.
Sarah Coles: Plenty going on and we’re now running into the next Budget now, so I guess it’s a question of whether we will get more tax hikes? So, can you tell us, sort of, what the political forces are at work here?
Anne Fairweather: So, whilst the finances are tight, tax cuts will be difficult to deliver. There have been noises off from supporters of last year’s Prime Ministers, both Truss and Johnson, on the need to push for a lower tax economy. But ultimately, if the Chancellor does have some wriggle room in the Budget, he’s more likely to hold it back for the Budget in 2024. Because an election is due by the end of that year and the Conservatives will want to go into that election cutting taxes ahead of the vote. However, much remains uncertain, from energy prices, to whether we’ll hit a recession, or how fast inflation will fall. Politically, the Chancellor, I think, is more likely to live by his rules of creating stability, and to wait before cutting taxes. Even when some members of his party think this is the only way to create growth. So, the true test for this Prime Minister will be the May local elections. If the Conservatives do badly then, the pressure will rise again on the Conservative benches, for a change in economic approach. So, just like in the Brexit era, politics, rather than economics, could be the primary driver of changes in the future.
Susannah Streeter: So, given all of this, Anne, what sort of measures do you think will be, or should be, in the Budget this Spring?
Anne Fairweather: So, getting people back to work will be a major focus for the Chancellor with reports of a mid-life MOT for those in their 50s to encourage them back to work. Labour market participation in this group is a lot lower post-Covid and so trying to boost that and boost productivity is a big focus for the Government. Whilst recent analysis suggests that this could be largely down to ill-health, there are still real benefits to working later in life. And, as Helen was discussing earlier, there are calls to raise the Money Purchase Annual Allowance to encourage people who have started accessing their pension in retirement, to go back to work. But, as ever, we’re also keen to see rules simplified to encourage greater saving and investing. We all need to save for short term plans as well as invest for long term goals. The Government should really ask itself “are the tax rules around products like ISAs, LISAs and SIPPs as straight forward as they could be?” And one big thing we’re looking at is how we can make it easier for firms like Hargreaves Lansdown to communicate with our clients. We also want to tailor more information to people’s circumstances, based on what we know about them. But, at the moment, too much personalisation could tip us over into giving financial advice, which would, of course, require an advice charge. With advances in technology and the ability for customers to share more data, we’d love to be able to produce more relevant guidance to help people to make financial decisions. So, the economic environment really remains uncertain and, in that environment, we hope the Government will remove as many barriers as possible to make it easier to help people to improve their financial situation.
Susannah Streeter: Yes, certainly. Lots of uncertainty still remains and the budget is going to be one to watch this year. So much of the government’s decision making depends on the prospects for the economy in the coming months, so it’s worth looking ahead a little to what’s on the horizon. The risks of a severe recession have receded again after the latest health snapshot, in the form of the closely watched Purchasing Managers Index, showing business activity surged in February. The services sector, in particular, is powering ahead, with confidence snapping back as companies navigated past peak inflation and customers proved resilient amid the pain of high prices. Plenty of companies appear to have shaken off the Autumn funk that descended and, with confidence returning, there are high hopes that a UK recession could even be side-stepped. Consumer confidence in the UK has also gone up, reaching its highest level in two years. However, and there’s always a big ‘however’, it seems, at the moment, with average energy bills going up by a fifth in April, and the housing market seems to be turning from a quiver to a shiver, so a recession still can’t be ruled out and, at the very least, I think we’ll be heading for an period of stagnation. Stagnant growth but higher inflation. There are still worries about just how far up interest rates will go and how long they will stay there, particularly in the United States, and what this will mean for the world’s largest economy. That’s been rattling investors again in recent weeks. But should everyone just be a little bit more patient? Well, that’s what Warren Buffett reckons. In his much-anticipated annual letter to shareholders, he struck a rather upbeat tone and said that investors should focus on the bigger picture over the longer term, signalling he has not lost confidence in the US economy.
Sarah Coles: So, with all this in mind, it feels like a good time to bring in Sophie Lund-Yates, our Lead Equity Analyst, who has been looking at share ideas for an ISA. Although, of course, I should make clear first that investing in individual shares isn’t right for everyone. It is higher risk because your investment depends on the fate of a single company, so if that company fails, you risk losing your whole investment. So Sophie, who’s caught your attention?
Sophie Lund-Yates: Hi Sarah, yes, I have indeed been looking at a number of shares. The team and I have put together 5 share ideas for an ISA, and you can find full details of those on our website. A couple you might recognise from our Five Shares to Watch for 2023 which we felt could be worth consideration with ISAs in mind. But we’ve also been looking at some different names and that includes Caterpillar. Caterpillar is in the world of heavy-duty machinery and vehicles. Think big machines to help build infrastructure projects, large scale mining equipment and then there’s also energy needs, so things like engines and solar panel units. One of the things I admire about Caterpillar is its scale and expertise, there aren’t many companies that can offer what they can, it’s highly specialised. As an idea of size, 2022 revenue was $59.4bn. While there are benefits to all business areas, it’s infrastructure that I find really interesting. A lot of demand for that comes from the US government and there are growth opportunities when you consider China reopening and what this could mean for demand. As always, I would say investors need to consider that the group would be exposed to an unexpectedly bad economic downturn. The final thing to keep in mind is that the valuation has had a 28% uplift in the last 12 months, so the market has set a high bar.
Susannah Streeter: So, that’s Caterpillar. But what about a tech name, Sophie?
Sophie Lund-Yates: Well, we always say it’s a good idea to invest with the long-term in mind and that’s especially true when looking at ISA investing. That’s why we’ve chosen Netherlands based ASML, which is a market leader in lithography machines used to make every type of semiconductor chip. Without these, you wouldn’t have the chips that power the latest phones, computers or even cars. It’s an advantage to be a key component in the chip manufacturing process, rather than a pure chip company. And it’s back to that point of specialisation again, which ASML definitely is. Its products took decades of research and development, with the end result an enormous gap to traverse before competitors can try and compete. The group has a huge sales backlog, to the tune of EUR40.4bn, which adds a layer of visibility even though the semiconductor market itself is going through a tougher time. In terms of risks, one so-called EUV machine has over 100,000 different parts, which is just phenomenal. But that means there could be blockers to production if just one part is hard to come by. The valuation is also pretty toppy which, as we know, is a mark of confidence from the market but increases the risks of ups and downs along the way.
Sarah Coles: Looks like an interesting one, but what about a slightly more luxurious name?
Sophie Lund-Yates: Yep, I’m back talking about LVMH again so I’ll keep it brief, and also think I should bring it back to basics for the benefit of our listeners. LVMH is the result of a merger between Louis Vuitton and Moet Hennessy in 1987. It wasn’t just hair that was big in those days, so was Bernard Arnault’s vision for the group. He owns 48% of LVMH and has been CEO for the best part of five decades. He’s overseen LVMH’s ascent to the top of the luxury pile. Other brands within the LVMH umbrella include Christian Dior, Celine, Tiffany & Co, Bvlgari and about 70 others across five business divisions. LVMH lives by the motto “passionate about creativity”. But the reason why we think the shares could be considered for an ISA is because of a different passion, and that’s margins. At around 27%, operating margins are very comfortable. That leaves room for the group to stomach ups and downs and feeds into a healthy free cash flow which is expected to reach about EUR16.0bn this year. LVMH’s revenue and profits are more reliable than other businesses because of its customer base. High net worth individuals simply aren’t as sensitive to economic difficulties. And a best-in-class creative team means LVMH can continue putting eye-watering price tags on its items. The reopening of China also bodes well as a growth lever at the group’s disposal. Not only from spending within Asia, but from tourists who travel and spend in Europe. The main sticking point is the valuation, which is a bit above the long-term average and adds pressure to perform.
Susannah Streeter: Okay, Sophie. Thank you very much. And remember, this isn’t personal advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment and investors should form their own view on any proposed investment. Clearly a lot to consider there. And for those who are looking to funds at this stage in the tax year, lets bring in Emma Wall now, who has been exploring some fund ideas for an ISA portfolio. So, Emma, tell us your take.
Emma Wall: Yes, we’ve been putting five fund ideas together for tax year picks for your ISA. Full details are on the website, but I wanted to run you through three of them, selected at random today. The first one is Troy Trojan which is managed by Sebastian Lyon since its launch in 2001, and uses the same investment philosophy as the whole of Troy Asset Management, which is aimed to grow investors' money steadily over the long run, by investing in a variety of asset classes including equities, bonds, cash and gold. We like this commitment to the philosophy and Lyon likes large, established companies he thinks can grow sustainably over the long run, and endure through tough economic conditions, such as the ones we’re experiencing at the moment. He has tended to focus on companies based in developed markets, such as the UK and US. This includes some of the world's best-known companies with highly recognisable brands. Less risky investments, such as UK government bonds or gilts and physical gold, provide balance. Gold can act as a safe haven during times of uncertainty, or could perform well if inflation takes off even further, or key global currencies weaken. Cash provides shelter when stock markets stumble. This fund, we think, could form part of the foundation of a broad investment portfolio, bringing some stability to a more adventurous portfolio, or provide some long-term growth potential to a more conservative portfolio.
Sarah Coles: Thanks Emma, that’s an interesting one. You’ve also got a global opportunities fund in there.
Emma Wall: Yes, Rathbone Global Opportunities is managed by James Thomson who has a straightforward, disciplined approach, and a willingness to view the world a little differently. He looks for easy-to-understand businesses that can grow to dominate their industry and defend themselves from competition, so a competitive advantage. He'll also search off the beaten track to find companies he thinks have superb potential that might be overlooked by other investors. Thomson mainly focuses on innovative companies with high-growth potential that tend to do better when markets are rising. So, this is called growth style investing. But he also invests in some companies that could grow their earnings at a steadier rate, which could hold up better when markets wobble, and he avoids those that are overly complicated. He likes companies where a positive catalyst, such as a change in management, should eventually get noticed by other investors and boost their share prices.
Susannah Streeter: And you’ve also got an ESG fund in with the mix, haven’t you?
Emma Wall: Yes. Finally, the third pick is a responsible investment fund. And these are funds which give you the opportunity to make money while doing good. So, our pick here is the Legal & General Future World ESG Developed Index which invests in a broad range of developed stock markets while being mindful of environmental, social and governance (ESG) issues. It won’t invest in tobacco companies, pure coal producers, makers of controversial weapons or persistent violators of the UN Global Compact Principles. The fund aims to provide long-term growth and is invested across developed stock markets including the US, Japan and Europe. And, in total, it invests in around 1,500 global companies. Because of its ESG tilt, it does have a bias towards sectors such as technology, and financials. Again, sort of ‘growthier’ style sectors. We think an index tracker is one of the simplest ways to invest, and this could be a good addition to a broader investment portfolio aiming to deliver long-term growth in a responsible way. As always, there are no guarantees with investing. All investments can fall as well as rise in value, so you could get back less than you put in.
Susannah Streeter: Okay Emma, thank you so much. Plenty of ideas all round for investors. I should add that before investing in a fund, you should make sure the fund’s objectives align with your own and you understand the fund’s specific risks. Any new investment should form part of a diversified portfolio, and if you’re not sure what’s right for your circumstances you should ask for advice.
Sarah Coles: You are listening to Switch Your Money ON – from Hargreaves Lansdown.
Susannah Streeter: And now it’s time for the stat of the week, and we’re sticking with the ISA theme, but in recognition of the fact that this podcast drops just after International Womens’ Day, we’ve been looking at the proportion of women holding ISAs.
Sarah Coles: Yes, figures from HMRC in 2019/20, showed that more women paid into ISAs than men, they paid into 52% of them. But because they tend to put their money into cash ISAs, they actually paid into far fewer stocks and shares ISAs than men, only 43% of them. Now we know there was a jump in the number of people investing during covid lockdowns, so it will be interesting to see what this means for womens’ ISA choices when HMRC releases new figures.
Susannah Streeter: It certainly will be. I think some of this may be down to the fact that women earn less on average than men, and some will need to build their emergency savings before they invest, but once you have that safety net in place, you don’t need to be earning a fortune to dip your toe into investments. HL is keen to help overcome some of the barriers women face when it comes to investing, and support them in all aspects of their finances, so on International Women’s Day we relaunched Financially Fearless. This is a community for women who want to take control of their finances. You can find out more online at www.hl.co.uk/financially-fearless and on Instagram @financiallyfearless_HL. And you can find me on Instagram as well at @susannahshares. That’s all from us this time, but before we go, we need to remind you that this was recorded on 6th March 2023, and all information was correct at the time of recording.
Sarah Coles: Nothing in this podcast is personal advice. You should seek advice if you’re not sure what’s right for you. Past performance isn’t a guide to the future. And this hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
Susannah Streeter: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.
Sarah Coles: You can see our full non-independent research disclosure on our website for more information. So, all that’s left is for me to thank our guests Helen, Anne, Sophie, Emma, and our producer Elizabeth Hotson.
Susannah Streeter: A great female line up. Thanks for listening. Goodbye.