Business Matters – Issue 7

Spring forward

Getting into gear for the new tax year

Back in the saddle

Getting your life goals back on track

Calm after the storm

Markets get off to a steady start in 2021

Business mergers & acquisitions

The pandemic has brought about a revolution in remote working

Let’s talk profits

What’s the most tax-efficient way to pay yourself from your company?

Spring forward: Getting into gear for the new tax year

What better way to kick off our latest newsletter than by looking at the fresh tax allowances for 2021/22? Early use of these exemptions could reap major rewards – now and in the longer term.

As we ease out of lockdown and the vaccine rollout continues, the start of a new tax year at the beginning of April may have flown under the radar. However, we can and should turn our attention to the important longer-term matters, as making early use of the investment tax breaks available offers the potential to put you in a better position when markets do eventually recover.

While last month’s Budget already feels a very long time ago, potential tax hikes are still on the horizon. Spring is therefore a perfect opportunity for financial housekeeping. ­Here’s a rundown of the main tax exemptions and allowances, and what has, or hasn’t, changed for the new tax year:

  1. Corporation Tax

Starting on the business side of things – the main rate of Corporation Tax will remain at 19% for the year beginning 1st April 2021 and will rise to 25% from April 2023 for businesses with profits of £250,000 and over. The rate for businesses with profits of £50,000 or less will remain at 19%, and there will be a marginal taper for profits between £50,000 and £250,000.

  1. Income Tax

Looking towards personal savings, and the personal allowance – which is the amount that you can earn before you start paying Income Tax – has increased to £12,570. Similarly, the higher rate threshold – the point at which you will start to pay 40% Income Tax – has risen slightly to £37,700 of taxable income or £50,270 of gross income in 2021/22.

Both the personal allowance and the higher rate threshold have been frozen for the next five years. The additional rate tax threshold of £150,000 is unchanged. There are some changes to the tax bands for Scottish taxpayers, which can be found on HMRC’s website.

  1. Inheritance Tax

The Inheritance Tax (IHT) nil-rate band for 2021/22 remains at £325,000 and will remain frozen until 2026. The residence nil-rate band stays at £175,000.

In the last issue of Business Matters, we talked about ‘Tax Day’ where the government proposed a tidy-up to the paperwork side of Inheritance Tax (IHT), and simplifying the tax itself clearly remains on the agenda. So, now may be a good time to review making lifetime gifts before the tax rules are potentially ‘simplified’ into something less generous.

Talking of future planning, the pandemic has provided a tragic reminder of why it’s so important to ensure that our affairs, including an up-to-date Will, are in order. The Office for Budget Responsibility has forecast a 20% increase in the number of deaths subject to IHT in this tax year1 – making matters worse for many of the families affected, these bills will be unexpected as those who have died from the virus will not have had time to plan their affairs.

  1. Personal pensions

Ahead of the Budget, speculation was rife over possible changes to pensions tax relief, but nothing was forthcoming; the government perhaps deciding that now was not the time. Most people can still get tax relief on pension contributions worth up to £40,000 per tax year (or 100% of relevant earnings, if less).

The annual allowance continues to taper down for individuals who have an adjusted income above £240,000 and threshold income in excess of £200,000. Those with adjusted income under £240,000 will not be subject to the taper and will have a £40,000 annual allowance (unless relevant earnings are below £40,000). The minimum that the annual allowance can taper down to is £4,000.

The lifetime allowance – the most you are allowed in your pension pot before triggering an extra tax charge – remains the same at £1,073,100 for 2021/22.

  1. Dividend and savings income

Through the Personal Savings Allowance, basic rate taxpayers can continue to earn £1,000 of interest on savings before paying tax in 2021/22. Those paying tax at the higher rate see their allowance remain at £500. The Dividend Allowance has also remained unchanged at £2,000.

Tax band Tax rate on dividends above the allowance
Basic 7.5%
Higher 32.5%
Additional 38.1%

Both allowances have been frozen since 2018/19, limiting the scope to earn tax-free dividend and savings income, and underlining the importance of making maximum possible use of your ISA allowance. Talking of which…

  1. ISAs

The most you can put into your ISA remains at £20,000 for the 2021/22 tax year. This includes Stocks & Shares and Cash ISAs. What also remains unchanged is the prospects for Cash ISA savers given the continued low interest rates available.

The current volatility in markets can be off-putting, but investing in stocks and shares is likely to remain the best long-term option for ISA savers.

  1. Junior ISAs

Last year brought a big surprise with a more-than-doubling of the Junior ISA annual allowance. This year, however, it remains unchanged at £9,000.

Alongside children’s pensions, Junior ISAs present a great opportunity to help give children a financial head start. Yet according to the latest available figures, nearly three out of four accounts of Junior ISAs are held in cash2: something parents should perhaps reconsider given the interest rate outlook.

  1. Capital Gains Tax

The Capital Gains Tax annual exempt amount for individuals will remain at £12,300 until 2026. Effective and repeated use of your CGT annual exempt amount is a great way to transfer assets into ISAs or pensions to provide a shelter from any future tax liability on income or gains.

Being a tax-year early bird

To summarise, as we take our first tentative steps out of lockdown and focus on the gradual reopening of the country, now’s the time to take action.

With no major changes announced in the Budget or Tax Day, speculation about how the government will seek to recoup the cost of pandemic support will no doubt continue. It’s therefore more important than ever to make the most of the current tax allowances, and to make sure you’ve got a retirement savings plan in place, your pension is working hard for you and that you know how much a comfortable retirement is going to cost.

If you’d like to find out more about the new tax year allowances, please get in touch.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.

Sources:

1 Office for Budget Responsibility, November 2020
2 HMRC, Individual Savings Account (ISA) Statistics, June 2020

Back in the saddle: Getting your life goals back on track

After over 13 months of restrictions, are you taking your life milestones more seriously?

Can you believe it’s been over a year since Boris Johnson put the UK in full national lockdown? An unprecedented move, which has now been repeated twice more, with the periods in between being peppered with tiers, track-and-trace and travel bans.

Indeed, it might sometimes feel as though our lives have been in limbo over the last 13 months, but we’ve certainly had plenty of opportunity to reassess our life goals – and according to new research by St. James’s Place, that’s exactly what we’ve been doing!

Brits are taking their goals more seriously than before the pandemic, with 22% saying they feel more focused, having used the last 12 months to reassess what’s important to them – whether that be a new car, house, job, or even a baby. A quarter (25%) report feeling anxious or worried about losing a year of time working towards their long-term goals – however, this again shows our heightened focus on the future, and what we want from it.

As a result, only one in five UK adults had to put their personal goals or ambitions on hold as a result of COVID-19. Instead, we’ve adapted and changed our goals with the world around us (40%) or indeed have remained determined to follow our career, family or property dreams (31%).

What’s more, a quarter of Brits now claim that having a financial goal is important to them, as a result of the pandemic.

Looking to the future

It comes as no surprise that the majority of adults valued family and relationships as the most important life focus pre-pandemic (74%), and this remains the same now (78%). However, 59% of Brits now hold personal health as ‘very important’ – an increase of 13% from before the pandemic.

Instead of dwelling on the hardships, we’re mindful of the positives that have come out of the last year, such as being able to cook more (31%) and having more free time to exercise (25%).

Alexandra Loydon, Director of Partner Engagement and Consultancy at St. James’s Place, commented:

“It is really positive to see that although the pandemic has brought hardship and uncertainty to many, there have also been some real positives, especially as people place their general well-being as a greater priority than before.”

At Wellesley, we always promote the idea of looking long-term – focusing on long-term stability rather than short-term turbulence. It’s therefore brilliant to see how flexible people have been in the face of adversity over the last year. After all, we haven’t just had the pandemic to contend with – but issues such as Brexit, the US Presidential election and reeling markets across the globe.

Financial goal-setting

With our options for socialising, travel and shopping being, let’s say, a little limited of late, it’s had the silver lining of allowing us to save more. One in three adults (37%) has been able to do so, on average pocketing £1,660 (although there’s a big gap between men and women at £2,040 to £1,300). Those aged 25-34 have been the biggest beneficiaries of the reduced social life – saving £2,330, with the 45-54s only saving £840.

Melloney Underhill, Marketing Insights Manager at St. James’s Place, says:

“The pandemic has taught us a really valuable lesson as to what (admittedly, enforced) financial discipline can do for your future. It’s so nice to see a silver lining for those who haven’t lost their jobs or had their incomes reduced. Their 12-month spending diet could set them up for a brighter financial future, but they need to be careful not to blow all those savings once restrictions are lifted.

“Seeking financial advice about how you could achieve your long-term goals is key to making the most of what you’ve accumulated.”

If you’re a member of that fortunate group who saved more during the pandemic, now’s the time to take action.

Seizing the opportunity

This stronger motivation for making – and committing to – future plans is perhaps a rare positive effect of the pandemic, but it’s important to start taking steps towards that end goal. You might want to return to the New Tax Year article at the start of the newsletter!

Wherever you are on your financial journey, Wellesley is there to help. Just ask.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief generally depends on individual circumstances.

Sources:

All statistics taken from research carried out by Research Without Barriers on behalf of St. James’s Place, sample size 1,026 UK adults, March 2021.

Calm after the storm: Markets get off to a steady start in 2021

After a choppy first quarter of 2020, investors will be relieved to see that markets have had a much smoother first three months in 2021.

Industry experts have described the start to the year as ‘fair’ – admittedly not a very exciting depiction, but arguably it is exactly what was needed after the volatility of 2020.

As the graph below shows, one year on, markets have had a much quieter first quarter. This reflects a period of rapid progress against COVID-19, with vaccine programmes gaining steam around the world. Naturally, this has been playing out in financial markets, and investors are looking to a brighter future.

The UK – as measured by the FTSE 100 – appears to still be a straggler, but that ignores the recent strength of sterling. Allow for that and the 3.9% rise in the FTSE 100 is better than the MSCI All-World performance of 3.2% in sterling terms. Similarly, the standout 10.3% rise of the Euro Stoxx 50 on the graph drops to just 2.1% when adjusted for the change in £/€ exchange rate.

A summary of the movements in the main markets is shown below:

31/12/2020 31/03/2021 Change in Q1 2021
FTSE 100 6460.52 6713.63 3.92%
FTSE 250 20488.3 21518.71 5.03%
FTSE 350 Higher Yield 2893.08 3106.46 7.38%
FTSE 350 Lower Yield 4291.83 4335.49 1.02%
FTSE All-Share 3673.63 3831.05 4.29%
S&P 500 3756.07 3972.89 5.77%
Euro Stoxx 50 (€) 3552.64 3919.21 10.32%
Nikkei 225 27444.17 29178.8 6.32%
Shanghai Composite 3473.07 3441.91 -0.90%
MSCI Em Markets (£) 1767.417 1785.206 1.01%
UK Bank base rate 0.10% 0.10%
US Fed funds rate 0.00%-0.25% 0.00%-0.25%
ECB base rate 0.00% 0.00%
2 yr UK Gilt yield -0.17% 0.10%
10 yr UK Gilt yield 0.19% 0.85%
2 yr US T-bond yield 0.12% 0.16%
10 yr US T-bond yield 0.92% 1.75%
2 yr German Bund Yield -0.71% -0.70%
10 yr German Bund Yield -0.57% -0.30%
£/$ 1.3669 1.3797 0.94%
£/€ 1.1172 1.1739 5.08%
£/¥ 141.1299 152.4559 8.03%

There are a few points of interest here. The out-performance of the FTSE 350 Higher Yield over its Lower Yield counterpart is a reflection of the trend towards value. It is mirrored in the USA, where the more heavily tech-weighted S&P 500 underperformed the Dow Jones Industrial Index by 2%.

What’s more, emerging markets were relatively disappointing in Q1, dragged down by China and rising US bond yields. Increasing bond yields were a notable feature of the quarter. Although base rates were unmoved and two-year government bond yields barely changed, 10-year yields rose sharply. There is now talk of the 2% barrier being breached for 10-year US Treasuries before the end of the year – more than double the starting level.

Reasons to be cheerful?

As the graph shows, the first quarter had its fair share of ups and downs – with the rise being more of a churn upwards than a straight trend. How long markets can continue to rise if bond rates continue to do the same is the point to watch in the coming three months.

Since the data was published, the UK has started to emerge from its latest lockdown, and is progressing nicely along the government’s ‘roadmap to freedom’. For investors in UK assets, the likelihood of a faster economic recovery is broadly positive. Provided that the vaccine rollout continues to progress, authorities in the UK, as in other countries, can begin to look forward to the longer-term tasks of restoring public finances and fuelling economic growth.

Business mergers & acquisitions: The questions on buyers’ lips

Many businesses have been hard-hit this year as a result of COVID-19. Ahead of purchasing a new business, buyers want to know how companies have performed during the outbreak and what level of success is expected post-pandemic.

Good-quality merger and acquisition (M&A) deals are still proceeding, despite the pandemic. However, buyers are understandably posing questions about how companies have reacted to COVID-19, and what their prospects for success are once ‘normal’ life has resumed.

Andrew Shepperd, Co-founder of business broker and corporate finance advisory firm Entrepreneurs Hub, shares his thoughts:

“There are two things you might assume. Either that deals aren’t being done or, if they are being done, they are opportunistic deals. But, actually, what we are finding is that good M&A is happening, good acquirers have still got strong balance sheets and they are acquiring in a very responsible way.

“The obvious question is, ‘are they cut-price deals that are unfavourable to the vendor?’ And the answer is ‘no’.”

Potential buyers usually have three important questions related to COVID-19, as part of their due diligence, he adds:

1. How have you performed through the pandemic?

Shepperd notes that acquirers are generally very considerate of the fact that companies have come up against various challenges during the crisis. They actually now feel more confident about the businesses they are buying in many respects, as those that are still trading have already proven their resilience.

Contracted revenues are expected through the worst months. They also want to have an awareness of what business was like pre-pandemic, and what it will look like in the months to come. They are essentially looking for a trend line that will help them to make a valuation based on business norms, as opposed to the low lockdown period.

“They will want to understand what the pandemic was like for you. What did it feel like in the business? What did your customers do? What did you do with your staff? They’ll also want to know whether you kept operating fully or closed down, how you maintained customer obligations, what happened to your cash, did your projects pause or get cancelled altogether, did you pick up different kinds of work, and was the size of your orders bigger or smaller than normal?” says Shepperd.

“Overall, they are looking for the colour that will give them a clearer understanding of your business,” he adds.

2. What are the prospects for the business?

It goes without saying that acquirers will want to understand how you plan to be successful beyond the pandemic. If your products have been in demand during the outbreak, how will you sustain sales? And if you changed your business model in order to produce products such as hand-sanitisers or masks, is demand likely to remain? If not, how will you revert to your previous business model?

Acquirers will also seek to understand how you’ve adopted the digital transformation to meet the demands of a modified business environment. Many acquirers, especially those in the technology sector, are enquiring about a target company’s cloud strategy and how they are addressing customers’ problems through the cloud, adds Shepperd. They wish to know about online information, online ordering, support, and how online orders are fulfilled.

“I’ve seen a number of businesses that I work with, and these are privately owned SME businesses, whose revenues have gone through the roof by going online. If you went back 10 months ago when COVID-19 was starting and some of their traditional customers and traditional ordering and fulfilment were jeopardised, revenue flows were highly disrupted. By going online not only have they recovered but they have grown more quickly.”

3. To what extent did you use government support?

While acquirers want to know whether you took advantage of the Job Retention Scheme, the Coronavirus Business Interruption Loan Scheme or the Bounce Back Loan Scheme, they also want some awareness of how these are reported in your books.

If you did make use of this support, it is not viewed as a negative. If anything, it is often seen as good business sense, since the loans were offered on extremely favourable terms and could be used to finance expansion. Businesses are, on the whole, considered to be resilient if they managed to continue trading through lockdown, but acquirers will want some reassurance that your success doesn’t rely on government support.

“They are assuming that businesses have taken the support and generally acquirers are very supportive, says Andrew. “They just want it reported clearly. Generally, it is broken out onto a separate line of your profit and loss report and they are fine with it.”

Finally, don’t be taken aback if an acquirer asks you how you truly are! One good thing to come of the pandemic is that something of the human touch has returned to mergers and acquisitions, says Shepperd. He has witnessed genuine concern from acquirers for business owners, as they recognise the sheer pressure they have been up against this past year.

The opinions expressed by third parties are their own and not necessarily shared by Wellesley Wealth Advisory or St. James’s Place Wealth Management.

Let’s talk profits: What’s the most tax-efficient way to pay yourself from your company?

Running your own business can be challenging and expensive, which is why it makes sense to make sure you’re extracting your profits in the most tax-efficient way possible. There are several considerations to make, as well as different choices depending on your own personal need – everyone’s financial journey and situation is different.

So, when it comes to extracting profit from your business, there are three options available if you run a business. These are:

  • Take more salary
  • Pay extra pension contributions
  • Pay a dividend.

Below, you’ll find a table that compares these three options based on £20,000 to distribute. Here are some of the main considerations you should make before deciding which option will be best for you.

National Insurance contributions

National Insurance (NI) contributions are made on an employee’s salary, at a rate of 13.8% employer NI and a further 2% employee NI, or 12% if their salary is below the upper earnings limit. This is the largest hit that payments could receive.

For example, £20,000 would suffer £2,425 employer NI. The residual would then suffer a further £2,109, if below the upper earnings limit, and that is even without Income Tax. If above the upper earnings limit, however, the employee NI would be only £351.50.

Corporation Tax

Both salary and pension contributions are generally classed as ‘allowable business expenses’, which means you would pay less corporation tax on them. The whole amount, therefore, can be used as the starting point for the payment – dividends, however, are not a business expense and will be subject to corporation tax. With Corporation Tax at 19%, this would reduce the payment made by £3,800.

Income Tax

Although pension contributions are not subject to immediate tax, they will eventually require Income Tax at your marginal rate, but in most cases 25% will be paid tax-free. Growth is also generated tax-efficiently within the pension, which could increase the eventual tax paid or even subject the payment to a lifetime allowance charge.

If you’re earning at or near £100,000, you will need to be careful – because the salary will be subject to your marginal rates of Income Tax, the loss of personal allowance could make this option less attractive. In the example, it is assumed that the whole amount will be within the higher rate band, so it is subject to 40% tax.

The same is true of dividends, but here you may also have access to the dividend allowance of £2,000 depending on other dividends received. Below, we have assumed that this payment is in addition to dividends already taken, which has used the allowance. The higher rate tax on dividends is less than on salary at only 32.5%.

How salaries, dividends and pension contributions compare for a company with £20,000 to distribute:

 

  Salary Dividend Pension contribution
Employer’s National Insurance £2,425
Corporation Tax £3,800
Cost to company £20,000 £20,000 £20,000
Residual amount £17,575 £16,200 £20,000
Immediate Income Tax £7,030 £5,265
Employee National Insurance £351.50
Amount paid £10,193.50 £10,935 £20,000
Income Tax if drawn from pension* £6,000
Net benefit £10,193.50 £10,935 £14,000

Inheritance Tax (IHT)

This is not an immediate tax, but it is worth remembering that payments made to your pension should remain outside your estate for IHT purposes. If your estate is already above the IHT nil-rate band, any further drawing – such as dividend or salary – that is not spent will just increase the estate and therefore the amount of IHT payable.

Annual allowance issues

The tapered annual allowance won’t be an issue in many cases, but for those who it affects – including those who have already used their standard annual allowance – this is a consideration you’ll need to make.

The benefit of tax relief will be lost on anything over the value of your available allowance and carry forward, meaning a pension contribution is less favourable. The annual allowance is not to be ignored, but it shouldn’t be the sole driver for dismissing pension contributions as an option.

Think about access

Don’t forget that pensions are not an immediate solution to your day-to-day situation – but rather a long-term investment. You can’t do your weekly shop with a pension contribution! So while it can be relatively easy to justify a pension contribution on the numbers alone, holistic planning requires you to have a good understanding of your own circumstances.

Take action now 

There are a lot of moving parts when it comes to extracting funds from a company. Realistically, some of, if not all, three routes will be used each year to maximise the use of allowances and provide a useable income and protection for the future.

Speak to a Wellesley Adviser to determine which, if any, of these options is best for you.

The value of an investment with Wellesley will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.