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Update Service Budget Bulletin 2017

Update Service Budget Bulletin 2017

This SPI Update Service Budget Special summarises the impact of the main measures of the 8th March 2017 Budget on you as an investor and taxpayer, rather than as a drinking, smoking car-driver. It shows the changes previously announced which take effect in 2017-18 affecting Lessons in the SPI course which you may already have received.

The Lessons most affected are:
• Yes, You Can Beat The Taxman
• Advanced Tax Planning for the Investor
• Tax-Efficient Investing
• Investing in UK Property
• Planning for a Prosperous Retirement

The Chancellor had already made clear that the main Budget this year will be in the autumn, and there were no announcements affecting taxes payable in 2017-18, other than confirmation of the usual rises in drink and tobacco taxes. The media outcry about the proposed rise in self-employed National Insurance contributions referred to measures which won’t take effect until 2018 or later.

The main purpose of this Bulletin is to remind you of the previously announced changes which come into effect this April, and to alert you to changes planned for later years which may affect your investment decisions.

This year everyone who can afford it will continue to benefit from:
• generous tax breaks on EIS, SEIS and VCT investments
• the 20% rate of tax on capital gains, one of the lowest since it was introduced in 1965.

But you may be hit by:
• the continuing freeze on the amount of your assets which escapes inheritance tax, except to the extent they are in a SIPP
• the unchanged £100,000 threshold above which you progressively lose the benefit of the tax free personal allowance.


Table 1 below shows the income tax bands and rates for 2017-18 compared with 2016-17, and Table 2 shows the allowances.

Table 1

The Chancellor confirmed that the tax free personal allowance rises by another £500, and that the starting point for higher rate tax rises from £43,000 to £45,000, as pre-announced.

He reconfirmed the commitment to increase the personal allowance further to £12,500 by the end of this parliament, and to raise the starting point for higher rate tax to £50,000 by 2020.

Table 2

So as a basic rate taxpayer, in 2017-18 you will benefit from:
• the further rise in the tax free personal allowance, worth £100 a year
• less tax on the interest from your savings.

As a higher rate taxpayer:
• the rise in the personal allowance will leave you £200 a year better off, and
• the increase in the starting point for higher rate tax is worth another £300
• This more than offsets the £3.66 a week rise in National Insurance Contributions if you earn more than £45,000 and are aged under 65.

If your total taxable income is between £100,000 and £123,000, you progressively lose all the benefit of the personal allowance. You lose £1 of allowance for every £2 of taxable income over £100,000, representing an effective marginal rate of tax of 60 per cent – increased to 62 per cent if your income comes from earnings rather than investments, and you are aged under 65 and so still paying NICs.

Once your taxable income exceeds £123,000 you will have lost all the personal allowance, meaning £4,600 in extra tax payable at 40 per cent. The point at which you start to pay the 45 per cent top rate remains unchanged at taxable income of £150,000 – another continuing stealth tax, thanks to inflation.

If you are a basic rate taxpayer, since April 2016 the first £1,000 of the interest on your savings is entirely tax free – a £200 saving.

For higher rate taxpayers the allowance is halved to £500, but this still saves £200 in tax. Top rate 45 per cent taxpayers get no tax-free savings allowance.
And a further £5,000 “savings allowance” means that if your total taxable income is under £16,500 you pay no tax at all on your savings income in 2017-18. Non-savings income above £11,500 is taxed at 20 per cent. 

As promised, the new National Savings & Investment Bond goes on sale for twelve months from April 6, offering a [just] “market-beating” interest rate of 2.2% pre-tax. You have to tie your money up for 3 years. The minimum investment is £100, and the maximum is £3,000. Astonishingly the government claims that “this will cover all the savings of over half of UK households”.

The maximum annual interest of £66 available on a £3,000 deposit falls way under the £1,000 tax-free savings allowance.

Since April 2016 dividends over £5,000 a year are taxed at 7.5 per cent.

Higher rate taxpayers still pay a nominal tax rate unchanged of 32.5 per cent on dividend income above £5,000, but the abolition of the dividend tax credit since 2016 means the real tax rate is 7.5 per cent higher than previously.

In one of his few pre-announcements for next year, the Chancellor has said that this allowance will be reduced by £3,000 to £2,000 from 2018. This will cost basic rate taxpayers with more than £5,000 dividend income an extra £225 a year.

For anyone with substantial dividend income this further enhances the attractions of shifting your dividends into your ISAs, or those of other family members.


As previously announced in the Autumn Statement:
• The employee’s contribution rate remains at 12 per cent on the “primary” band of income.
• The rate on earnings above this primary band remains at two per cent.
• The primary threshold at which contributions start to be paid rises to £157 a week,
• but the upper earnings limit (UEL), where contributions fall from 12 to 2 per cent, is raised from £827 to £866 per week, to align it with the starting point for 40 per cent tax.

Despite this, the Budget further undermines previous attempts to harmonise the impact of tax and National Insurance by further widening the starting points for NICs and income tax.

This year employees start paying 12 per cent NICs on earnings of £157 a week, but don’t start paying 20 per cent income tax until they earn over £221 a week.

For 2017-18 we have a tax regime where for all except those over retirement age:
• the effective starting rate is 12 per cent NICs at £157 a week, £8,164 a year
• the combined NICs plus basic income tax rate of 20 per cent on earnings between £221.54 a week, £11,500 a year, and £45,000 – £866 a week – is 32 per cent, rather than the headline 20 per cent
• the rate on earnings between £45,000 and £100,000 is 42 per cent
• the rate on income between £100,000 and £123,000 is 62 per cent, because the £11,500 personal tax allowance is progressively withdrawn on incomes above £100,000
• falling again to 42 per cent on taxable earnings up to £150,000
• finally rising to 47 per cent on taxable earnings over £150,000.

The Chancellor justified his politically contentious decision to raise contributions for the self employed by 1% in 2018 and a further 1% in 2019 by the fact the basic state pension is now available to the self employed as well as those in employment, and promised further consultation on widening state benefits available to the self employed.

Isas – the pensions of the future

The amount you may contribute each year to an Individual Savings Account goes up to £20,000 from April 2017.

April also sees the launch of an expanded version of the concept – the Lifetime ISA. 

As announced last year, this allows anyone under the age of 40 to receive a £1 credit for every £4 paid in, up to a maximum credit of £1,000 a year until they are age 50. The fund may be used for house purchase, or can be withdrawn for any purpose after the age of 60, or earlier in cases of serious illness.

Withdrawals for any other purpose than house purchase before the age of 60 lose the government bonus, plus any growth or interest on it and also attracts a 5 per cent penalty.

These plans are separate from normal ISAs, but contributions count towards the 2017-18 total annual £20,000 limit. With an ordinary ISA you may take as much as you like out any time for any purpose, and providing you repay it within the same tax year, you can continue to shelter the income and capital gains under the ISA wrapper in future. Existing Help to Buy ISAs may be rolled over into the new Lifetime ISAs.

Capital Gains Tax

After last year’s surprise cut in the flat rate to 20%, the rate remains unchanged for 2017-18.

The annual tax-free capital gains tax allowance increases by £200 to £11,300, restoring the commitment made by George Osborne – but abandoned in his last budget – to raise the allowance by only 1 per cent a year.

The Chancellor made no new announcements about pensions, despite widespread speculation that he may have been con-sidering reducing further some of the tax breaks currently available.


As previously announced, the rate of corporation tax is reduced by a further 1 per cent to 19%, with a reaffirmed commitment to reduce it to 17% in 2020.


The £325,000 limit remains unchanged and the tax rate remains unchanged at 40 per cent.

Since 2009 widows or widowers may “inherit” their former spouse’s or civil partner’s nil rate band.

VCTs, EISs and SEISs

For the fourth year running there are no changes in the contribution limits.
• The maximum you may invest in an EIS remains at £1million.
• The limit for VCT investment remains at £200,000.
• The limit for SEIS investment remains at £100,000.
• The up-front income tax relief for investing in both EISs and VCTs remains at 30 per cent.
• The up-front relief for investing in a SEIS remains at 50 per cent, regardless of your actual rate of tax.
• The length of time for which you must own a VCT before being able to sell it free of capital gains tax remains at five years; for EISs and SEISs it remains at three years.
• SEISs and EISs continue to qualify for roll-over capital gains tax relief, and for inheritance tax business property relief.


Since April 2002, the personal tax you pay for cars registered after January 1998 has been determined by the price of the car, and its carbon dioxide (CO2) emissions – how “dirty” it is.

For 2017-18 the bands have changed as follows:
• 9 per cent of the car’s value for cars with less than 50kg/km CO2 emissions.
• 13 per cent of the car’s value for the next band of clean cars – those emitting between 51g/km to 75g/km.
• 17 per cent of the car’s value for the next band of clean cars – those emitting between 76g/km to 94g/km.
• Above that the tax increases by one per cent for each extra 5/km of CO2 emitted, rising to
• 37 per cent for the most polluting cars emitting 190g/km of CO2 or more.
• Within all bands an additional supplement applies for cars using diesel.

Since 2003-04 the fuel scale charges have also being aligned to the car scale charges, designed to tax you on your personal benefit from your use of a company car. Your bill is determined by the same percentage of a fixed fuel scale figure. The “fuel benefit charge” multiplier increases by two per cent more than inflation each year, rising this year to £22,600.


If the Chancellor is right, and we are in for rocky times ahead, then investors will naturally incline to caution.

There is little in the Budget itself to affect investment decisions.

For all the concern about productivity and lowered growth forecasts, the UK is still going to be one of the fastest growing developed economies over the next few years, and that should underpin current stockmarket valuations, though clearly there will be nervousness until the terms of Brexit have been agreed (or not) and legally endorsed and accepted by the country.

The prospect of imported inflation due to the depreciation of sterling since the referendum may put pressures on corporate profit margins, if the government forecast is correct that wage rises will continue to exceed price rises. As inflation rises the prospect of a rise in UK interest rates increases, though there is little likelihood of returns from cash in sterling becoming remotely attractive in the near future, as the interest rate on the NS&I Bond underscores.

The elephant in the room – and in rooms around the world – remains what effect the reversal of quantitative easing here and in the US will have on market valuations as interest rates rise further in the US.


To the extent you consider it appropriate, consider the following as the key areas for action:
• Make use of the full ISA, EIS, SEIS, VCT and capital gains tax allowances – you cannot carry them forward from one tax year to the next.
• If you are likely to have a taxable income of more than £33,500, and even more so if more than £150,000, consider maximising the extent to which high yielding investments are sheltered in ISAs or SIPPs. Holding such assets in these wrappers is dramatically more attractive the higher your tax rate, and even more so if you have more than £5,000 in dividend income.
• Think very carefully about withdrawing any of the funds which are within your SIPP, both from the point of view of losing the long term capital gains tax and income tax benefits of the fund, but also the future value of your estate.
• Depending on your age, re-examine whether it makes sense to run down your assets outside your pension fund now that you can bequeath it free of all taxes to anyone you wish.
• Consider creating matching tax losses on high yielding investments such as preference shares which you might benefit more from holding in an ISA or SIPP, by “bed and SIPP-ing” or “bed and ISA-ing”.
• Consider adding as much to your pension plans as you can afford. The new Lifetime ISA makes it unlikely higher rate tax relief will survive the next budget, or indeed whether any tax relief at all will be available to those eligible for Lifetime ISAs. The 40 year age limit makes logical sense only in terms of eventual plans to phase out upfront pension tax relief.
• If your taxable income falls between £100,000 and £123,000, consider strategies such as pensions contributions or charitable donations to reduce the amount in that band, which is effectively taxed at 60 per cent.
• Determine whether your portfolio contains adequate inflation protection. If the economy matches the Chancellor’s hopes for growth, rising equity dividend yields must be a better bet than the derisory returns on gilts coupled with the near certainty of capital losses when interest rates eventually rise.

March 2017

P/E ratio Is the FTSE 100 too high to buy

P/E Ratio – Is the FTSE 100 too high to buy?

One of the most basic tools for evaluating a stock or index value is the Price-Earnings ratio, or P/E.

You simply divide the current price of a share or index by the earnings per share for the previous 12 months. This provides a simple figure that makes the share price of a company you’re interested in comparable to the shares of other companies.

The rule of thumb is that the higher the P/E ratio, the more over-valued the share is. If the ratio value is 5 it means that investors are paying £5 – or whatever currency it is traded in – for £1 of earnings. So a share with a P/E of 15 is 50 per cent more expensive than a share with a P/E of 10, and twice as much as one with a P/E of 7.5.

Sometimes high P/Es mean the stockmarket is anticipating a future increase in earnings, maybe after a recent setback. For instance British American Tobacco has a record of steadily increasing earnings and dividend payouts and stands on a P/E of about 21, but Shell’s is over 70. In the US Microsoft has a P/E of 22, forecast to fall over the next two years. DJIA members GE, Disney and Boeing all have similar values. But Amazon, the online book and everything else retailer has a P/E of 171. Some companies, such as electric car innovator Tesla, have negative P/Es as they do not have any profits to report yet, and when they do the P/E will likely be sky high.

Variations may be due in part to how a company is run and reports its earnings.
But the P/E allows you to make broad comparisons between individual shares, and decide that one is more expensive than another.

In the same way each index can have a P/E ratio too, based on the monthly average of daily closing prices, divided by their previous 12 months earnings. That allows you to compare different UK markets against each other and with other international ones.

The FTSE 100 has an often quoted “historic” – established in lore, but not often a true mathematical average – P/E average value of 15 to 17.

But it goes up and it goes down just as the index does. Back in 1993 it was nearly 25. In 1999 and again in 2000 it got as high as 30. By 2008 at the height of the financial crisis it was well below ten, and again in 2011.

But Figure 1 shows that the FTSE 100 P/E ratio has risen well in excess of 30.

Figure 1 How the P/E rose throughout 2016, pausing above 37 before falling back

By comparison with the other key indices the FTSE 100 is high. The DJIA is at 20, and the S&P 500 and the Nasdaq both 24. But there are actually many unusual circumstances that have driven the FTSE 100 P/E higher since February 2016. Knowing this may settle the nerves, as can taking a longer term view through an alternative to the simple P/E.

The dramatic rise in the FTSE 100 P/E coincided with companies releasing their results at the calendar year-end. Many of these had taken a battering in 2015, with massive write-offs in the commodities sector. That continued through 2016, and while earnings fell or remained static, the index value rose.

As these numbers were calculated the P/E of the FTSE 100 rocketed. The Earnings have fallen while the Price has increased.

From June the index rose further because of the Brexit vote, in the expectation that those blue chip international companies that comprise the bulk of the FTSE 100 would benefit from the devaluation of sterling. Prices have also risen on the expectation of a rise in earnings that is yet to happen. It was not until October 2016 that the P/E ratio started to fall back to more reasonable levels. By the end of 2016 it was 33.

The long road

Another way to look at it is that the index is undervalued. Look back over the last 20 years; there were lots of volatile swings but no gains. This is because the index was overvalued, starting back as far as 1995. Since the highs of 1999-2000 while it has been moving sideways we have been waiting for profits to catch up with those valuations.

Figure 2 shows how the FTSE 100 has taken a long and tortuous path to get to where it is now. On the way there were good days and bad, rather than just good it might have experienced if it had grown more slowly and steadily.

Figure 2 How the FTSE has taken the long route to current valuation

The straight line path suggests what values the index should have had over the last 20 years if it were not for boom and bust.

Smooth out the bumps

Or you could consider another measure of value, one that perhaps is not so reactive as P/E has shown itself to be. Nobel Prize-winning economist Robert Shiller – of Irrational Exuberance fame – perfected the concept of a long moving average of earnings. It is called the Cyclically Adjusted Price to Earnings ratio, or CAPE.

This average smoothes out the short-term volatility of both earnings and business cycles. It may be better, but it’s not foolproof; it fails to consider changes in reported earnings through changes in accountancy procedure, for example.

Figure 3 shows recent CAPE values are well below the long-term CAPE average between 15 and 16.

Figure 3 CAPE smoothes out the volatile short-term effects that have sent the P/E ratio so high

As with the P/E, the CAPE long-term average is not absolute, but often a broad centre line. You’ll see variations of what is claimed to be the CAPE average.

Values extending beyond 24 and into the “red zones” are warning signs that the market is too high, as they were in 1995 to 1999 before declining through 2003. Figure 4 shows the CAPE for the overall UK market.

Figure 4 CAPE of the overall UK market. The late 2016 valuation of 15.2 is below the average of 20.4.

An analysis by Schroders in Figure 5 suggests that under or overvaluation is not actually market wide, and some sectors offer better value than others.

Figure 5 Under-and over-valued sectors of UK markets

Technology is over priced, but the Oil & Gas, Materials and Financials sectors remain bargains. What’s more, they may benefit should inflation start rising, as it inevitably will for a short period at least.


The high nominal P/E for the market as a whole may at first suggest that “we’re all doomed”. But a closer look at other measures reveals that the UK stock market still has more to offer investors than might be seen at first.

Ways to exploit the remaining upside include simple index trackers, offering the easiest “no thinking required” approach and no selections to consider. Alternatively consider sector funds that may be undervalued. Or drill down further into sectors for the particular bargains within each.

February 2017