Financial Review 5th September 2014

Higher rate tax becoming the norm
One in three people could be a higher rate taxpayer within 20 years as the 40 pence band becomes the norm for millions who would not view themselves as high earners. More than 10 million people will be over the higher rate threshold by 2033, twice as many as at present, according to an analysis by the Office for Budget Responsibility. The figures will increase pressure on David Cameron to pledge to raise the higher rate threshold in the Conservative manifesto next year.

Twenty-five years ago, when the then Tory chancellor Nigel Lawson introduced the 40% band, it caught only one person in 20. Today, it is just over one in six. At present, 4.6m people pay the 40p higher rate and 300,000 pay the 45p additional rate for those earning more than £150,000. By 2033 the OBR forecasts 9.2m people will pay the 40p rate and 1.7m the 45p rate, roughly a third of the workforce. The focus of the coalition government has been on increasing the tax-free allowance, now £10,500, while leaving the higher rate unchanged.

More households fall into debt
More than a quarter of a million households have fallen into financial difficulty over the past year, according to a report. One in eight do not earn enough to cover their bills, up from one in nine last year, according to a survey by Legal & General. The average monthly shortfall for those who cannot pay their bills and debts has, however, fallen 30% to £60 across the UK over the past year.

The company says this confirms that despite the recent upturn in the UK economy this is not yet producing an upturn in household finances.

Loyalty to energy firms costs us dear
Households loyal to their energy company are being charged up to £230 a year more than those who have switched, new figures suggest. Price comparison website, uSwitch.com, compared the cheapest online deals – enjoyed by customers who have switched – to the standard dual-fuel tariffs that customers are put on if they do not switch supplier. It found the difference between the cheapest and standard plans of the big six energy suppliers can be as high as £232 a year, and £180 a year on average.

These figures raise questions about reforms introduced by the regulator Ofgem to make tariffs easier to understand and fairer. Before the reforms in 2012, the average standard tariff was just £167 more expensive than the cheapest online deals, according to uSwitch.com.

Staff hiring rate to hit 16-year high
British companies are planning to hire new staff at the fastest rate in 16 years, according to research from accountancy group BDO. The BDO employment index, which measures hiring plans for the coming quarter, hit 109.6 in July, its highest level since 1998, and up from 108.8 in June, with companies in the services sector delivering a significant boost.

However, BDO says many companies are now feeling the effects of a tightening labour market with skills shortages beginning to bite. The research also revealed that employment prospects for university leavers are at their strongest since the financial crisis hit in 2008.

Copycat tax website creamed it
The success of a copycat website that enticed thousands of taxpayers to file their self-assessment tax returns for huge fees has been revealed. Taxreturngateway generated revenue of £7 million in just four months by charging customers up to £1,000 for processing their tax returns, according to reports based on information from an insider.

Some 13,000 people used the site, paying an average fee of just over £500 for a service that is free if used via the official HM Revenue and Customs website. This success was based on the fact that it would appear at the top of internet searches when people typed in keywords such as ‘self-assessment’ and that it looked very similar to the official Revenue website.

After submitting basic information, users were asked to make payments online. It was only once their payment was confirmed that they discovered their money had not gone to the Revenue so that any tax owing still remained unpaid. The site was forced to close down, and its owners have been under investigation.

Interest rates still on hold
Interest rates will remain on hold until next year, the Bank of England has signalled, after it said rapid growth and falling unemployment would be tempered by pay growth continuing to lag behind the rising cost of living.

The Bank has halved its forecast for UK wage growth this year. It now expects the average pay packet to grow by 1.25% in 2014, compared with a May forecast of 2.5%. Pay growth in 2015 is expected to strengthen to 3.25%, which is also slightly lower than its previous forecast. Mark Carney, the Governor of the Bank, said earnings growth had been remarkably weak, even as unemployment has fallen rapidly.

Official August data showed that average weekly earnings fell for the first time in five years. Total pay fell by 0.2% in the three months to June, despite unemployment falling to a six-year low of 6.4%.

Data show British shares’ strength
British investors have enjoyed some of the highest returns in the world in the 100 years since the outbreak of the First World War – but they would have made even more if they had widened their horizons and invested globally. This is the conclusion of research by The Telegraph, which analysed a vast amount of stock market data from the world’s major economies over the past century.

Since 1914, the average investor in British shares has made a return of 5.7% a year after allowing for inflation. This is a healthy figure, and among the best returns for 20 of the world’s leading markets. But an investor who split their portfolio equally among each of the 20 countries would have made annual returns of 6.9% after inflation.

The figures underline the importance of timing. Invest in shares and get the timing wrong and at some points over the 100 years it could have taken 20 years for the value of the asset to recover.

Pay gap widens
The average FTSE 100 chief executive was paid 143 times their average worker’s salary last year. Analysis by the High Pay Centre think-tank and low pay lobby group reveals a dramatic surge in executive pay in comparison with most employees during the past three decades. The pay gap was highest at media company WPP where CEO Martin Sorrell took home a pay package nearly 800 times bigger than his employees’ average earnings.

In 1998 the average FTSE 100 CEO was paid 47 times more than their average employee but the figure has soared in just 16 years as leading executives and head hunters demand bigger and bigger salary packages.

Happiness comes at a price
Money can buy you happiness, a new study suggests, but only if you earn less than £45,000. Once annual earnings pass this mark, people become more focused on climbing the corporate ladder than finding happiness in what they do, according to research by Dr Miriam Tatzel from the State University of New York. The study found that higher earners lose sight of what really makes them happy – strong relationships and positive experiences.

“Emotional well-being rises with income, but there is no further progress beyond an annual income of about $75,000,” said the author of the research. Dr Tatzel added that despite celebrity culture suggesting being a big spender will make a person happy, it is actually quite the opposite. In general, having a good social life and being independent were far more likely to make a person happy than the pursuit of money and possessions.

UK top on low costs
Britain is now the lowest-cost manufacturing economy of Western Europe, with stable wages and improved productivity over the past decade making the UK increasingly competitive even compared with many Eastern European countries.

Direct manufacturing costs in the UK have improved by up to 10 percentage points compared with other Western European countries. The trend is so pronounced that the UK is even becoming competitive in comparison with countries such as Poland and the Czech Republic, according to a study undertaken recently by the Boston Consulting Group (BGC).

It classes the UK along with the Netherlands, Indonesia and India as ‘regional rising stars’. As well as low labour costs, BCG cites the UK’s low corporate tax rates and flexible labour market as major competitive advantages.

German deflation threat may start QE
German inflation fell to its lowest level since February 2010 in July, dropping to just 0.8% compared with the same month a year earlier. The price growth figures came as weak data from across the eurozone had analysts worried its recovery has been derailed.

The European Central Bank (ECB) is considering a quantitative easing (QE) plan to pump money into the ailing eurozone to drive growth. Some analysts have suggested the eurozone could now face a deflation problem. When that happens consumer spending drops dramatically on big ticket items, such as cars, because potential buyers believe if they hold off prices will fall further. This creates a deflationary spiral of falling spending and job losses, which further drive down spending.

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