This episode of the The Money Compass podcast was published on Wednesday 15th January 2023. You can listen again by heading to our episodes page, or on your favourite podcast player.
Episode Highlights
Emma Knights and Lukas Spyrou review the past 12 months financially and discuss all of the events that have happened in an extremely busy year, and what impact they have had on the world.
Have you had a chance to take a look back on 2022?
Rediscover the Conversation
Lukas Spyrou
In today’s episode, we will be looking back at the past 12 months. we’ll look at all of the events that have happened in an extremely busy year, and what impact they have had on the world. Emma, where do we start?
Emma Knights
There is only one place to start, at the very beginning. We will go all the way back to January 2022, when the year started with its highest level of inflation since March 1992, at 5.4%. I think it’s safe to say we all know that it’s only gone one way from there.
Lukas Spyrou
You’re right on that! We will touch on that more as we go through but that hasn’t improved since January, it’s not a great start.
Emma Knights
That was not the only poor start to the year, there were lots of calls for Boris Johnson to resign as our Prime Minister asking him to leave number 10, after all those supposed parties he had during COVID, when everybody else was staying at home.
Lukas Spyrou
Yes again, that was a theme throughout the year there was a lot of political ins and outs, we will talk more on that later. It didn’t get any better unfortunately, the sad events in February with Russia invading Ukraine causing all sorts of global panic.
Emma Knights
I thought it was just a military operation.
Lukas Spyrou
That was the initial thought, but I think that the wiser amongst us knew that it might escalate and carry on. That has been a big theme throughout the year and caused a huge impact on the markets economically, politically, and obviously it is very sad what’s going on for the people in Ukraine.
Emma Knights
Most definitely. Come March, the Bank of England started to try and combat inflation. They started to increase interest rates further from the raises they had done in 2021. Rates increased from 0.5% to 0.75%. I think there was something quite significant that happened in your world though Lukas, wasn’t there?
Lukas Spyrou
Yes, that meant that Chelsea’s owner also got sanctioned, being Russian. That had a big impact on the world of football, and a knock-on effect of that is that not only the Chelsea’s owner, but a lot of Russian billionaires, businesses and any company really affiliated with Russia, were getting sanctioned and bank accounts being frozen. Obviously, that again caused huge impact on the world.
Emma Knights
Definitely. However, some slightly better news for homeowners, Nationwide reported that house prices increased by 14.7%. It was the highest annual increase since 2004. The typical UK home now costing just over £265,000, was some really good news for existing homeowners. Obviously, the equity in their home had gone up. But it was not as good news for first time buyers, or for those trying to get on the property ladder.
Lukas Spyrou
Exactly that. Trying to get on the ladder, and as we go through, again with the rise in interest rates, that’s not going to be helpful at all.
As well as the houses going up, the energy price cap in April then rose by 54%, up to just under £2,000. The Governor of the Bank of England, Andrew Bailey, was then warning that could be the biggest single shock from any prices since the 70s. Which caused a lot of panic with people thinking, how are we going to afford these increases?
Emma Knights
I don’t think it stopped there, from April it has just continued.
Lukas Spyrou
Yes. The early theme to the year is all the trends that started early in the year just carried on throughout and increases kept coming. Another increase in April was the National Insurance increase that came into effect. There was an extra 1.25% contributions being paid by employees, businesses and the self-employed. However, that has since been reversed. One of the few things that was reversed in the Autumn Budget!
Emma Knights
Moving on into May, there was some slightly better news. Unemployment fell to its lowest level since 1974, so there were finally more job vacancies than there were unemployed people in the in the UK for the first time since records ever began. Great news that there were less unemployed people, but as an employer, very difficult to find any new employees if you did need anybody.
Following on from what you were just talking about, with the energy costs and everything going up, our chancellor at the time, Rishi Sunak, announced a 15 billion pounds package for measures to address the increase in energy costs. Part of that was a windfall tax on oil and gas firms, again it hasn’t necessarily helped to combat the increase in prices at this time.
Lukas Spyrou
No. There was an announcement as well that some of the poorest households were going to get some cost-of-living payments to help ease that, so that was a little bit of not necessarily positive news, but at least there was some assistance.
Emma Knights
Especially for those households on lower incomes that were really going to need that help.
Lukas Spyrou
I agree. In June obviously there was some positive stuff, such as when the Queen became the first ever Monarch to reach the milestone of seventy years on the throne and celebrated her Platinum Jubilee. There was a really good feel-good factor around the country.
Emma Knights
Good times. I had a good party for that one.
Lukas Spyrou
Lots of parties everywhere, street parties, bunting, and there was a real nice feeling around the country.
Emma Knights
Definitely gets the patriotism out.
Lukas Spyrou
Yes, and it wasn’t just the Queen celebrating in June, I think it was your birthday as well Emma?
Emma Knights
It was indeed, the 16th of June was a very important day. Not only was it my birthday, but the Bank of England also decided to increase interest rates again. They went up to 1.25% so ‘Happy Birthday’ to me.
Lukas Spyrou
I think that actually, at the time, was the fifth successive increase. The main reason for that was to try and restrain the inflation that had been ever increasing since the War started in February. We had to put a bit of a downer on June, we couldn’t have it too positive.
Emma Knights
That was June. What about July? There are quite a few things that happened in July.
Lukas Spyrou
In July we had both Rishi Sunak and Boris Johnson resigning – prompting in a leadership election, the start of what we alluded to earlier. The political ins and outs at number 10 Downing Street. One of the effects of that is that they actually knocked the pound down to a two-year low against the dollar, anyone going to America at that time would be spending a lot.
Emma Knights
It would have become a very expensive holiday at that time.
Lukas Spyrou
A lot of people don’t think of those things at the time, and it can have small changes what an impact it can have on lots of things like, holidays and how much you can actually spend and what your money is worth abroad.
The month ended with some more positive news, largely on the sporting front when the women showed the men how to do it. The women’s football team won the Euros beating Germany in the final. It brought a feel-good factor back to the country with everyone getting behind them. Not only did the women perform well, on the sporting front, we also performed excellently in the Commonwealth Games – coming second to Australia with an impressive 97 gold medals. That was a good sporting time of the year.
Emma Knights
Most definitely. We mentioned back in April that there had been an energy price cap and it had increased to just under £2,000. Come August, Ofgem announced an 80% rise in the price cap for energy bills and households. An increase from those £1,971 all the way up to £3,549, which is what made those payments to the lower income households so important because prices are just continuing to go up and up.
August seems like a relatively quiet month when you then look at September, September was a very busy month.
Lukas Spyrou
You’re right there, a lot happened in September – we had the leadership election. Ultimately, whether it was the right decision (in hindsight, it wasn’t) that Liz Truss was elected, pipping the now Prime Minister, Rishi Sunak, well not pipping, but winning 57% of the vote and taking over at number 10.
But, that unfortunately, wasn’t the saddest news of September. The biggest story to come out of that was the death of Queen Elizabeth the Second, who passed away on the 8th of September. Our longest serving Monarch and just had her Platinum Jubilee. Again, I think it wasn’t just the UK that stopped that day, I think the entire world came to a halt, and you really did feel that she was a fantastic Monarch, and I’m sure everyone would agree.
Emma Knights
And worked until the very end didn’t she.
Lukas Spyrou
Just a few days before she was welcoming Liz Truss into number 10. She was a great servant and worked right until the very end.
Later in that month, I suppose there’s no other words apart from the car crash of the Mini Budget.
Emma Knights
I think that is a very polite way of putting it.
Lukas Spyrou
Yes, I’m trying to be a bit diplomatic here. Kwasi’s Mini Budget, in which he announced some of the biggest tax cuts in the UK since 1972. Top rate 45% Income Tax rate was scrapped. The basic rate in England was reduced to 19%. That caused huge implications in the financial markets and led to a huge criticism of the UK fiscal policy.
So, we all know how that went, it just compounded all of the other issues that were already going on from the war, inflation, the rising interest rates, the housing costs – it couldn’t have come at a worse time.
Emma Knights
It also just brought more uncertainty that people were then thinking ‘what on earth is going on?’ in an already very uncertain time. There were all these changes to be brought in that nobody was expecting, just didn’t seem to sit very well.
It is then not surprising that a few weeks later Kwasi was dismissed. We were given a new chancellor, we now have Jeremy Hunt looking after us.
Kwasi was the second shortest serving chancellor in the UK, the only other person that served for a shorter period than him was Iain Macleod, he died of a heart attack in 1970, therefore I think it’s a fair reason that he had a much shorter time serving.
Jeremy Hunt, our new chancellor, then delivered a new emergency statement which basically unwound everything from the Mini Budget. He basically put everything back to where we were and said, ‘no, we’ll have our Autumn Budget in November. That’s when all that the major decisions that will be made.’
Lukas Spyrou
Yes. I think the fallout from that just put huge pressure on Liz Truss, she sort of threw Kwasi under the bus a little bit, but it just led to such pressure on her that her position became untenable. It wasn’t too much longer after, 45 days at Number 10 and she was gone too. She moved on at the end of the month. That led to Rishi coming in. I think he was, probably at the moment, the best person for the job out of the candidates that were available. It may be a bit of a shame that it took longer than it should have for him to get there. I think all of that uncertainty just made things a lot worse, financially and economically which didn’t help at all.
Emma Knights
Random fact that I don’t know if you knew Lukas, he’s actually the youngest leader that we have had in the UK in over 200 years.
Lukas Spyrou
Yes and the first British Asian Prime Minister as well.
Emma Knights
Bringing lots of firsts with him.
Lukas Spyrou
Yes, then moving on into November, I think you just touched on it. To bring us up to date we have just had our Autumn Statement from Jeremy Hunt, the chancellor, and there is lots of important points to come out of that. I think if we break them down into sections and do a brief summary of what’s happened in the autumn statement that will most definitely kick us off.
If we start with the one that a lot of people are particularly interested in, income tax. The amount that you can earn now before you pay any additional income rate of taxes has reduced down from £150,000 to £125,140. It is important to point out a lot of these changes won’t actually take place until the new tax year, the 6th of April 2023. But at least you will be aware of them well, in advance of that. The personal allowance of £12,570 has remained unchanged so that’s the amount you can actually get paid before you start paying any tax, really important for those people on low incomes.
Emma Knights
It would have been good if that one went up, but it is what it is, we can’t wish for these things. Things that have changed slightly though are dividends. The dividend allowance is going to be reduced, at the moment you can earn £2,000 in dividends before you pay any dividend tax come April 6th 2023. That’s going to reduce to £1000. And the following tax year, they’ve already announced that it’s going to reduce to £500, so that is reducing quite a bit.
Lukas Spyrou
Yes. What’s happened to the actual dividend tax rates Emma, have they changed at all?
Emma Knights
So they changed earlier this year, when national insurance rates went up, dividend tax rates went up at the same time. For basic rate dividend taxpayers it is 8.5%, the higher rate is 33.75%, and additional rate is 39.35%. When they reduced the National Insurance, it was questioned whether that would go back down too but they have remained where they are so tax has increased and also your allowance is reduced in the area. So not particularly helpful for those high dividend earners.
Lukas Spyrou
Capital Gains Tax allowance is also going to be reduced from 2023. It’s currently at £12,300 but it’s going to come down to under half to £6,000 from April and then again in April 24 to £3000. As you said tax allowances have gone down so there’s there may be a lot of planning to be done and around that time. That’s something we’ll probably touch on in future episodes.
However, those allowances have changed and that can have a big impact, particularly on people who have second homes and any gain that’s on investment portfolios. I’m sure we’ll have a lot of clients in the early part of the year and around April well, we need to have a careful look at their planning and make the most use of those allowances for them.
Emma Knights
Most definitely, another one that hit business owners is Corporation Tax. This has been changed slightly, but not for all businesses. At the moment, Corporation Tax is 19%, but it will increase to 25% as of the 1st April 2023. However, any companies with profits below £50,000 are still going to continue to pay the rate of 19%. Again, it’s still supporting the smaller businesses, and not expecting them to pay such a high level of tax.
There is also going to be a reintroduction of taper relief for businesses with profits between £50,000 and £250,000. It doesn’t mean that they are immediately going to go up to a rate of 25%, it’s helping on a sliding scale, which is what businesses need, especially with a looming recession that we’re expecting to be announced, anytime.
Lukas Spyrou
Yes, and I think one other thing, going back to what I touched on earlier, is the increase in National Insurance which was introduced to help pay for the social care reform. That has been scrapped now, the additional 1.25% that was previously added, the current 2022/23 rates are going to remain in force.
One other thing that’s probably quite important as well, is what has happened to pensions. There has been no mention of any extension to the Lifetime Allowance. That allowance is going to remain fixed until 2026, it’s currently at £1,073,100. The triple lock was quite a hot topic at the time, and everyone was wondering what’s going to happen with that. That’s the triple lock on the state pension that’s going to be maintained and that’s going to guarantee the 10.1% cpi based increase for next April. That, along with the same increase to the pension credit, so there was a lot of discussion, because of the high rates of inflation, whether that was actually going to kick in.
Emma Knights
Lots of happy pensioners for that increase. Just a random piece of information, I spoke to a care home yesterday, they have written to all of their residents and they will be increasing their care home fees by 10% next year, that is going to be passed on immediately.
Lukas Spyrou
That really brings it in a nutshell. Obviously, there was lots of other things that happened throughout the year. Although just to really bring you up to date and let you know where we’re at exactly at time of recording. The latest away from the economy and all the doom and gloom of 2022, England have just qualified for the knockout stages of the World Cup. We are trying to end the year on a positive note, if you’re a fan of I’m a Celebrity, Jill Scott has just become the Queen of the Jungle.
Emma Knights
Also, the world population has reached 8 billion people. That’s a significant milestone. We’ll see in years to come the impact that it has with ageing populations, and all sorts of things that could be an issue.
I think a nice way to round up today’s episode is to have a look at how all these different things have actually affected the world and the volatility the ups and downs in the markets. Lukas, take it away.
Lukas Spyrou
As we have gone through the year, the world doesn’t look like a particularly bright place this year. But how do you compare it to previous years? It hasn’t been one to remember when it comes to market volatility and the post pandemic financial landscape, it doesn’t look very different to previous years. But how does it stand in real terms? A good way, our most simple way I suppose, to measure it is just looking at, or counting the number of days when a market has moved up or down by more than 1%.
I think that’s quite a good way just really simply to look and see how much it’s moved. If it’s moved up or down by more than 1%.
Emma Knights
If it were to move by, say 3% or more, that would be something quite extreme.
Lukas Spyrou
That’s extreme volatility, if it is swinging up and down that much. If you look back during the COVID pandemic, in 2020, there are about 10 days when the market moved more than 5%. That really reflected the chaos that was going on at the time. Comparing it to a couple of years ago, 2022 hasn’t actually been quite as dramatic, despite everything that’s been going on, but we still have had movements that are a bit above average, above that 1% if we took that as a marker.
Emma Knights
Most definitely, if we look back over a 12-month period, from November 2021 to November 2022, there are 105 days so far where the market have moved by more than 1%.
Lukas Spyrou
That’s about double the average you would normally expect it. In a normal year it’s around about half of that, 52 days really.
Emma Knights
What it shows us is that 2022 is sixth in line to be the most volatile year. It’s beaten by a few years, 2020 was one, 2009, 2008, 2002 and 1974. I know that there is still a little bit of time in 2022, for that to change, however it just shows you that, although this year has felt very turbulent, and very rocky, actually, when you compare it to previous years, we are still okay, it’s not quite as bad as it’s been made out.
Lukas Spyrou
We have seen worse, and obviously things do get better. It is easy to sit here and say, don’t worry, don’t panic, it’s totally understandable if people are worried about cost of living. If you can just hang on in there, things do tend to get better it is just trying to remain positive and hanging in there really. What do you think that means going forward, Emma, for 2023? What can we expect to happen?
Emma Knights
Very tricky question, I would love to pull out my crystal ball right now and be able to give you the exact answer to that. As I said before, there’s a looming recession in the UK, the War continues in Ukraine and all of those things continue to affect the market volatility. I think 2023 could still be a bit rocky and it could still be turbulent, but I can see light at the end of the tunnel and things starting to improve. My personal opinion is we are starting to move forwards and things can go up.
Lukas Spyrou
Yes, obviously everyone is individual, and we can’t comment on individual circumstances. I think the big takeaway is that we have certainly had more volatile times in the past, and as I have mentioned, they do tend to settle down. It is just simply the nature of financial markets, that’s what they do, they go up they go down. The key thing is to just take a longer-term view of your planning and your finances and just try and ride out the turbulent times if possible. If you do need anything, if you’re worried or have any concerns with anything, then certainly speak to your financial advisor.