Aurelia Butler

This year is set to be a bumper one for bonuses, due to the high profits generated in finance during the past 12 months. But those lucky enough to receive one are weighing the impact of higher taxes, rising inflation and interest rates as they plan to deploy their cash. Three-quarters of FT readers say their 2022 bonus will be bigger or substantially bigger than last year’s pay out. Our recent poll of nearly 900 readers found that 40 per cent expected six-figure sums. One in five readers said their total bonus would be valued between £100,000 and £250,000, and one in three expected to be awarded between £10,000 and £50,000. We also asked readers whether they intended to invest, spend or save the cash element of their bonus, and why.“When it comes to bonuses, high earners tend to drift towards two very different extremes,” says Maike Currie, head of personal finance at Fidelity. “They’re either very sensible and invest the lot, or live beyond their means throughout the year, and rely on the bonus money to pay off debts they’ve racked up.”You won’t be surprised to learn that 58 per cent of the FT readers polled said investing the money was their primary aim. More than a third of respondents did not plan to spend a single penny. Most intend to maximise the tax wrappers and allowances detailed below to ensure their money goes as far as possible. However, rising inflation and interest rates weigh heavily on readers’ minds. Plenty are shifting their investment strategy and the rising cost of borrowing has convinced 13 per cent of readers to pay off a chunk of their mortgage. Others are taking a different approach to manage inflation, with 11 per cent of readers saying they will spend the majority of their bonus this year.“If that’s the case, halve what you think you’re going to get in your mind,” Currie advises, noting that tax and national insurance will swallow nearly half of what high earners will take home in cash — more if they’re still repaying student loans.Spending on home improvements was the top answer for readers, closely followed by buying a property or trading up. The next most popular answer was blowing some cash on a foreign holiday as Covid travel restrictions end. One reader justified this decision as “investing in memory creation” but another was more honest: “I’ve worked my arse off earning my bonus this year, so I’m going to enjoy it. Life’s too short!” Whether you intend to spend, save or invest any bonus money coming your way, the insights below from readers and experts will help you make the most of the money. Protecting your bonus from tax There are plenty of tax advantages for those who choose to invest their bonus, but staying on top of different rules can be taxing.Income tax If your bonus is likely to push your total pay over the £100,000 mark for the first time, be aware this could trigger a future tax bill — even if you are a salaried employee. This is due to the gradual withdrawal of the £12,570 personal allowance, which results in a 60 per cent marginal rate of tax on income between £100,000 and £125,140. Any extra charges won’t necessarily be collected via the PAYE system (this is why HM Revenue & Customs requires everyone earning over £100,000 to complete an annual tax return). If your employer offers “salary sacrifice” arrangements, you could avoid the hassle of tax returns (and tax charges) by paying more into the company pension scheme, taking your salary below £100,000. These schemes are popular with employers, as they also offer substantial national insurance savings — even more so when NI rates rise in April.You can also use tax relief on personal pensions (Sipps) to navigate the 60 per cent rate, but you won’t get the NI savings and will need to claim back higher rate relief via your tax return. The same tactics can be used by those earning more than £150,000, at which point the 45 per cent additional rate of income tax applies. Pensions The best protective “tax wrapper” for bonus cash, especially if your employer matches contributions, 23 per cent of readers say they plan to make the most of this — though tax limits are a growing issue.Many companies offer employees the option of investing all or part of their bonus directly into their pension — up to a limit. Most people have an annual allowance of £40,000 (the combination of employee and employer contributions). “Those who have maxed out their annual allowance should act fast and see if they can use the ‘carry forward’ rules to use up any remaining allowance from the 2018-19 tax year,” says Nimesh Shah, chief executive of Blick Rothenburg, the accountancy firm. Carry forward rules apply to the three preceding tax years, so you’ve only got until April 5 to use up any headroom from 2018-19 — or lose it forever. “If you haven’t got your bonus yet, but know it’s coming, you could shove in cash savings now and replenish them later,” is Shah’s tip. These rules are especially pertinent to very high earners. As a rule of thumb, when your total earnings exceed £200,000 you are potentially in scope of the pensions taper, which whittles down your annual allowance from £40,000 to as little as £4,000. Being “capped out” of making further pension savings was the second biggest factor influencing readers’ bonus investment decisions, according to our poll. Even younger readers are conscious of hitting the frozen £1.073mn lifetime allowance in future years, so were prioritising other forms of investment. “As a 38-year-old, I already have £450,000 compounding away in my pension, so it’s foolish to save much more,” said one. “Don’t forget that you can also set up stakeholder pensions for your spouse and children,” says Shah. Non-earners who don’t pay tax can have up to £2,880 per year invested on their behalf. Topped up with £720 of tax relief, this is immediately boosted to £3,600. Isas Tax efficiency, flexible withdrawals and a £20,000 annual allowance made stocks and shares Isas the number one investment choice, with 54 per cent of readers saying this was the destination for some of their bonus. Once inside the Isa wrapper funds are sheltered from capital gains tax and dividend tax and future withdrawals are exempt from income tax. In written responses, plenty of readers said they would fill up their spouse’s £20,000 Isa allowance after using their own. Up to £9,000 per year can be saved into Junior Isas (Jisas) for the under 18s. A tax loophole means £20,000 can additionally be saved into a cash Isa for children aged 16-17 and transferred to an adult stocks and shares Isa when they turn 18. Finally, readers under 40 — or whose children are aged over 18 — could also take advantage of the Lifetime Isa. Up to £4,000 of your Isa allowance can be paid into a Lisa, attracting a 25 per cent bonus. But the complex rules will not suit everyone — the money has to be used for a property purchase or withdrawn after the age of 60. General investment account After exhausting the tax limits on pensions and Isas, bonus money can be deployed into a general investment account (GIA) — something that one-third of respondents said they intended to do. Unlike an Isa, investments in GIAs are liable to capital gains and dividend taxes in future — but don’t forget your tax-free annual allowances (£12,300 for CGT and £2,000 for dividends). These limits are per person, so you could make investments in your spouse or civil partner’s name to use up their tax allowances. Shah urges clients to “do the simple stuff first” before looking at riskier tax-efficient investments such as Venture Capital Trusts and Enterprise Investment Schemes, which 7 per cent of readers said they were considering. “Make sure you really consider the investment case — the tax relief should just be a bonus.” This message is not lost on FT readers. “I’ll fill my Isa, and put the rest in my GIA as I’ve previously invested in sufficient VCTs for my risk appetite,” one commented. Even so, 7 per cent of readers were happy to risk putting part of their bonus into unregulated cryptocurrencies. Protecting your bonus from inflation Inflation was the number one factor influencing readers’ bonus choices this year, cited by more than one in 10 respondents.For many, high inflation is a driver to invest more or change their investment strategy, although others used it to justify their decision to spend money now.Mindful of volatile markets and high valuations, some readers said they would lock in the tax benefits of putting bonus money in their Isa or Sipp, but use the “cash park” facility until they were ready to invest. “I’m waiting for markets to tank, and will then buy blue-chips and sensible investment trusts,” said one. “A likely dip in stock markets is a good opportunity for building up long-term holdings,” reasoned another. Rather than try to time the market, other readers said they were shifting strategy by moving away from growth stocks and targeting shares with dividend income.Interactive Investor, the retail funds platform, has seen dividend payers Unilever and Shell top its most-bought shares in January, while increasing numbers of customers are selecting Capital Gearing and Personal Assets, two investment trusts focused on wealth preservation. Other investors are eschewing bonds as they seek market-beating returns and some FT readers hope that investing in risky but high-growth UK businesses via Venture Capital Trusts and Enterprise Investment Schemes will boost their returns, with these routes favoured by 7 per cent of respondents. Laith Khalaf, head of investment analysis at AJ Bell, says investors are targeting shares in sectors that are sources of inflation, in particular energy and commodities, as well as luxury goods. He predicts brands with “pricing power” like Burberry could prosper in an inflationary environment by passing on rising costs to consumers — those flush with bonus cash are unlikely to complain. “The bottom line is, there’s not a lot you can do about inflation, interest rates, or market volatility, but by using tax shelters shrewdly, you can at least hang on to more of your profits rather than paying them over to the taxman,” he adds. Moving and improving Property plans were a driving force for readers who said they intended to save or spend most of their bonus money — though many considered sinking cash into their home to be an investment (of sorts).Nearly one in five (19 per cent) said they were allocating some of their bonus towards home improvements, with some readers citing the challenges of hybrid working as the reason for this.“My wife wants an extension, so we are getting an extension,” one wrote. “I will enjoy the improvements now, and they will increase my home’s saleability in five years or so,” said another. In second place was using the bonus to help buy a property, or trade up, chosen by 16 per cent. “I want to buy my first property before interest rates rise further,” one reader confessed. “High stamp duty means it’s better to improve than move,” was another opinion shared by plenty of other readers. Paying down debt Some 13 per cent of readers said that using their bonus to reduce debts was their primary objective, with the vast majority focusing on their mortgages ahead of expected interest rate rises. “I want to be in the best possible situation when I remortgage in 15 months,” said one. Another reader with a large mortgage said they craved “the guaranteed returns that paying down debt will provide”.“We are already seeing clients looking to use bonus payments to reduce their mortgages or obtain a better remortgage deal,” says Andrew Montlake, managing director of mortgage broker Coreco. “Many seek to take advantage of the standard 10 per cent repayment without penalty clauses that exist on most fixed rate mortgages. This has a dual effect of reducing their monthly payments now, but also ensuring that when the time comes to remortgage, they are able to obtain a lower rate as they will fall into a lower loan-to-value banding.”For example, Montlake says if a buyer purchasing a £600,000 property was able to use their bonus to boost a £100,000 deposit to £150,000, they would be able to slash the best available mortgage interest from 1.84 to 1.59 per cent on a five-year fix. This would reduce their monthly payments by £262, saving them £15,720 over the initial five-year period.More cautious readers said they intended to save bonus cash for future expenditure, with school fees scraping into the top 10 of reasons cited. “Having school fees to pay in the coming years means I can’t risk keeping the money in anything other than my offset mortgage savings account,” said one reader — a method several readers championed. Some private schools offer the ability for parents to pay up front, known as “advance funding”. “This is worth exploring as it could protect you from hefty inflation on private school fees in the future,” says Catherine Morgan, financial coach and founder of The Money Panel. Some schools structure this as an investment scheme, as their charitable status enables them to make tax-free returns on investments, which can be passed on to parents in the form of a discount.Giving to charity Despite the inflated size of this year’s pay outs, only 39 per cent of readers said they intended to donate to charity. Those with philanthropic intentions can use Gift Aid to boost their charitable donations, as well as claiming tax relief — another way that readers earning over £100,000 could manage the 60 per cent tax trap, says Shah. “It’s worth knowing that you can make donations after the end of the tax year, and carry the relief back to the previous tax year, up until the point that you file your tax return,” he says. More

Major investment banks have been penciling in an increasingly strong run of interest rate hikes for 2022 after hotter-than-expected inflation data ramped up pressure on the Fed to take a firmer stand against soaring prices.”Following the recent changes to our inflation outlook, we now expect the Fed to deliver a total of six 25bp hikes this year,” Morgan Stanley Chief U.S. Economist Ellen Zentner wrote in the report.The Fed is likely to hike rates by 25 basis points at the end of its March policy meeting, followed by additional 25 basis point hikes in May, June and July, with another two hikes in September and December, according to Morgan Stanley.Data last week showed U.S. consumer prices rose at their fastest pace since the early 1980s, fuelling market speculation for a hefty 50-basis-point hike from the Fed’s March 15-16 meeting.Morgan Stanley had previously said 125 basis points of policy tightening this year would be “appropriate”.The current Fed fund effective target is 0-0.25%. More

(Reuters) – U.S. officials held discussions with Saudi Arabia about a “collaborative approach” to managing potential market pressures stemming from a possible Russian invasion of Ukraine, the White House said on Thursday.”In Saudi Arabia, State Department Special Envoy for Energy Affairs Amos Hochstein joined Brett McGurk (coordinator for the Middle East and North Africa) to discuss a collaborative approach to managing potential market pressures stemming from a possible Russian invasion of Ukraine,” the White House said in a statement. More

(Reuters) -The Federal Reserve will need to move more aggressively to remove accommodation than it did following the Great Recession by raising interest rates at a faster pace and shrinking its balance sheet more quickly, Cleveland Fed President Loretta Mester said on Thursday. “Barring a material change in the economy, I anticipate that it will be appropriate to move the funds rate up at a faster pace this time and to begin reducing the size of the balance sheet soon and more quickly than last time,” Mester said during a virtual event organized by the New York University Stern Center for Global Economy and Business. Policymakers are expected to start raising interest rates from near zero levels when they meet next month and to begin reducing the Fed’s nearly $9 trillion portfolio soon after. Officials are debating how quickly to raise interest rates to combat the highest inflation seen in decades.St. Louis Fed President Jim Bullard is calling on the Fed to raise rates by a full percentage point by July, while others favor a smaller increase to start. Mester said she would support removing accommodation at a faster pace in the second half of the year if inflation does not abate by mid-year, and at a slower rate if inflation comes down faster than expected. The policymaker said she sees inflation remaining above 2% this year and in 2023, with the risks tilted to the upside.Mester also said she supports selling some of the Fed’s mortgage holdings at some point to accelerate the move to a portfolio that invests primarily in Treasury securities. She is among the officials who view asset sales as a backup plan for the central bank as it shrinks a balance sheet that doubled in size during the pandemic.Fed officials also need to move away from providing explicit forward guidance as they reduce support, Mester said. “Instead, we will need to convey the overall trajectory of policy and give the rationale for our policy decisions,” she said. More

(Reuters) – Federal Reserve Chair Jerome Powell won high marks from Wall Street as he dialed up expectations late last year for a more hawkish policy stance to quell rising inflation, a survey by the New York Federal Reserve published Thursday showed. The report card is included in the New York Fed’s quarterly survey of primary dealers who assess the U.S. central bank’s communication with markets and the public, using a scale of one, for “ineffective,” to five, for “effective.”The Powell Fed received an average score of 4.08 in the Jan. 12-18 survey released on Thursday. That is up from 3.75 in late October, the last time the Fed was graded on its messaging skills.In the intervening period, Powell shepherded an effort to radically reset policy expectations, from a view that the Fed would not even begin raising rates until after mid-2022 to what many economists now expect will be a string of hikes beginning next month, quickly followed by a reduction in its $9 trillion balance sheet.The shift is evident in the survey itself, with dealers seeing the Fed beginning to trim its balance sheet sometime between July and September, more than a year sooner than the survey showed two months earlier.Overall, the Fed under Powell has received better communications grades than under previous chairs. It is the only Fed to have received any above-4 average mark since the surveys were first published in 2011. GRAPHIC: What Wall Street thinks of the Fed’s messaging – https://graphics.reuters.com/USA-FED/POWELL/lbpgnwkodvq/chart.png “Most dealers noted that FOMC participants were in general clear or consistent in their communications on the policy outlook,” the survey published Thursday said, referring to the Federal Open Market Committee, the panel of central bankers headed by Powell that sets U.S. interest rates.”Several dealers suggested that communications on the outlook for balance sheet policy were less clear.”Powell likely faces an even tougher communications test in coming months, as investors struggle to figure out how quickly the Fed will raise rates and shrink its balance sheet to slow the fastest inflation in 40 years. Investors have been particularly focused on whether the Fed will start the coming round of rate hikes at half a percentage point or a more typical quarter of a percent. Dueling views from policymakers have roiled markets that investors use to place bets on or hedge against interest rate moves. St. Louis Fed President James Bullard has called for a full percentage point of rate hikes by June, while San Francisco Fed President Mary Daly has signaled a gentler approach.Powell has not spoken publicly since immediately after the Fed’s January policy-setting meeting.”Powell has been out of the limelight in recent weeks and not providing the markets any guidance on this point,” wrote SGH Macro Advisors’ Tim Duy.It will be up to Powell’s messaging to guide expectations for March and beyond, he added. More

How well did you keep up with the news this week? Take our quiz.Joe Biden has warned that Russia is on the brink of invading Ukraine within “several days”, saying the US believes the Kremlin is engaged in “a false flag operation to have an excuse to go in”. The US president spoke as Kyiv and Moscow blamed each other for clashes in Ukraine’s eastern Donbas region — incidents the west fears will be used as a pretext for a co-ordinated Russian military campaign. Russia reiterated its threat to take “measures of a military-technical nature” after it complained that the US had “twisted” draft proposals Moscow put forward to address its concerns about European security. Speaking at the White House, Biden offered a bleak assessment of the situation, noting there was a “very high risk” of a Russian invasion. “Every indication we have is they’re prepared to go into Ukraine, attack Ukraine,” he said. “My sense is it will happen in the next several days.”Markets briefing: Wall Street and European stocks sank on Thursday as the US said Russia was on the brink of invading Ukraine.Rachman Review podcast: Gideon Rachman talks to Charles Grant, head of the Centre for European Reform, about the impact of the Russian threat on US ties with Europe, and on Nato and the EU.FT Magazine: A 1946 telegram predicts much of Russia’s 21st-century foreign policyThanks for reading FirstFT Asia. Do you have any feedback on today’s newsletter? Share your thoughts with us at [email protected] — Emily Five more stories in the news1. Trump must testify in New York investigation Former US president Donald Trump and two of his adult children will be required to testify under oath in a civil investigation by the New York attorney-general into their family business, a judge has ruled.

Donald Trump, centre, with two of his children, Donald Jr and Ivanka. In a January court filing, New York’s attorney-general said her office had uncovered “significant evidence” of fraud committed by the family-owned business © AFP via Getty Images

2. Elon Musk and Tesla accuse SEC of ‘harassment campaign’ Tesla has accused the Securities and Exchange Commission of going “beyond the pale” and harassing its chief executive Elon Musk over his compliance with a 2018 agreement on his use of social media, the latest salvo in a lengthy dispute between Musk and the US stock market regulator. 3. GFG routed transactions through Gupta’s Romanian bank Steel tycoon Sanjeev Gupta has turned to an obscure bank he owns in Romania to process transactions, as criminal probes draw scrutiny on his troubled metals empire in the wake of his main lender Greensill Capital’s collapse.4. Sequoia earmarks $500mn for crypto push The firm, which is one of Silicon Valley’s most influential venture capital groups, announced that it had set aside between $500mn and $600mn for a new fund that would primarily invest in cryptocurrency tokens traded on third-party exchanges5. Climate ETF on brink of failure months after UN summit launch The MSCI Global Climate Select exchange, a UN-backed green investment fund, is on the brink of failure three months after its launch during the Glasgow COP26 climate summit because institutions including big banks never delivered expected seed funding. Thanks to those who voted in yesterday’s poll. Fifty-eight per cent of respondents said they would vote against Tim Cook’s $99mn pay and bonus package. Coronavirus digestStandard Chartered’s chief executive has warned that Hong Kong will struggle to retain its dominant position as Asia’s top financial centre the longer that China persists with its strict “zero-Covid” policy. Athletes grappling with the nerves of elite-level competition must also contend with an array of strict coronavirus restrictions at China’s first Winter Olympics.The chief economist of the European Central Bank said eurozone inflation looks unlikely to drop below its 2 per cent target in the next two years.Workers are returning to UK offices in their greatest numbers since the start of the pandemic.Opinion: The world will be a more dangerous place if G20 finance ministers downgrade the importance of pandemic and health response financing, writes Gordon Brown, former UK prime minister.The day aheadSingapore budget statement The city-state is expected to announce tax increases on Friday when finance minister Lawrence Wong unveils the new budget. (Bloomberg) Munich Security Conference The two-day meeting, which begins today, will be attended by several western allies as well as Volodymyr Zelensky, Ukrainian president.Vladimir Putin holds talks with Alexander Lukashenko The Belarusian president is expected to visit Moscow to meet his Russian counterpart. Lukashenko said on Thursday that Belarus would host “nuclear weapons” if threatened by the west. (Euronews) What else we’re reading and listening to Cost of Beijing Games spiral as China tries to project rising status The country has spent at least Rmb56bn ($8.8bn) to host the Winter Olympics, with the cost to retrofit or build a dozen new venues almost double the original budget, despite a pledge to ensure the Games would be “economical”.What it would take for Japan to get a national pay rise For those entering the Japanese workforce this year, their entire lives have been spent with three things stuck at zero: inflation, interest rates and the chances of the shunto “spring offensive” of wage demands being anything other than a disappointment. Can unions change employers’ minds?Go deeper: Explore global inflation forecasts with our inflation tracker.

Can Jay Powell build consensus at a divided Federal Reserve? As the Federal Reserve prepares to unwind unprecedented monetary support in the face of surging inflation, divisions have emerged among its policymakers over how — and how quickly — to withdraw the stimulus that has been in place for nearly two years.Boris Johnson’s Tories are facing a crisis of direction The Conservative party is facing two crises. First and most obvious is the one around Boris Johnson’s leadership. But there is a second, related, and deeper problem. It is also facing a crisis of purpose, writes Robert Shrimsley.Inside Peloton’s epic run of bungled calls and bad luck It was a darling with investors and customers. But as the home fitness company was soaring to a peak valuation of nearly $50bn in late 2020, we now know that it was about to endure a series of tribulations that would involve the chief executive ceding his position and laying off three in 10 employees.

Peloton was forced to recall products and face an activist investor’s ire over profligate spending as Wall Street turned on it for missing forecast after forecast

FilmSteven Soderbergh’s smart thriller Kimi, Netflix documentary Downfall: The Case Against Boeing and animated refugee story Flee are some of our six films to watch this week — reviewed by Danny Leigh and Leslie Felperin. More