Tax planning using an employer’s pension contribution

Employer pension contributions are one of the most tax-efficient ways for a business to remunerate their key employees.

In theory, an employer can pay any amount of pension contribution to a registered pension scheme in respect of one of their employees or an ex-employee, regardless of their salary.

For tax relief to be given on employer contributions, they need to be deducted as an expense in calculating the profits of a trade, profession or investment business.

In most cases, this will not be a problem as pension contributions often are a central part of any employee reward package, and staff costs are perhaps the most genuine trade expense.

Other components such as salary and bonuses are similarly deductible from profit. However, what sets employer contributions apart from cash rewards is their exemption from employer NICs.

There is no liability to income tax as a benefit in kind for the employee if the employer pays the contributions into a registered pension scheme.

However, an employer’s pension contribution will be assessed against the individual’s annual pension allowance, money purchase annual allowance (MPAA) and tapered annual allowance.

Contributions over the employee’s relevant allowance may result in an annual allowance charge.

The following example shows the tax impact of an employer paying an employee in salary, dividends and pension contribution.

Julie owns a small business and wishes to pay herself £100,000 from the company. To keep things as simple as possible she initially wants to look at the effect of paying the full amount as salary, dividends or an employer pension contribution.

Pensions

Please note there are a number of assumptions in each case: the salary column assumes Julie has no other income, so has her full personal allowance available; the dividend column assumes that she can pay herself this amount in dividends under HMRC rules; and the pension column assumes that she has sufficient annual allowance available to cover the full contribution and that she will be a higher rate taxpayer in retirement.

As you can see, employer contributions can be a tax-efficient strategy. However, it is important to consider the employee’s annual allowance, as well as the fact that the pension plan cannot be accessed before age 55.

MARKET UPDATE: INFLATION, EMPLOYMENT AND RETAIL SALES DATA

MARKET UPDATE: INFLATION, EMPLOYMENT AND RETAIL SALES DATA TO PAVE WAY FOR UK RATE HIKE?

LAST WEEK – KEY TAKE AWAYS

Trump flies into the UK as May warns MPs not to put Brexit at risk

  • US president met with Theresa May to talk about Brexit, while also calling the EU a “foe” on trade.
  • A white paper published on Thursday outlined the UK government’s plans, advocating close links with the EU on trade in goods, but not in services.
  • Writing in the Mail on Sunday, May urged MPs to “keep their eye on the prize” ahead of a crucial Commons vote on trade and customs policy.
  • The Omnis view: Trump causes furore whether he goes, suggesting that European countries were taking advantage of the US and not paying their Nato bills. The prime minister, meanwhile, has a busy time ahead warding off any possible leadership challenge.

UK GDP growth rises to 0.3% in May

  • The UK economy strengthened in May, with growth of 0.3% from 0.2% in April, following a winter slowdown.
  • Growth was led by a strong services sector, including retail, computer programming and legal services.
  • The Office for National Statistics also calculated that gross domestic product (GDP) only rose by 0.2% in the March-to-May quarter, matching the growth of the first three months of the year.
  • The Omnis view: this was the ONS’ first monthly estimate of GDP, which presents a mixed picture of the UK economy. We expect continued slow, but steady, growth in the months ahead.

Mixed results for banks as US earnings season kicks off

  • JPMorgan and Citigroup both beat expectations for second-quarter profits on Friday, a big day for US bank results.
  • Wells Fargo saw second-quarter profits fall by 11%, in part caused by previous regulatory issues.
  • Global banks have recently been subject to Federal Reserve stress tests, designed to assess how well they could withstand another financial crisis – Deutsche Bank’s US division notably failed.
  • The Omnis view: the health of the banking sector is important as this sector makes up a big part of stockmarkets in the US and in the UK.

US inflation up 2.9% over 12 months

  • The Consumer Price Index (CPI) came in at 0.1% for the month of June, with the annual figure coming in at 2.9%, which is the highest since December 2011.
  • Excluding the volatile food and energy sectors, core CPI rose 0.2% for the month. Annually, this core figure is 2.3%.
  • The Federal Reserve is forecasting that its favourite measure of inflation, the Personal Consumption Expenditure Price Index, will remain at 2.1% this year.
  • The Omnis view: the Federal Reserve said on Friday that it expects rising inflation and low unemployment will keep it on track to raise interest rates at a gradual pace over the next two years. Two more hikes are projected in 2018.

Chinese economy growing at slowest pace since 2016

  • The second-quarter growth rate for China was 6.7% year-on-year, slowing from 6.8% for Q1.
  • The current pace of growth still remains above the government’s annual growth target of 6.5%.
  • Asian stocks were mostly trading lower on Monday in reaction to the data.
  • The Omnis view: it is clear China is slowing, though 6.7% growth is still the envy of other nations. The impact of trade disputes with the US will likely be felt in the second-half of this year.

Looking ahead – TALKING POINTS

Inflation, employment and retail sales to shed light on UK economy

  • Inflation remained steady at 2.4% in May, despite a rise in oil prices. Forecasters expect the Consumer Price Index to rise to 2.6% for June.
  • Wages will be in the spotlight ahead of the Bank of England’s Monetary Policy Committee meeting on 2 August.
  • Following two consecutive months of strong retail sales growth, there could be further good news for the UK’s embattled high street.
  • The Omnis view: the Bank of England’s Monetary Policy Committee is expected to raise the base interest rate from 0.5% to 0.75% in August, though poor data this week could put that move in doubt.

UK inflation rate (%) – June 2017 to May 2018

uk-inflation-july_499x205_jpg

Source: Office for National Statistics, tradingeconomics.com

Powell testimony will give clues to future US monetary policy

  • Federal Reserve chair Jay Powell is set to deliver his semi-annual testimony on the US economy and monetary policy to a Senate committee on Tuesday morning.
  • This should support expectations of a 25bp rate hike at the Federal Open Market Committee’s September meeting.
  • The median estimate of projections put rates at 3.1% at the end of 2019, and 3.4% at the end of 2020.
  • The Omnis view: The market still expects Powell to raise rates much slower than he has indicated. Any hints at this in his testimony will be taken positively.

US Fed Funds Rate –  2013 to 2018

us-fed-funds-rate_500x205_jpg

Source: Federal Reserve, tradingeconomics.com

 The Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC are authorised Investment Companies with Variable Capital. The authorised corporate director of the Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC is Omnis Investments Limited (Registered Address:  Washington House, Lydiard Fields, Swindon, SN5 8UB) which is authorised and regulated by the Financial Conduct Authority, 25 North Colonnade, London E14 5HS. Omnis Investments Limited does not offer investment advice nor make recommendations regarding investments. Potential investors are particularly advised to read the specific risks and charges applicable to the Funds which are contained in the Prospectus and Key Investor Information Documents (KIIDs).

Omnis Investments Limited is registered in England and Wales under registration number 06582314 (Registered Office: Washington House, Lydiard Fields, Swindon SN5 8UB).

 

Market Update: Unemployment data to give clues on Macron’s progress one year on

Market Update

LAST WEEK – KEY TAKEAWAYS

Key questions for Italian economy as new coalition government imminent

  • Five Star Movement and anti-immigration League close to clinching a deal to lead the country after 10 weeks of political stalemate.
  • Uncertainty around the future of the Italian economy leads to volatility in the country’s equities and bonds.
  • Leak of coalition’s draft plan shows proposals to ask the European Central Bank to write off €250bn of debt as well as to set up procedures allowing EU member states to exit the euro.
  • The Omnis view: it is hard to see what impact a partnership between two very different political forces will have on the Italian economy, though we are encouraged that volatility has so far been contained to domestic assets.

Commodities boost helps FTSE 100 hit new record high

  • Strong oil prices help FTSE 100 push to record high closing of 7,787 points on Thursday 17 May.
  • BP and Shell among the winners, while a weaker sterling has also been a boon to companies with big overseas business.
  • The price of oil has hit its highest level since November 2014, in part because of Donald Trump’s decision to exit a nuclear deal with Iran, a major exporter.
  • The Omnis view: UK equities have bounced back strongly from a downturn earlier in the year. However, we remain cautious on the asset class based on Brexit uncertainty.

UK employment at record high while wages climbing faster than inflation for first time in a year

  • Office for National Statistics reports that employment has climbed to a new high of 75.6% with the jobless rate at 4.2%.
  • UK wages climbed at an annual rate of 2.9% in the first three months of the year, with the latest inflation figure at 2.5%.
  • Average total pay was £515 a week in nominal terms, before tax and other deductions, for UK employees in March.
  • The Omnis view: this is encouraging news for UK workers, though real term wage growth of 0.4% is still very low and its remains a challenging time for consumer spending.

Mixed news for Japan as economy shrinks, but wage growth on the rise

  • World’s third-largest economy contracted at an annualised rate of 0.6% in first quarter of 2018 as consumption and capital expenditure slowed.
  • On a quarter-on-quarter basis, the economy shrank 0.2% compared with growth of 0.1% at the end of 2017.
  • However, wages increased by 2.1% year-on-year on the back of tight labour conditions.
  • The Omnis view: this is the first time in two years that the economy has shrunk, though many of its listed companies remain in good health and have contributed to strong performance from the Omnis Asia Pacific Equity Fund in particular.

Doubts over Trump and Kim Jong-un summit as Pyongyang gets edgy

  • North Korea has threatened to abandon historic leaders’ summit as it accuses the US of putting it “into a corner” on nuclear disarmament.
  • But Washington officials say preparations still underway for meeting in Singapore on 12 June.
  • North Korea has also cancelled high-level talks with its southern neighbour, angered by continuing US-South Korea joint military exercises which it sees as a rehearsal for invasion.
  • The Omnis view: June promises to be a vital month for US diplomatic relations with Asian countries, given the meeting in Singapore as well as ongoing trade negotiations with China.

Looking ahead – TALKING POINTS

Unemployment data a sign of Macron’s progress one year on

  • Analysts are looking for any changes to the 8.9% unemployment rate in France, registered at the end of 2017.
  • A year into the job as president, the jury is still out on Emmanuel Macron’s efforts on economic reform.
  • Labour laws passed in September 2017 allow companies to reach deals with workers rather than comply with industry wide rulings on working hours, pay and overtime.
  • The Omnis view: unemployment levels remain high in France, particularly among the young, with many workers on limited-time contracts. Macron must work to address the problem if the economy is to thrive.

France unemployment rate (%) – February 2015 to January 2018

bulletin-210518-1_499x195.jpg

Source: Insee, France, tradingeconomics.com

Fed minutes to reveal pace of future rate hikes?

  • The minutes from the Federal Open Market Committee (FOMC) meeting will give investors insight into its recent decision to hold the federal funds rate at 1.5-1.75%.
  • By the end of 2018, would we have seen three rate rises or four? It depends on the view on inflation and the overall health of the economy.
  • Markets are pricing in a 96.7% probability that the central bank will hike rates again at its June meeting.
  • The Omnis view: given the size of its economy, the pace of interest rate rises in the US is of huge significance globally, particularly if there were to be a policy mistake.

US Fed funds rate (%) – January 2015 to May 2018

bulletin-210518-2_308x200.jpg

Source: Federal Reserve, tradingeconomics.com

 The Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC are authorised Investment Companies with Variable Capital. The authorised corporate director of the Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC is Omnis Investments Limited (Registered Address:  Washington House, Lydiard Fields, Swindon, SN5 8UB) which is authorised and regulated by the Financial Conduct Authority, 25 North Colonnade, London E14 5HS. Omnis Investments Limited does not offer investment advice nor make recommendations regarding investments. Potential investors are particularly advised to read the specific risks and charges applicable to the Funds which are contained in the Prospectus and Key Investor Information Documents (KIIDs).

Omnis Investments Limited is registered in England and Wales under registration number 06582314 (Registered Office: Washington House, Lydiard Fields, Swindon SN5 8UB).

MARKET UPDATE: RATE RISE ON THE CARDS IN THE US

Market Update

MARKET UPDATE: RATE RISE ON THE CARDS IN THE US, WHILE UK LIKELY TO HOLD FOR NOW

LAST WEEK – KEY TAKEAWAYS

Brexit transition deal agreed

On Monday (19 March) it was announced that the UK and EU have agreed terms for the Brexit transition period next year, which lasts from ‘Brexit day’ on 29 March 2019 until 31 December 2020. After several days of talks, the two sides reached a compromise with the EU to allow Britain to sign its own trade deals during the transition, and the UK giving full free movement rights for EU citizens who arrive during the period.

UK growth upgraded in Spring budget

Chancellor Philip Hammond used his Spring Statement to unveil upgraded UK growth forecasts. Office for Budget Responsibility (OBR) figures have revised the UK gross domestic product (GDP) forecast for this year upwards from 1.4% to 1.5%. Government borrowing has also been revised down from previous estimates given last November. For 2017-18, the figure dropped from £49.9bn to £45.2bn, and the 2022-23 estimate is now £21.4bn down from £25.6bn. While the revisions were positive, they were only marginally so and had little impact on UK asset markets.

Putin landslide in Russian polls as relations with UK sour

Vladimir Putin secured a victory in Sunday’s Russian presidential election with more than three-quarters of the vote. He will lead the country for another six years. However, the election was not without controversy with main opposition leader Alexei Navalny barred from standing because of an embezzlement conviction, which he says was manufactured by the Kremlin. There have also been reports of irregularities at polling stations, with video evidence of officials stuffing ballots into boxes. Russian/UK relations have also hit a low amid accusations over the poisoning of ex-spy Sergei Skripal and his daughter in Salisbury.

You’re fired! Trump sacks US secretary of state Tillerson

Rex Tillerson, the US secretary of state, was the latest government official to be sacked by Donald Trump amid reports of disagreements over the country’s stance on issues such as North Korea and climate change. Trump’s chosen replacement is CIA director Mike Pompeo, who will need to be confirmed by the Senate. Tillerson joins a growing list of departures this year from the Trump administration, which includes chief economic adviser Gary Cohn, White House communications director Hope Hicks, White House staff secretary Rob Porter, and FBI deputy director Andrew McCabe.

US inflation steady while retail sales soften

The US core consumer price index (CPI) rose in line with expectations in February. The measure, which excludes volatile food and energy prices, came in at 1.8% higher for the month compared with 12 months’ previous. This was the same as the January figure. However, US retail sales fell for a third straight month in February, with the Commerce Department reporting a 0.1% slip. This was attributed to a cut back on purchases of cars and other big-ticket items.

Looking ahead – TALKING POINTS

Fed set to raise US interest rates

The Federal Open Market Committee (FOMC) of US Federal Reserve (Fed) meets on Wednesday with analysts overwhelmingly expecting a first interest rate rise for the year. A 25-basis point hike would put the Fed funds target rate range at 1.5% to 1.75%. The big talking point for markets remains how many rises are expected to come this year, three or four.

The Fed has said it expects inflation to move toward its 2% target by the end of the year. As outlined above, core consumer price inflation rose 1.8% in February, and a further pickup could push the central bank to raise interest rates faster. The Fed has recently come under the stewardship of new chair Jerome Powell, who took an upbeat view of the US economy when addressing Congress in February.

Following this week’s meeting, the Fed will release new economic projections and an updated ‘dot plot’ which shows the rate projections of the each of the FOMC’s 16 members. The December dot plot (shown below) suggested three rate rises this year. Currently, the average expectation is for rates to hit 2% to 2.25% by the end of 2018, and as high as 2.75% in the long run.

 

FOMC interest rate predictions – Sep-Dec 2017

dot-plot-dec-17_497x310_jpg

Source: Federal Open Market Committee, Business Insider

Big week for UK economic data

The Bank of England’s Monetary Policy Committee (MPC) will also make an interest rate decision this week though a hike is considered unlikely, for this month at least. According to Bloomberg data, investors believe there is just a 15.8% chance of a UK rate hike in March, compared with 62.6% probability of a rise in May (as at 19 March).

Updated employment data, due out this week, will likely play a significant role in informing the MPC’s decision. At last count, data for the last quarter of 2017 showed the jobless rate ticked up to 4.4% from a 42-year low of 4.3% previously. The second big determinant on interest rate decision making is inflation. Again, the latest data is due this week for the month of February, having stood at 3% in both December and January.

UK inflation (%) – Feb 2017 to January 2018

tuk_inflation_march_18_500x193_jpg

Source: Office for National Statistics, tradingeconomics.com

THE OMNIS VIEW

Through a well-diversified approach to asset allocation, the Omnis investment team aims to defend and grow the value of your portfolio through market cycles. The big economic story of 2018 so far is speculation around interest rate rises, both at home and abroad. It is the Federal Reserve in the US that has led the way with five rises so far since 2015, while the Bank of England has been more cautious with rates at just 0.5%. The European Central Bank is even further behind in the cycle, showing what a huge impact the financial crisis of 2008 and 2009 had on the health of major economies.

The Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC are authorised Investment Companies with Variable Capital. The authorised corporate director of the Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC is Omnis Investments Limited (Registered Address:  Washington House, Lydiard Fields, Swindon, SN5 8UB) which is authorised and regulated by the Financial Conduct Authority, 25 North Colonnade, London E14 5HS. Omnis Investments Limited does not offer investment advice nor make recommendations regarding investments. Potential investors are particularly advised to read the specific risks and charges applicable to the Funds which are contained in the Prospectus and Key Investor Information Documents (KIIDs).

Omnis Investments Limited is registered in England and Wales under registration number 06582314 (Registered Office: Washington House, Lydiard Fields, Swindon SN5 8UB).

Risk Vs Reward

While homeowners can still benefit from low mortgage rates, savers will be struggling to enjoy any kind of growth on money they have on deposit, leading some to consider a riskier investment.

If you’re considering investing in the stock market, one crucial and very personal issue is, quite simply, how you feel about the prospect of putting money at risk and your ability to accommodate any loss in value.

What’s your appetite for risk?

It’s a fact that risk and the potential for reward go hand in hand: Investments that are low in risk are low in potential reward, whereas the more risk you’re willing to take with your money the greater the potential for reward.

Factors in determining risk

As investment advisers, we will consider a range of factors  when assessing your attitude to investment risk:

  • Age – how old you are may affect how you would like to invest, particularly the closer you get to retirement.
  • The need for emergency cash – you should always keep a certain amount readily accessible (for example, in a deposit account) in the event of an emergency or as a foundation for your longer-term savings and investment.
  • Can you afford to take a risk? – if your investments dropped in the short term, do you have the time to wait for them to recover?
  • Can you afford not to take a risk? – leaving all your money on deposit may carry minimal risk, but you may miss out on higher potential returns and possibly see the spending power of that money fall due to inflation.
  • Are there tax-efficient opportunities available – such as pensions or ISAs?

Devising an appropriate investment strategy

Once you are clear about the risk you need to take to reach your goals and you feel entirely comfortable with your risk profile, you’ll need an investment strategy that is finely calibrated to deliver the results you’re looking for.

This is where a number of other key aspects of investment come into play:

 

  1. How to avoid the ‘eggs-in-basket’ principle. We can make sure your portfolio is invested across a range of assets in order that the positive performance of some neutralises the negative performance of others.
  2. Making sure that your money is in the hands of some of the best and most consistent investment managers in the business.
  3. Making sure you can give your investments time – the longer you can leave your investments in place, the more likely you are to cope with any short-term changes in market value.

Talk to us

As members of Openwork, one of the UK’s largest networks of financial advice businesses, we follow a clear and thorough process designed to clarify exactly what you need from your investments. We also have access to a meticulously researched and managed range of investments specifically designed to meet clients’ different needs.

Taken together, you will know not only that your money is in good hands, but also that given time, there is an increased level of probability that it will perform in line with your expectations.

Need advice?

Good investment advice involves building a clear picture of the results you’re looking for, taking into account your current financial position, your future goals and your personal attitude towards the subject of investment risk.

Talk to us for expert advice.

The value of investments and any income from them can fall as well as rise. You may not get back the amount originally invested.