I was wondering whether the markets fell on Tuesday morning as a result of the length of the Chancellors ‘Scene-Setter Speech’ but if the unprecedented pre-budget speech this week wasn’t enough to convince us tax rises are on their way then news reported in the Times that the chancellor has informed the Office for Budget Responsibility (OBR) that a rise in personal taxation is one of the “major measures” on tax and spending that she is preparing to announce later this month, must make it a certainty.
The forecaster will assess the impact of the measures, which also include Rachel Reeves’s plans to increase economic growth, before informing the Treasury of its assessment on Monday. It is the penultimate round of forecasts before the budget on November 26.
While Reeves could still pull back from the planned tax rise, its inclusion in the government’s official submission to the OBR is the clearest signal yet that the chancellor is preparing to break Labour’s manifesto pledge not to increase income tax rates. The chancellor is considering a 2p rise in income tax and a 2p cut in national insurance in an attempt to shift the burden of tax rises away from workers and on to other groups, such as pensioners and landlords.
What has the reaction been? The Bank of England’s monetary policy committee (MPC) said on Thursday that consumer spending and business investment had fallen in recent weeks as speculation about the chancellor’s plans for taxes grew. It added that businesses were now experiencing “very high” levels of uncertainty that were greater than at any time since Liz Truss’s mini-budget. “Contacts report that weak demand and elevated uncertainty ahead of the autumn budget may be causing firms to delay investment,” the Bank said. “The proportion of [businesses saying] that the overall level of uncertainty is high or very high has been around its highest level since end-2022.”
This move was previously put forward by the Resolution Foundation, which was headed up by Torston Bell, now an economic adviser to the Chancellor. Perhaps the more worrying thing for many people is that the Resolution Foundation also proposed significant cuts to the amount of tax free cash that can be taken from pension arrangements.
However, published today in the Times are reports that Rachel Reeves has decided not to cut this limit, as it would have a significant impact upon those nearing and planning for their retirement. I do so hope this proves to be true.
However, pension arrangements themselves still seem to be locked in the crosshairs of her targeting. I’ve heard from a number of sources, and it was also mentioned in the same Times article that salary sacrifice on pension contributions being the focus of that targeting.
At present there is no limit on the amount an employee can put into their pension under a salary sacrifice arrangement. This results in a National Insurance saving on the contribution. The speculation is that Reeves will cap the amount of someone’s salary that can be sacrificed without attracting National Insurance Contributions (NICs) at £2000 a year. Any contributions over that level would result in an employee paying the full rate of NICs of 8% on salaries up to £50,000 and 2% on income above that.
By way of example a basic rate taxpayer earning £50,270 who puts 6% of their salary into pensions this way would pay £80 a year more in NICs. If they were paying in 10%, its £240 more.
Of course, this not only impacts on employees, but employers too and they are already reeling from the impact of a number of changes introduced at the last budget.
Market News
The usual offering from Lothar Mentel and Team at Tatton Investment Management this week covers the following:
- Liquidity, actually – Markets had a tough start to the month, albeit after a cracking October. Some valuation reflection feels healthy, but we doubt that was the driver for the pull back.
- October Asset Returns Review – A bumpy road to achieve strong returns for the month; the end of the gold rally, a $19 trillion crypto crash and the slow, but growing, impact of the US government shutdown.
- Germany engineers a recovery – Germans like to talk themselves down almost as much as us Brits. A less emotional perspective though uncovers constructive 2026 upside dynamics.
And it’s a Monthly update from our friends at Rathbones in which they look back at a month of further gains for global equity markets, which continue to scale new heights despite the polarised environment. Some indicators are flashing clear signals of fear, yet there remains plenty of demand to fuel fresh gains.
This month’s update considers the three Presidents driving the moves in the markets: Donald Trump of America, Xi Jinping of China and Vladimir Putin of Russia. We’ve seen how escalating trade tensions between the first two can cause market upsets, and also how quickly the trade bombs can be defused.
A big source of fuel for market gains has been expectations of central bank interest rate cuts. So, we also examine the prospects for these forecasts to come to fruition.
Meanwhile, it seems they are sticking to their guns, by investing in ‘quality’ companies: businesses with low debt, stable earnings and strong market positions.
The Problem with Tax…
On a related but lighter note, have you ever noticed a Wilkes’ Gob? You may well have seen one at some point, if you’ve spent any time in Leicestershire (although you were probably looking at the beautiful countryside) says 7IM.
Or you might have seen something similar if you’ve been to Brick Lane in Shoreditch (although you were probably looking at the beautiful selection of curries). A Wilkes’ Gob is a type of brick. Specifically, a double-sized brick:
Source: Wikimedia Commons, Measham, Leicestershire, Wilkes’ Gob on the left
In 1784, the British government needed cash to cover the cost of the American War of Independence. And with new towns springing up as the Industrial Revolution took hold, MPs imposed a “brick tax” of 2 shillings and sixpence for every thousand bricks produced. The result? BIGGER BRICKS. For fifteen years, until the government closed the loophole.
The Wilkes’ Gob is a wonderful real-world example of why clever tax ideas often don’t produce sensible outcomes – people find other solutions.
Ahead of the budget in a few weeks*, here are a couple of the other more … quirky … taxes in British history; and the resulting behaviour, which very rarely involved paying the tax!
- The Hat Tax was also introduced in 1784 (expensive, that war!). The idea was that richer people would have more hats, so would have to pay more tax. Quite aggressively, the punishment for forging hat-tax stamps was death! Of course, people either stopped wearing hats, or started wearing these new-fangled things called “caps” which were exempt!
- The Window Tax (1696). In the 17th century, most people thought the government had no business asking them about their income. So when William III needed to raise money, he had to do it based on things his revenue officers could count. Like windows. More windows = bigger house = more money = more tax. Result – bricked up windows all across the country (which you can still see). And, allegedly, the creation of the phrase “daylight robbery” to describe the tax.
But. The most surprising tax fact we learned during our research: until 1990, in the UK, a married woman’s tax rate was the same as her husband’s! And when that rule changed, the UK workforce saw a significant uptick in workers.
Tax isn’t about the numbers. It’s about the behaviour.
*We’ll have a more serious note on that after the fact, but for now, speculation isn’t helping anyone!
Chart Of the Week
Every so often we get the privilege of meeting with some of the top people in our industry and this week was no exception when we caught up with John Wyn-Evans, Head of Investment Strategy at Rathbones. One of his slides took my eye and it was one of his ‘market truths’ showing the folly of moving into cash for 6 months once the market has dropped 10% below its market highs.
A STRATEGY OF SWITCHING TO CASH AFTER CORRECTIONS HAS UNDERPERFORMED STAYING INVESTED IN THE LONG RUN
Sources: LSEG, Rathbones
Investments can go down as well as up and you could get back less than you invested. Past performance is not a reliable indicator of future results. Value of an initial $1,000 investment (USD)
As ever, it pays to be invested!
Inheritance Tax
One tax change that is not going to change was announced in the Autumn Budget 2024. The Government will introduce legislation in the Finance Bill 2025-26 to include the value of unused pension funds and pension death benefits within the member’s estate on their death. This measure will take effect in respect of deaths on or after 6 April 2027 with the policy intention to prevent pensions being used as a tax planning vehicle to transfer wealth.
Legal personal representatives (LPRs) will be responsible for paying the IHT on the pension scheme where due. This outcome was a result of significant industry feedback around the complexity and likely delays that would be introduced if pension schemes themselves were responsible for IHT payments. The existing inheritance tax principles, providing an exemption for death benefits passing to a surviving spouse/civil partner and registered charities, will be maintained. Quilters has prepared a summary of the options:
LPRs are required to pay inheritance tax before they can apply for probate and distribute the assets in the estate. To mitigate any liquidity challenges, LPRs and pension beneficiaries (once appointed) will have several options to pay inheritance tax due on unused pension funds and death benefits, as follows:
- Pay directly from the free estate: LPRs can pay the inheritance tax due on the entire estate — including the pension component — directly from funds in the free estate, then proceed to apply for probate. If the beneficiaries of the free estate and the pension beneficiaries are the same, they can then take their pension benefits in full. If the free estate beneficiaries and pension beneficiaries are not the same, LPRs can use their existing legal right of reimbursement from pension beneficiaries to reclaim the value of the inheritance tax paid on the pension and distribute this to the beneficiaries of the free estate.
- Pension beneficiaries direct Pension Scheme Administrators (PSAs) to pay: The Government will set up a new scheme through which beneficiaries can direct the PSAs to pay the inheritance tax on their behalf directly to HMRC.
- Pension beneficiaries take their pension benefits in full and pay inheritance tax directly.
The things that jumps to my mind are the difficulty that LPRs might have in tracking down all the information about the pensions that were in place and that the payment of benefits will be dictated by the pace the slowest pension provider operates at. I can’t imagine that anyone wants to leave their personal representatives with a difficult job after their passing. Therefore, the is perhaps even more incentive to consider consolidating pension benefits where you have accumulated a number of them over the years.
Miscellaneous
If you are making regular payments into an RBC Brewin Dolphin General Investment Account (GIA) or Individual Savings Account (ISA) you should have had a letter from RBC Brewin Dolphin saying that the bank account details are changing. This is a genuine change to their banking procedure so if you wish to continue to make payments to them you will need to follow the directions on the letter. This does not apply to Pension arrangements as the payments you make go to the pension provider and not directly to Brewins. If you have any queries please speak to your usual JB Wealth adviser.
Bank of England says UK inflation has peaked after leaving rates at 4% reports the Guardian. City economists said the knife-edge decision and the Bank’s latest predictions for a fall in inflation from the current rate of 3.8% would pave the way for Threadneedle Street to cut rates after the budget. Holding the casting vote, Andrew Bailey, the Bank’s governor, said he wanted to “wait and see” whether inflationary pressures would continue to fade and if Reeves’s budget would have an impact.
I’m off now to watch the bonfire parade and firework show that the town puts on every year. If its anything as explosive as the ‘Traitors’ finale this week we are in for a good night. I hope yours is too and to catch up with you again next time.