This week George Osborne delivered his Autumn Statement. As expected, he announced that the government was behind its schedule for cutting the deficit. However, thanks in part to a fumbling display by shadow chancellor Ed Balls, the House of Commons reception wasn’t as painful as Osborne might have feared.
On Wednesday my MoneyWeek colleague Matthew Partridge was quick to break down how the statement would affect you.
“As we predicted, the chancellor has gone after pensions”, says Matthew. “His big move is to cut the annual allowance on pension contributions from 2014/15 by £10,000 to £40,000.” That wasn’t all as “he also followed it up with a cut in how big your pension pot can be (the lifetime allowance) before you have to pay tax, from £1.5m to £1.25m (it was £1.8m in 2010).”
Matthew’s advice? Put as much as you can into an Individual Savings Account (ISA). “One of the few bright spots for investors was the above inflation increase in the ISA allowance to £11,520. He has also said he will seriously think about allowing investors to hold Alternative Investment Market (AIM) shares within their ISA.”
Elsewhere on the tax front, the news is mixed, says Matthew. There was quite a lot of good news. “An above-inflation rise in the personal tax allowance next year means that you don’t have to pay tax on earnings below £9,440. The government has signalled that it won’t adjust the clawback that occurs for those earning more than £100,000 to take account of this, so higher rate taxpayers will also benefit.
“The planned increase in fuel tax has also been scrapped, rather than merely postponed. This is good news if you do a lot of driving.” And, perhaps to the disappointment of Nick Clegg, there will be no new tax on high-end property (the so-called ‘mansion tax’). That will come as a relief to anyone who lives in an area where property is expensive.
However this good news was balanced out by sneaky rises elsewhere. “The zero rate thresholds for inheritance tax and capital gains are to rise by less than the rate of inflation, creating yet more ‘fiscal drag’ on your assets. The threshold at which the top rate of income tax kicks in is also being increased by just 1% in 2014 and 2015, a cut in real terms. Meanwhile tax dodgers watch out – HMRC’s anti-evasion budget is going to be increased by £70m in an attempt to catch people trying to cut their tax bill by bending the rules.”
The best way to deal with tax avoiders
The tax issue of the moment was barely mentioned in Osborne’s statement – firms dodging corporation tax. So on Tuesday, Merryn Somerset Webb took to her blog to investigate how it could be reformed.
The problem, says Merryn, is that because modern money accrues mostly through intellectual capital we are losing most of our tax base. “Losing tax revenues is never a happy thing for a state, but it is a particular problem for a country such as ours with an expanding welfare state and a seeming inability to cut spending to anywhere near income.”
So what’s the solution? One of Merryn’s recent interviewees, the MP Douglas Carswell, thinks we may as well accept a lower tax base and cut our spending. Another solution, proffered by a reader, is to cut out corporation tax completely. That would surely attract international companies, says the reader. They might not pay direct taxes but “all their employees would pay taxes, they would rent offices, they would create jobs in the local economy”, and all their UK shareholders would pay the usual dividend and capital gains taxes in the UK.
Add all this up, says the reader, and “I rather expect it would only take four or five years before that figure was far surpassed with the growth and the personal taxes thereon which this country craves.”
Another idea is to “chuck a pile more money at HMRC to have a go at getting companies to pay more”. In effect that’s what Osborne did in his Autumn Statement.
The problem with these ideas? None of them would work, says Merryn. “The first is too random. The second is too boring and, as Michael Devereux points out in the FT today, it could also “undermine the integrity of the tax system” – if people are constantly told that other people are not paying their fair share, they are less likely to feel inclined to do so themselves. And the third? Fine as far as it goes, but it addresses the wrong problem: most big companies are abiding by the law perfectly well, so putting HMRC on their case will make no real difference.”
But plenty of other readers had their own solutions on how to remedy the problem.
‘Shinsei1967’ suggested that cutting corporation tax should be combined with a minimum wage. “Some sort of quid pro quo might help it being more popularly received, like increasing the minimum wage substantially and improving workers’ rights. Would people be happy with Starbucks paying no corporation tax if they paid staff £10 per hour and gave paid holidays and sickness pay?”
Meanwhile ‘Old Gaffer’ feels those who claim companies have a ‘moral’ duty to pay more corporate tax are missing the point. “I find it rather repulsive to see our government begging Starbucks and others to please give us a bit more money. The British Treasury is not a charity. It is wrong to embarrass any business into giving money when they are abiding by the horrendously complex tax rules that we have in this country.”
If you think you have a better solution, how it could be reformed.
The end of Britain
Collecting corporation tax situation is perhaps the least of Britain’s problems. We examine the bigger issues in a controversial new report called ‘The End of Britain’. So far it’s proved something of a sensation. We’ve had a lot of feedback, with some people outraged and others full of praise. We knew it would cause a stir and that some people would not be able to accept it. Our findings suggest Britain is about to face a massive shock and those who are not prepared will be worst hit. You may be unsettled by our conclusions – but we think it’s essential you see what’s going on for yourself. You can see the full report here.
Buy into this rising metal
The situation in the UK may be grim but that doesn’t mean there aren’t good places to put your money. In this week’s Penny Sleuth Tom Bulford explained why one metal – no, it’s not gold – looks a great investment right now.
To start off with Tom takes a general look at the commodity market. Commodity prices might have softened recently but Tom think that’s just a temporary glitch in the commodity ‘supercycle’. After all, says Tom, “the trend towards urbanisation in China and the developing world that is driving demand for metals… still have some way to go before they reach the level of city dwelling seen in the Western world.”
Looking at a recent report from brokers RFC Ambrian, Tom notes “there are also some signs that prices are rallying. Although it is always hard to distinguish between end-user demand and a restocking of the supply chain, the iron ore price is up 40% since its January low.”
“The free market has worked well. Money has been thrown at exploration and mine development and ‘supply has caught up with demand in most commodities.’ But this accelerated production is fast depleting resources, making it increasingly difficult and expensive to meet demand. This should mean that prices stay high, but equally that costs of production will also stay high. Rising costs, along with the political risks, are the main reasons to treat the sector with due caution.”
In other words, it’s not like the good old days of the commodity bull run when you could pick almost any old miner and be sure of success. Investors need to be a lot more selective now. So what commodities does Tom like?
“Potash and tungsten. Here in the UK, two projects are under way to produce these valuable commodities. And these projects look to be free of the political risk that is unnerving investors elsewhere. Why? Because the UK government likes these projects and the ‘real’ jobs that they provide, so is not putting obstacles in their way. While investors are getting excited about iron ore in east Africa, gold in Patagonia and copper in central Asia, it may just be that two of the very best projects are right here at home. Short supply of tungsten and high prices has made a site here in the UK very attractive to one mining company in particular.”
If you’re interested on hearing more on the UK natural resource story, sign up to The Penny Sleuth here.
Are you ready for 1 January 2013?
On 1 January the way we receive financial advice will be revolutionised. So in this week’s video tutorial Tim Bennett gives a timely explanations of the three main changes that the retail distribution review (RDR) will bring in and what they mean for you.
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