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U-turns and tax shake-ups: Four tips to navigate fiscal instability in 2023

Paloma Kubiak
Written By:
Paloma Kubiak

Investors have taken a pummelling in 2022, with the market gyrations exacerbated by significant political tumult and economic uncertainty. Q4 offered some solace as risk assets rallied, raising hopes of market recovery in 2023.

That said, the news is likely to remain gloomy into the New Year. Economic data, especially GDP prints, are back-ward looking – telling us where we have been. Equity markets, by contrast, are a good forward-looking mechanism for pricing earnings expectations

Simple steps

Going into 2023, investors would do well to take simple steps to protect themselves from a less optimistic mood of fiscal orthodoxy now being imposed by the Rishi Sunak government.

Fiscal instability is, sadly, nothing new. Governments and Chancellors change tack or U-turn with alarming regularity. From current Chancellor Jeremy Hunt unravelling Kwasi Kwarteng’s reckless ‘fiscal event’ to ‘Spreadsheet Phil’ Hammond’s U-turn on National Insurance rises on the self-employed in 2017.

We also witnessed George Osborne’s ‘omnishambles’ 2012 budget, which included the notorious ‘pasty tax’ débacle. Gordon Brown pulled the rug from under the tax reliefs he had earlier introduced on film-making, which had, arguably, laid the foundations for the UK’s current success in film production.

Far more damaging were the perverse reversals to previous incentives to save for retirement (reducing the Lifetime Allowance, cutting annual contribution limits etc). Retrospective tax legislation used to be considered bad governance because it was unfairly damaging to corporates and individuals encouraged to plan, build and save for the long-term. This prescription does not seem to apply so firmly today.

So what can private investors do to protect against political uncertainty and back-tracking?

1) Shelter as much as you can in ISAs

With £620bn sheltered in ISAs, and just over half held in Cash ISAs (at end-2020, according to latest HMRC figures), the Treasury may be eyeing the humble ISA enviously, but these simple tax-wrappers should remain a priority for sheltering as much of your savings as possible.

Remember, you can shelter up to £20,000 every tax year. With a good investment manager, it should not cost a thing to transfer ordinary portfolio assets into a Stocks and Shares ISA account.

With sensible investment decisions, it does not take long to build up a significant ISA portfolio whose income and gains are totally outside the tax ‘net’. ISAs don’t even have to be included in tax returns.

2) Maximise tax rebates on pension savings

The other way to shelter earnings from tax is to maximise pension contributions. Even if you have no earned income, you can still save up to £2,880 into a pension, with the scheme administrator claiming up to a further £720 in tax relief from HMRC.

So even if markets stay flat, your contribution grows immediately by 20% (which is the basic-rate tax relief, even available to non-earners).

3) Limit the effect of rising rates

Individual savers outnumber borrowers by 5:1, according to Gov UK. Pensioners, savers and investors have suffered the financial squeeze of a near decade and a half of ultra-low interest rates. With interest rates set to rise, the balance will at last be redressed.

However, with the Chancellor desperate to plug the black hole in the nation’s finances, Income Tax and Dividend Tax rates are only likely to go one way, with personal allowances currently frozen until March 2026.

The additional 1.25% on Dividend Tax imposed by Rishi Sunak in October 2021, reversed by Kwasi Kwarteng in September 2022 then swiftly re-confirmed by Jeremy Hunt in the Autumn Statement, takes the top rate to 33.75% and the additional rate to 39.35% for this tax year and subsequently. The Dividend Tax allowance, cut from £5,000 in 2017/18, remains at £2,000 (for the moment, anyway).

Single-premium life assurance bonds – which can hold collectives like unit trusts or investment trusts – are likely to become more popular.

This is because up to 5% of your original capital in such a bond can be withdrawn each year on a cumulative basis; these withdrawals can ‘feel’ like tax-free income (though any further withdrawals above 5% of your original capital each year may attract income tax).

Investments packaged as life insurance usually consist of a raft of individual policies, which can be split up and assigned to a spouse or children with a lower tax-rate, which may be a useful strategy to reduce the overall tax burden. If the bond is written in trust, subject to certain rules, it may fall outside your estate for IHT purposes.

Underwritten by Life Assurance companies, they can be useful, tax-advantaged ‘wrappers’ for a long-term investment portfolio and may be useful for long-term succession planning. They are more appropriate for those with genuinely surplus capital, who can commit to an investment bond but want to retain interim control of the income.

4) Take advantage of Capital Gains Tax allowances

Finally, if you want to realise some gains in your portfolio – perhaps to supplement income – make sure to utilise your £12,300 CGT allowance before 5 April. The Chancellor is cutting the individual’s exemption in half next tax year (to £6,000) and reducing it again down to £3,000 for 2024/25. For trusts which only benefit from half the individual exemption, it will therefore reduce to a negligible £1,500 by 2025/26.

James Johnsen is director at Church House Investment Management