Mitigating the long-term effect of inflation
With continuing inflation in the UK, many of us and our businesses have been put “off track” in the short to medium term. The Bank of England recently increased interest rates by a quarter of a percentage point to 4.25 per cent, despite the turmoil that has engulfed banking in recent weeks. The rise was as expected by economists in view of the latest data showing inflation rising to 10.4 per cent in February and annual food prices spiralling to 15 per cent last month.
Andrew Bailey, the Bank of England governor, said last week that recent financial turmoil would not stand in the way of the central bank controlling inflation with higher interest rates.
Inflation is a problem for most of us. Savers find that the value of their cash is being rapidly eroded. At 10% inflation, the £100 you save today will only buy £90 worth of goods in a year’s time. Many people find that their household budgets are stressed.
If you are struggling with your mortgage repayments and can’t get back on track, it’s important you don’t ignore the problem. There’s a lot of help available. Money Helper has a 5-step guide and a budget planner to help manage your money. See: Mortgage arrears or problems paying your mortgage | MoneyHelper
Even borrowers, who might be expected to benefit from inflation when the value of what they owe is falling, suffer when inflation triggers increases in interest rates.
So, what can you do to protect your long-term finances and combat inflation?
- Protect your retirement income
Inflation has an enormous impact on how long retirement savings will last. The income that seems more than adequate when your start your golden years can look less than generous after 10 years of inflation, and a recipe for misery after 20. A basic level annuity will mean having the buying power of your income eroded every year. An inflation-linked annuity will start off providing a much smaller income, but one that keeps increasing over time. A drawdown pension – where your pension pot remains invested, and you draw down an income as you need it – is more flexible, but you will still need to take care to avoid running out of cash.
- Avoid locking your cash savings away
Savers should benefit when higher inflation leads to the Bank of England increasing the Bank Rate. But beware – although the rates offered by savings providers are rising, they have not yet done so enough to come anywhere near inflation.
However, with the Bank Rate forecast to rise further and with savings deals forecast to follow, there could be better deals to be had over the next few months. Shop around for the best deal – and avoid locking your savings into a long-term deal, because it could mean missing out on much better rates in the near future.
- Look at your investment strategy
In an inflationary world, investing – where your cash is used to buy something which could appreciate in price – could be more rewarding than saving.
While inflation erodes the value of cash savings, it actually works to boost the value of some investments. But how should you invest? Bond investment becomes less attractive in times of inflation, as the income provided by bonds is subject to inflation.
Investors can protect themselves by buying index-linked bonds, where the interest paid rises in line with inflation. Some business sectors will suffer during inflationary periods. Oil and mining companies can tend to do well as rising commodity prices are good for their bottom lines. Utility groups often pay dividends linked to inflation. However, inflation could be bad for others such as retailers and supermarkets, which may lack the ability to increase prices. Luxury goods may be shunned when households tighten their belts.
- Secure a low-rate mortgage before rates rise
Inflation has already triggered rate rises, and mortgages are substantially more expensive than they were last year. This process could continue – the Bank of England has hinted as much. To avoid increasing interest costs which could mean that buying your home becomes difficult or even impossible, it makes sense to try and secure the lowest rate you can for your mortgage, fixed for the longest possible period.
- Get some expert help.
Managing money in inflationary times can be challenging – but the challenges can be much more manageable if you have an expert to call on, so talk to your financial adviser. If you don’t have one see: Choosing a financial adviser | MoneyHelper
UK Employer taxes update – Online P11D reporting
As the new tax year approaches, we highlight some important employer developments and changes to legislation and allowances relating to UK employer taxes, especially about online P11D submissions.
Spring Budget 2023
On the 15 March, the Chancellor of the Exchequer, the Rt Hon Jeremy Hunt MP, made his Spring Budget announcements.
Headline tax measures announced include reforms to capital allowances, changes to the pension allowances and a series of rate changes.
Information on all the measures announced can be found in the Budget Red Book. You can also read an overview of tax legislation and rates announced.
Reporting expenses and benefits for the tax year ending 5 April 2023
For existing employers who already submit the original P11D and P11D(b) returns online, there is no change. For those remaining employers who have submitted paper returns in previous years, from 6 April 2023, they will need to submit their original P11D and P11D(b) returns online.
HMRC is changing legislation to mandate the submission of original P11D and P11D(b) returns online through one of the following:
HMRC will no longer accept paper P11D and P11D(b) forms. This includes lists. For employers who need to submit up to 500 P11D and P11D(b) returns, the free HMRC PAYE online services can be used. For anything more, 3rd party software is required.
HMRC will publish electronic versions of the P11D and P11D(b) forms on GOV.UK, which will enable employers and agents to submit amended forms electronically from 6 April 2023.
No software changes are required, as this electronic form is not part of the current online services.
Paper P11D and P11D(b) (original or amendment) forms submitted from 6 April 2023
If an employer submits a paper P11D or P11D(b) (original or amendment) from 6 April 2023 the form will be rejected on the basis that it has not be submitted to HMRC in the prescribed manner. The employer or agent will be notified of the rejection and sign-posted to the correct process.
Please talk to us about any of these changes to legislation and submitting your returns, we will be delighted to assist!
HMRC late payment interest rates to be revised after Bank of England increases base rate
The Bank of England Monetary Policy Committee announced on 23 March 2023 to increase the Bank of England base rate to 4.25% from 4%.
HMRC interest rates are set in legislation and are linked to the Bank of England base rate.
As a consequence of the change in the base rate, HMRC interest rates for late payment and repayment will increase.
These changes will come into effect on:
- 3 April 2023 for quarterly instalment payments, and
- 13 April 2023 for non-quarterly instalments payments.
Late payment interest is set at base rate plus 2.5%. Repayment interest is set at base rate minus 1%, with a lower limit – or ‘minimum floor’ – of 0.5%.
Energy Advice for Welsh Businesses
Business Wales, the North Wales Business Council, Ambition North Wales, in collaboration with the Welsh Government Energy Service, has summarised some ‘low and no cost’ energy efficiency solutions, to help businesses and individuals mitigate against rising energy costs this year.
See: Energy Advice for Welsh Businesses | Business Wales (gov.wales)
