The world’s share markets had an eventful end to the third quarter, down at least in part to the fallout from UK’s ‘mini-Budget’.

Index
2022 Q3 Change

FTSE 100
–3.8%

FTSE 250
–8.0%

Dow Jones Industrial
–6.7%

Standard & Poor’s 500
–5.3%

Nikkei 225
–1.7%

Euro Stoxx 50 (€)
–4.0%

Shanghai Composite
–11.0%

MSCI Emerging Markets (£)
–4.8%
 
The third quarter of 2022 ended in tumult for UK investors. The third Chancellor of the quarter, Kwasi Kwarteng, produced a ‘mini-Budget’ on Friday 23 September that sent shock waves around the world throughout the following week. The Monday after the ‘mini-Budget’ – which the Chancellor insisted was not a Budget at all – the Bank of England and HM Treasury were both forced to issue statements designed to calm jittery markets.

Two days later the Bank of England was in full fire-fighting mode as government bond (gilt) prices tumbled. To stem the falls, the Bank of England announced it would be spending up to £65bn to buy gilts over a period of 13 days. That message helped bring some stability but left many economists musing over the fact that six days previously the Bank of England had said it would be selling £80bn of gilts it owned over the coming year.

On the final day of September, the Chancellor and the Prime Minister, Liz Truss, held a meeting with the head of the Office for Budget Responsibility (OBR) to discuss an assessment of the not-so-mini-Budget’s economic and fiscal impact. The OBR had offered such a review before 23 September, but it had been rejected by Mr Kwarteng, a decision that contributed to the market turbulence.

The dramatic ending to September left many investors thinking it must have been a terrible quarter. In fact, as the table shows, the most widely quoted UK market index, the FTSE 100, showed considerable resilience, declining by less than 4% over the three months. On the bald numbers, the FTSE 100 performed better than the US market yardstick, the S&P 500. However, that is not the case once currencies are considered. Over the quarter, the dollar appreciated by 9.0% against the pound – a mix of dollar strength and pound weakness. Adjust for this and a UK investor would have seen a sterling return on the S&P 500 of +3.2%.

The difference is a reminder of one benefit of investment diversification that can be forgotten – it can spread beyond just investments markets to include currencies.

The announcements in September’s not-so-mini-Budget have altered the balance between operating your business as self-employed or via a company.
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In September, the new Chancellor announced a range of tax and other changes including:
·     The increases in corporation tax announced by former Chancellor, Rishi Sunak, and originally due to take effect next April will be scrapped. While the media focus was on the main rate staying at 19% rather than rising to 25%, there was a larger potential drop in the marginal tax rate for many small businesses (and no benefit at all for those with profits of up to £50,000).
·     Mr Sunak’s 1.25 percentage point increase to national insurance contributions (NICs) was also scrapped, this time from 6 November 2022 for employers, employees and the self-employed. Do not forget that if you are employed by your own company, that can mean a total saving of 2.5% NICs for you and your business.
·     From 6 April 2023, outside Scotland, the basic rate of tax falls from 20% to 19%.
From 6 April 2023, the reforms to off-payroll working (often referred to as IR35) introduced in 2017 and 2021 will be withdrawn. This does not mean that IR35 is disappearing, to the disappointment of many. What the Chancellor’s move does is pass the decision about whether IR35 deemed employment rules apply from the employer to the individual worker. In theory, the underlying law remains the same. In practice, HMRC clearly expects many individuals to reach a different IR35 conclusion from their current ‘employer’, as revealed in a projected revenue loss of over £2bn in the medium term.

This set of changes means that from 2023/24, the financial balance between being in business on a self-employed basis or via a personal company will alter. In addition, the removal of the off-payroll reforms will give many people who are now classed as employees the opportunity to consider the self-employed/company alternative.

With so many factors involved – not just financial – advice is vital as the clock is already ticking to April 2023.

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September’s ‘mini-Budget’ made major changes to tax and national insurance contribution (NIC) rates, which have important short-term consequences.

The ‘fiscal event’ that the new Chancellor, Kwasi Kwarteng, presented in late September was more a ‘maxi’ than a ‘mini-Budget’. It contained a raft of measures that amounted to tax cuts of nearly £45bn a year in the medium term. The more significant changes on the personal tax front included:

·     A reduction in the basic rate of tax (outside Scotland) from 20% to 19% was brought forward a year and will now begin from 6 April 2023.
·     The 45% additional rate of income tax in England, Wales and Northern Ireland was briefly destined to disappear from the same date, before the politics of such a reform prompted a screeching U-turn. However, even if it had been abolished, the UK’s complex tax system would have continued to generate much greater marginal tax rates, such as the 60% effective rate on the band of income between £100,000 and £125,140 subject to phasing out of the personal allowance.
·     This tax year’s 1.25 percentage point increase in tax on dividends above the £2,000 dividend allowance will be removed, also from the start of the next tax year.
·     The increases to NIC rates for employees, the self-employed (and employers) that took effect in April 2022 are removed from 6 November 2022.
·     The 1.25% Health and Social Care Levy, which had been due to replace the NIC, increases from April 2023 will be scrapped.

These changes have a variety of consequences. For example, if you are a director of your own company, paying yourself a dividend after 5 April 2023 rather than before means you will benefit from the lower dividend tax rates. Some quoted companies may adopt a similar deferral strategy to benefit their taxpaying shareholders.
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In other instances, it may be better to bring forward income because next tax year the basic rate tax credit will be lower. As is often the case, what appear to be simple changes could mean serious consequences to your financial situation, so you should be seeking advice before making any moves.

There are many simple ways to cut expenditure and ease the bite of inflation.

The peak reading for inflation is likely to have been changed by the government’s September decision to introduce a ‘price cap’ of £2,500 on utility bills. Of course, the cap is no such thing – you could pay more than £2,500 – but what it represents is a ceiling on standing charges and unit prices. Although press coverage has said the new cap will reduce inflation by up to 5%, the decision on whether it does rests with an interpretation of its operation by the Office for National Statistics (ONS), the guardian of inflation measurement. For example, the ONS decided that the £400 flat rate rebate from October 2022 to March 2023 is an increase to household income rather than a reduction of household expenditure and so does not affect inflation.

Whatever the ONS decides, it is likely that your income will not keep pace with inflation in the near term. If you are searching for ways to cut expenditure, there are plenty of often overlooked opportunities. Here are three quick examples:
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·     Check how you pay your regular bills. Household and general insurance premiums are often usefully cheaper if paid on an annual basis, rather than monthly. Amazon Prime is another good example of favouring the one-off basis – the new cost is £95 a year or £8.99 a month (£107.88 for 12 months if paid monthly).
·     On the other hand, electricity and gas suppliers prefer payment by monthly direct debit to quarterly billing and the utility price cap reflects this.
·     Think carefully before automatically renewing contracts for services such as broadband. While the Financial Conduct Authority has now prevented insurance companies from charging more to renewing policyholders than new clients, so-called ‘loyalty penalties’ abound elsewhere. You could find that merely threatening to switch provider will see a ‘customer retention unit’ offer you a lower renewal cost.
·     Pay attention to your credit cards. Borrowing by card is expensive – often 20% plus –although these days it is usually less costly than a bank overdraft, where rates charged above any interest-free element are typically a shade under 40%. At the opposite end of the spectrum, some credit cards (and debit cards) provide cashback (or vouchers/points) on all purchases, albeit normally at below 1%.

One strategy we do not recommend is cutting back on savings and investment. Do that and you might be looking at greater cuts to your spending in retirement. 

The latest data from the Office for National Statistics (ONS) reveals that more people than ever are working beyond age 65.

One of the stranger economic statistics of recent times has been the strength of employment markets on both sides of the Atlantic. For all the talk of an impending recession and the upward march of interest rates, employment has remained buoyant in both the UK and the US. The unemployment rate in both countries is under 4.0%, which is about as close to full employment as can be reached. The latest estimate for the UK is that unemployment numbers are 42,000 less than job vacancies, whereas in the US, job openings are double the unemployed numbers.

A notable feature of the UK employment market has been the increase in the population aged 65 and over who are in work. The latest data from the ONS – covering the period April to June 2022 – showed both a record quarterly increase and a record total of close to 1.5 million, of whom nearly three quarters were employed. Viewed another way, 15.5% of men and 9.2% of women aged 65 and over were in work during this period.

The longer-term ONS figures show that over the last ten years, while overall employment has risen by about a tenth, employment among those aged 65 and over is up by a little over a half. These senior workers are not labouring all week, but they are, on average, putting in nearly 22 hours. The recent joiners of the 65-and-over workforce are predominantly part-timers, both employed and self-employed, according to the ONS.

What the ONS statistics do not reveal is why employment is growing so rapidly in this sector of the population. There is a clue in the fact that, to quote the ONS, “The industries where informal employment is more common, such as hospitality and arts, entertainment and recreation, saw some of the largest increases.”

The combination of sharply rising inflation and the increase in state pension age to 66 is likely to be forcing some former retirees back into work to make ends meet. It does not help that the April 2022 increase in the state pension was 3.1%, less than a third the current (August) rate of CPI inflation.

If the idea of joining that growing band of those still working at 65 and over does not appeal, then make sure your retirement planning provides you with enough income when you need it. ​