Avoiding tax in the UK

I was asked to help a friend of mine, a (~50 year old) widow, complete her UK tax return recently. In the UK the final deadline for filling in your own tax return is 31 January, and the process these days can all be done online via the taxman’s excellent website. Her finances were illuminating.

What is a rich widow?

This widow’s income is roughly as follows:

  • £45k of earnings. She is a freelance creative.
  • £25k of investment income, about half of which was taxable (‘unsheltered’). She has about £700k of investments, roughly half in tax-free accounts (ISAs/SIPPs), and half unsheltered. She has no other income-generating assets.
  • £10k of contribution to her pension. She is a (non-executive) company director of her ex-husband’s company which doesn’t pay her but does make £10k per year payment into her SIPP.
  • £12k of (realised) capital gains last year, all in unsheltered accounts .

This lady’s total income/gains last tax year amounted to over £90k. This puts her in the top 10% of the UK by income, but not the top 5%.

But how much does an ‘average striver’ pay in tax?

Now, before we continue with my widow friend, let’s have a think about ‘average Joanna’, a typical striver in the UK.

Consider Joanna, a (hypothetical) 50 year old who works full-time for the NHS, earning £45k (roughly the London average wage). For a like-for-like comparison, her pension (contribution, from her employer) and (NHS pension investment equivalent) income on top of this would add about £25k to her taxable income, all tax-free.

Joanna pays £6.6k of tax, and £4.4k of national insurance, totalling £11k of tax/NI. This works out as 24% of total gross pay.

How much tax does this ‘rich widow’ making £90k pay?

“the art of taxation consists in so plucking the bird as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” – Colbert, paraphrased

What total tax/social charges (National Insurance, in the UK) do you think she owes on her annual income/gains?

Before continuing reading, think of a number.

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December returns and 2018 review

Well, what a month.

The October bloodbath resumed in December, and then some, after a brief November hiatus. US stock markets fell by over 9%, just in the single month. Even Donald Trump has subsequently conceded that stock markets “hit a glitch”.

Given the reality TV show that is the Trump presidency it is hard to say exactly which news story drove such a drop, but you can take your pick from:

  • Trump attacking the Fed – which calls into question American economic governance.
  • The ongoing ‘trade war’ between the USA and China.
  • The government shutdown in the USA, due to the standoff between Trump and Congress over the $5bn border wall. This has resulted in hundreds of thousands of American workers not being paid/not working; I am never clear whether, if the shutdown stops, they then get backpay, so I’m not quite clear how severe this actually is but it clearly can’t be good.

On top of the Trump nonsense, I think that we saw the first rumours in December of a more significant slowdown in China. As 2019 started Apple shocked markets with (slightly Polyanna-ish) tales of Chinese woe.

While UK news was feverish about the inability of the Tory government to pass its EU Brexit deal through parliament, this had very little discernible impact on UK markets; I tend to agree with the commentators who say that this outcome was ‘priced in’ (i.e. expected) by the market already.

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My Dividend Growth Portfolio: a review

One small portion of my invested portfolio is run as a ‘Dividend Growth Portfolio’ (DGP).  I kicked off this portfolio in early 2013, and have run it pretty consistently ever since.  It’s time for my first ever ‘deep dive’ into how this portfolio has been performing.

The strategy: buy growing dividends

I didn’t document  my exact strategy for this portfolio at the time, but it has been something along the line of this:

To own Dividend Champions, and their ilk, with a strong likelihood of growing their dividend over the short and long term.

I have been a longtime admirer of the Dividend Champions, who are the ~100 publicly listed US companies that have raised their dividend for 25+ years in a row.   The UK has hardly any companies that can boast of this track record, and the UK approach to paying dividends (interim + final, rather than 4 equal quarterly instalments) makes the UK fiddlier to monitor for shallow analysts like me.  I will certainly consider shorter track records than 25 years, such as the Dividend Achievers, Dividend Contenders etc, but for true quality you need Champions.

You will note that there is nothing in this approach that prioritises high yield payers.  In fact US companies tend to have lower yields than UK companies.  Much as I like dividend income, for this strategy I am prioritising predictable growth in dividends, not the level of dividend itself.

Leverage: a changing approach

This portfolio was one of my early uses of leverage, though in a very modest way: I used to leverage up the portfolio by one to two year’s worth of dividends (i.e. 2-5%).  In late 2015 this approach changed as I leveraged up across the board to buy my Dream Home and by 2016 my leverage for this portfolio had risen to over 40%. As rates have risen, I have reduced my leverage, so right now the Loan to Value is around 30%, and I am in fact paying almost as much interest (~3%) as the after tax dividend yield of the portfolio.

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How the stock lineup has expanded over time

My initial set of about a dozen holdings comprised stocks like AXP, CAT, KO, MCD, T, VZ, WFC, with a smattering of IBM, GE in there too.  Sizing my positions has been very ad hoc.

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