economic #aGENda 22.04

Our regular roundup of financial news from the last two weeks that's driving the economy

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UK Tax Receipts Rise

Government statistics just released show that HMRC tax receipts are £80bn higher than they were before the pandemic.

Growth in tax returns was fuelled in part by a 35% year-on-year surge in the UK’s capital gain tax bill, which is up from £10.8bn to a record £14.6bn in the past year. This is owed largely to a hike in tax in entrepreneurs selling businesses.

HMRC’s yield from capital gains tax has increased sharply in recent years, with the latest total almost double the £8.1bn collected five years ago and more than treble the £4bn collected decade ago.

Self-assessment income tax receipts collected in January and February 2022 [the two months when people were due to pay it over due to extended deadlines] saw a small reduction of just over £800 million from the same two months in 2021.

Whilst the self-assessment receipts have dipped, capital gains tax receipts are positively buoyant. Rules on paying tax on property transactions throughout the year mean that there is now a steady inflow each month. Total receipts are up nearly £5 billion (£4.8 bn) in the last 12 months.

And it’s only going in one direction

The rise in National Insurance (NI) by 1.25 percentage points came in at the start of the tax year, a measure being undertaken to raise £12bn in funding to support the NHS and social care.

But the hike’s introduction – which breaks a key Conservative Party manifesto pledge from the 2019 general election – coincides with a deepening cost of living crisis, the worst inflation Britain has seen in 30 years and a 54% hike in Ofgem’s energy price cap, adding almost £700 per year to average domestic electricity and gas bills. With household finances already under significant duress, here’s what the changes to NI mean for you:

• NI is a direct tax paid by employees earning more than £184 a week and the self-employed making a profit of £6,515 or more per year and is regarded as “progressive” in that it charges higher earners more on the assumption that they have more to give than those less fortunate.

• The rate increase first announced by the government last September means that workers will now pay a 13.25% contribution, up from 12%, until the start of the new tax year on 5 April 2023.

• For the moment, that means that those earning £20,000 per annum will pay an additional £130 a year, those on £30,000 will pay £255 more, those on £40,000 will pay £380 more, those on £50,000 will pay £505 more and those on £80,000 will pay £880 more.

• However, chancellor Rishi Sunak has been under intense pressure to do more to help households with spiralling costs and duly announced in his Spring Statement last month that the earnings threshold before which people are required to begin paying NI would be raised from £9,880 in April to £12,570 in July.

• Between April and July then, all NI contributors will pay more because of the hike, as outlined above.

• But afterwards, according to the government’s figures, those earning £20,000 per annum will pay £197 a year less, those on £30,000 will pay £53 less, those on £50,000 will pay £197 more, those on £80,000 will pay £572 more and those on £100,000 will pay £822 more.

• Essentially, that means that the combined impact of the rate increase and threshold hike coming in from July will see workers earning less than £34,000 a year paying less in NI than they did previously.

No fault divorce laws

New divorce laws have now been rolled out, making separation easier for married couples – but this may have consequences for family finances, lawyers warned.

Under the new “no-fault” rules, couples will no longer have to provide grounds for their divorce or civil partnership dissolution. Under the old system, in England and Wales, couples could only prove their marriage had broken down as a result of adultery, unreasonable behaviour or desertion.

But, since Wednesday April 6, they only need to state that their relationship has “irretrievably” broken down. The change – part of the changes in the Divorce, Dissolution and Separation Act – aims to remove the element of blame from split-ups, which can complicate a process which is already traumatic and difficult.

Since Thursday 31 March the service for dealing with the previous rules ceased. Separating couples may find the new system fairer and more amicable – but there are concerns it could lead to an increase in divorce rates.

The divorce rate dropped in 2020, declining by 4.5% to 103,592 cases in England and Wales, according to the Office for National Statistics – but this may just be the calm before the storm as people wait for the new rules to kick in.

It’s important to remember the divorce element only serves to officially end a marriage or civil partnership. It’s critical that couples realise that, and still take all the necessary – additional – steps to settle their money matters.

While there are lots of options separating couples can take when it comes to finances, full and frank conversations about the value of assets and income remains key to achieving the best outcome.

Additionally, all agreements will still need final court approval to ensure they are legally binding and tie up any loose ends.

Russia on brink of first debt default

Russia said it had sent interest payments due on its dollar bonds for processing but it could not guarantee investors would receive the cash, leaving the country on the brink of its first debt default since 1998.

Investors were awaiting $117 million (€106 million) in coupon payments on two Russian bonds, the first such payments since western countries responded to President Vladimir Putin’s invasion of Ukraine with unprecedented financial sanctions.

The deadline marks a crucial test of Moscow’s willingness and ability to continue servicing its external debt. Russia’s finance minister Anton Siluanov said that the payment instruction had been sent to the US bank that usually handles such transactions but there was a risk the cash would not get through, according to state newswire Ria Novosti.

Last month, Mr Siluanov said that payment would be made in roubles if the transfer was unsuccessful, adding that western sanctions freezing some of the Russian central bank’s assets were an attempt to force the country into an “artificial default” on its $38.5 billion of foreign currency bonds.

Fastest house price rise in 18 years

UK house prices grew in March at the fastest rate since 2004, continuing the ascent to new record levels – with the price of an average home now a fifth higher than at the start of the coronavirus pandemic.

Prices rose by 14.3% in the year to March, the strongest pace of increase since November 2004, when the UK experienced a housing boom that preceded the financial crisis, according to Nationwide, the UK’s largest building society.

The price of an average UK home hit £265,312, more than £33,000 higher than March 2021. Price rises were evident across the country, with prices in Wales increasing by 15% over the year. House price growth accelerated in every region of England and Scotland.

Detached homes have gone up nearly £68,000 in price since the start of pandemic, a 22% rise, as people working from home sought out bigger properties, while average flat prices have increased by £24,000, or 14%.

The near-relentless rise in house prices has come despite the economic damage from the pandemic, which caused a deep slump in activity. However, government wage support schemes and savings during lockdowns have supported the housing market.

Nationwide estimated that reduced spending has meant that households were on average able to save £190bn more than would have been expected before the pandemic – £6,500 a household, albeit unevenly spread.