Looming recession. Stagnant wages. Soaring prices. Higher unemployment. Falling property prices.

The backdrop of gloom today and more gloom tomorrow was unremitting as chancellor Jeremy Hunt on Thursday laid out a series of well-trailed measures on tax rises and tight controls on spending.

The Office for Budget Responsibility (OBR) released forecasts warning that real disposable incomes would drop by 7.1 per cent over the next two years, the biggest fall in living memory.

“Virtually all of us can expect to be worse off,” Paul Johnson, director of the Institute for Fiscal Studies think-tank, said in the wake of the Autumn Statement. “We are in for a long, hard, unpleasant journey.”

Readers at the very top end of the income scale, however, may regard the chancellor’s measures as less punishing than they might have been. His main revenue raiser came from “stealth taxes” — the effect of freezing allowances and thresholds, which pulls millions of taxpayers into higher tax bands as inflation leads to wage increases.

“Super higher earners were warned that those with the broadest shoulders would pay the most,” says Tim Stovold, tax partner at accountancy firm Moore Kingston Smith. “That hasn’t happened. It’s a reasonably soft landing for them.” 

When it comes to the investment outlook, there may be brighter prospects in store for some unloved UK equities. As the country enters an era of painful fiscal retrenchment, FT Money assesses the impact of the chancellor’s measures for taxpayers, investors and retirement savers.

The investment outlook

Only eight weeks ago then-chancellor Kwasi Kwarteng sent markets into panic mode with tax cuts in his “mini” Budget. Investors looking for reassurance in Hunt’s statement this week could take heart from a relatively muted market reaction.

William Hobbs, chief investment officer at Barclays Wealth, said he was watching to see if investors in UK debt would put up with the chancellor delaying most of the fiscal tightening for several years.

“The grown-up tone and the mostly orthodox thinking . . . seem to have been well received,” Hobbs says.

As the relationship between markets and the government moves to a more stable footing following weeks of tumult, investors say there are some opportunities peeping through the gloomy economic outlook.

The business owner: ‘I don’t know why directors are being targeted’

One particular Autumn Statement measure, the cut in dividend taxation allowances from £2,000 to £1,000 next April, and to £500 from April 2024, left business owner Rachel Hayward deeply disappointed.

Coming after exclusion from government Covid support, she believes this suggests a policy stance towards directors. “I don’t know why we’re being targeted in such a way.”

Hayward’s company, Ask the Chameleon, helps client businesses submit procurement tenders and applications for business awards. Set up in 2015 in Burton upon Trent, Staffordshire, she estimates it has helped secure £38mn funding for clients.

Her annual turnover is £60,000-£70,000. To cover running costs and keep money in the business, Hayward, 50, takes an income of about £20,000 a year, comprising salary and £5,000-£7,000 in dividends.

The tax-free dividend allowance was, she notes, £5,000 until a cut in 2018. She will now seek advice on whether to take out more in dividends while the basic rate remains at 8.75 per cent.

She accepts the freezing of personal allowances — “We all have to contribute a little bit” — and welcomed the highest earners having to pay more tax through the lowering of the top-rate threshold. But she wishes the chancellor would crack down on tax evasion and avoidance.

“We have had a poor year, in particular [for] mid- and small-cap UK equities. But it’s hard to see at these valuations that stocks will sell down even further,” says Anna Macdonald, fund manager at Amati Global Investors. “We still see a lot of pressure and a lack of confidence in domestically exposed equities. But selectively they are looking like very good value now.” 

Stuart Clark, portfolio manager at Quilter, says his strategies have been light on UK equities, a position he’s now prepared to re-evaluate. “With the stability we see now, that can make the UK look slightly more attractive than it was before. That was something we were waiting for,” he says.

Labour-intensive sectors will face pressure from the record increase Hunt announced to the national living wage, MacDonald says, but there will be some relief from business rates.

Clark zeroes in on the chancellor’s decision to include even renewable energy producers in windfall taxes. “The move on the lower carbon producers I think is very interesting for the British economy,” he says. The government is still on a green push, but “it’s moving away from the carrot more to the stick,” he adds.

Bonds could also present an opportunity after a dreadful year, particularly for UK gilts. Yields on UK 10-year debt have risen from around 1 per cent in January to 3 per cent today. Many investors might find that income stream tempting, but have been nervous about volatility in bond prices. Further turbulence now looks less likely.

“The repricing of government bonds is proving an attractive opportunity for us,” says Clark.

However, Hobbs says taking advantage of a more stable market to scoop up bargains in either UK stocks or bonds carries substantial risks.

A higher-than-expected inflation rate could mean interest rates stay higher for…

Read More: Autumn Statement: A soft landing for higher earners?

2022-11-19 05:00:23

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