Why The UK Middle Class Pays The Most

Being middle class used to be a dream. It was an aspiration of so many Brits, kind of like the American dream back in the '60s. You own your own home, you sustain a family with just one income, and you go on holiday a few times a year. You live a comfortable life. But that dream's kind of a nightmare now. I mean, being in the middle class isn't what it used to be. And now if you're part of that group, you're not so rich, but you're not poor either. You're sort of the worst off. And that's because of not one, not two, but a bunch of factors. That make the perfect storm. In this video, we'll look at how the UK trapped you in the middle class, how it turned from a dream into a bit of a trap, and determine if there's a way out or if we are doomed. Being middle class is sold as safe in the UK. You've got your own house, you've got a pension, you've got a salary, you've got an employer at the end of the day. But in the reality, it's actually a bit of a treadmill. We've got higher bills since 2021. We've got higher taxation and even higher taxation coming. In the autumn. But amongst this, we also have stagnant wages. And whilst bad things happen in front of us, that inflation is gradually eating away at savings. Now, I've had many discussions with people over the last couple of months, and the fact of the matter is Brits don't invest enough. There was one guy who has £60,000 in a cash ISA which has returned 2.62% since 2010. 2020. In my mind, that is insane. So if that's what's sold to us, how are so many people falling for this trap? So there's two components to the fiscal side, so the taxation side, that I really want to touch on here. Now, obviously people need a job, and not everyone wants to take sufficient risk to open up a business. For instance, it's very, very hard to run a business. However, the government is squeezing earners more and more. Let's start with taxes. There are two ways in which employed people are getting absolutely fucked. The first is that since 2020, the actual tax bands have not raised whatsoever. This is while we've had massive inflation. And so while your cost of living has increased, the government has not permitted you to actually have your tax bands aligned with these increases, which they actually should have been. This then means that while they're also raising taxes, you are getting a double whammy hit by also not retaining most of your earnings, which should be aligned more with inflation. Now, the second way is naturally income is taxed a lot more than capital. Now, there should be some favorable treatment towards capital, mainly because business owners for instance, do not have things like sick pay. They do not have paid time off. And so this is one of the reasons as to why business owners get preferential treatment on things like dividends. And it should really foster an environment of greater risk-taking and more investment. However, business owners are now getting absolutely punished. For instance, the Employer's National Insurance increase that happened back in April means that employment costs for businesses are increasing. Now, obviously, as a business person, you're going to try and retain a bigger margin. What this means is is by either getting rid of workers or not hiring as many, which is why we're experiencing such a loose labor market now. There are so many people looking for jobs but not enough vacancies. This is on the government. Increasing labor costs on the employer does not translate to sufficient tax revenue coming through, and instead what it actually does is it punishes the employees. Now, one of my biggest gripes of the UK is this absolute hard-on for property. And what we can actually translate property to is leverage, because when you take out a mortgage, what you are doing is effectively increasing the leverage in the economy. Since 2022, people have been facing higher and higher costs of mortgages as interest rates have increased. In the UK, we tend to only have 1 to 5 year fixes on mortgages. In the US, however, they can go up to 30 years. It's very, very common to have a 30-year fixed mortgage. This means people that might have taken out a mortgage in 2020 when interest rates were really, really low are experiencing almost capital appreciation because inflation is effectively eroding away their debt costs because their interest payments are less than inflation, or at least have been less than the average of inflation over the last couple of years. Now, this might not necessarily continue because perhaps inflation absolutely tanks and then that mortgage costs increase. However, in the UK we have a situation where people have to refinance into a higher interest rate environment when previously their interest rate might have been 2%. Now they're looking at maybe 4%, which is actually a 100% increase. It's not a 2% increase like many people like to think. It's 200 basis points. And so this is where we are much more susceptible susceptible to the whims of the housing market and monetary policy than the US. People in the US are able to forecast a much, much longer time out where they might be trapped in a 30-year mortgage. However, they know exactly how to finance it. Here it's very, very different. We have to jiggle around every few years with whether we're getting the best mortgage rate, and when interest rates go up, we are affected right away. Now couple this with stagnant wages and you start to see a really, really big issue. Now, for higher earners, people approaching £100K, this is possibly one of the worst things that can happen, and I'll tell you why. Under certain circumstances, someone going from £99,999 to between £100,000 and £125,000 can be taxed at a marginal rate of 71%. Tell me why anyone would want to take the higher risk of a higher responsibility job, obviously commanding higher pay, if they were gonna be taxed that much. Do you know where all of these nice cars on the roads are coming from? It's coming from something called salary sacrifice, and people are actually putting loads of money into their pensions or into cars to lower their tax bill because they do not want to face that 71% marginal rate. It is insane to me how the middle class are getting absolutely shafted by stupid tax policy. Now everyone is aware of the last couple of years as being a high inflationary environment. Something that not many people are really focusing on now is why the 30-year government bond yield is so high. There's a few different factors to this, but the key one is that inflation currently is at 3.7%. This is well above the Bank of England's target, and that target is normally 2% plus or minus 1%. So 3.7% is about 70 basis points higher than what it should be. Now, people are not earning enough. Across the board, apart from at the very bottom, whereby statutory minimum wage has been increasing massively. It is now only second to Luxembourg, which by the way has more corporations than people living in it. It's only second to Luxembourg in highest minimum wage. Even the Scandinavian countries have collective bargaining rather than a statutory minimum wage. And so you can start to see that if we're getting minimum wages increasing, increasing, while the median salary doesn't really increase at the fastest pace, there is a big, big disincentive problem there whereby people are gonna be asking, okay, if I can go and work at Tesco's and, you know, stack shelves while my minimum wage is actually increasing, why would I want to take a higher risk job even at the lower to mid-end if I can basically earn almost the same or at least work a few less hours? It doesn't make sense. Everything is set up in the UK for disincentives to prevail. Now, naturally, we have a real hard-on as well for cash ISAs. Now, cash ISAs are short-term deposits, so they are basically invested in short-term government bills. And what this is designed to do is to be super secure, so it means that you're not really going to lose your physical cash anytime soon. However, the big risk of this is that in a high inflation environment, it is absolutely going to erode away the value. Now Brits love cash ISAs. It's very, very linked to the property market where people love to keep their savings for their deposit in a cash ISA because they perceive it to be very, very safe. Now this is absolutely unproductive because that cash could actually be invested in productive assets like equities, shares, and potentially even venturing out into alternative investments. But we're not going to discuss that right now. Since 2013, 2013 to 2023, Brits have lost £500 billion by not being invested in equities and being invested in cash ISAs. That is 20% of GDP. So you can start to see why we have some of the issues that we do with regards to wealth generation, because we are consistently as a population forgoing the opportunity to actually build wealth, and instead We seem to want to let inflation just run rampant and destroy any kind of value that our wealth has. Even the housing market in real terms over the last 10 to 15 years has not actually been that big of a wealth generator when you consider all of the maintenance costs and the interest costs of actually owning that home. And if you'd have just shoved your money into the S&P 500, you'd have probably made about 50 or 60% more. We also have a massive, massive skills mismatch in the UK. So many people go to university and it's almost like they're training people just for work rather than having actual practical skills. Skills like understanding what risk is, is so important, but it's never ever taught. All you get is loads of theory. Now, so many people going to university, this generates that skills mismatch. But one of the other biggest issues is, is a study from 2017 actually showed that graduates at university have one of the lowest numeracy and literacy rates in the world in the UK. So what this must mean is that we're actually permitting a really low quality of academic prowess into our undergraduate degrees. And so how does this translate well to the work economy? It doesn't. What we should be focusing on is what they actually do in Germany, which is called "Triebschule," and that means that they actually go and learn a trade. They learn a trade from 16. Now, apprenticeships are fantastic. I think apprenticeships are one of the best things ever because what you're actually doing is learning on the job. The one thing employers need to actually work out is that apprentices are more valuable to them than the graduates that might actually go for the same job because they've already got maybe 3, 4 years practical experience. So bottom line there is that practical experience matters way, way more than theoretical experience. Your degree is actually just proving that you're able to complete something for 3 years. And a lot of degrees these days are absolutely useless and could be probably done by an 11-year-old. The sad part though is that this trap is actually more psychological than anything else, in my opinion. And the first and most key bit of this being a psychological trap is that people in the UK are scared of risk. You remember that stat that I told you about, £500 billion being kept in cash, right? Says and not in equities. That is born out of an absolutely massive fear of losing money in something that is perceived high risk. However, what people need to switch their thinking to is that the opportunity cost of not being invested in productive assets that in actual fact tend to go up and to the right over time is massive. Fear of being invested in shares— listen to me here— is a bigger risk than the actual risk of being invested invested in shares. 100%. It's undoubted. Look, over the last 30 years, if you'd have been invested in pure momentum shares over that period or any kind of momentum factor, you would have made a ton of money, probably already a millionaire depending on how you actually invested it, how much capital, etc. The other thing as well is that many sort of have a social conditioning element to it. You know, a steady job equals success. In many regards it does, you know, building a strong career is absolutely something that everyone should probably strive for. Even if you are a business person, you could call that your career as well. However, they get stuck in a trap perhaps of not thinking that they can actually excel and exceed, you know, the comfort of that steady wage coming through and feeling like, okay, yeah, next month's sorted, the month after that's sorted, I can go on my holiday. That's very, very comfortable. However, you can always attain more. You can always do something extra. And one of the things that I think people really, really need to focus on is how do you optimize that financial cog? How do you actually go out and say, okay, I'm gonna be able to step into my investing mindset and be able to go and buy some shares in this company, some shares in this ETF, but have a specific reason and an outcome, i.e., in 10 years I want my pension to look like X. Just wanted to give a big shout out to our sponsor. Tickmill. Now, if you don't know about Tickmill, they are one of the longest-running FX, CFD, and futures and options brokerages in the industry. They're run by two brothers, and they've been doing this for such a long time. And I tend to only work with people who I know are of good nature, good quality, and have a fantastic product. I've known about Tickmill for the last probably 10, 15 years when I TradingView, various brokerages, and they've always been around as one of the firms that have a fantastic reputation. Now they offer FX, futures, options, CFDs on over 600 different assets, and I think that is testament to the extent to which they want to cater towards traders who want to go a little bit varied across different asset classes. Now I'm predominantly US stocks focus. However, sometimes I still have a punt around in FX. I'm just not going to go and tell you guys to do it because I don't think it's necessary for every retail trader. However, we're all going to go and have a punt, so why not do it with a firm who is absolutely excellent and who will go above and beyond to fit you as a customer into their company? Click below to sign up with Tickmill if you want best-in-class execution. Now obviously wealthy people use the system to benefit themselves. They might, you know, have expensive accountants and tax advisors to create certain structures which will optimise the amount that they actually owe. It might be via, you know, certain asset ownerships or certain taxation regimes abroad, but they absolutely are doing it. Whereas someone on PAYE, you are going to get taxed exactly what goes through your employer because your employer actually pays that income tax on your behalf. You don't actually pay it. So effectively, business people and entrepreneurs, they sort of stay outside the salary trap. However, let's not forego the fact that they take on a hell of a lot of risk to be able to actually get out of that salary trap. There are many, many trade-offs with being an entrepreneur versus an employed person, and you should never discount that because it's not easy to do. However, and this is the big however, understanding risk is exactly why they do what they do. And of course, there's going to be many pitfalls along the way, but that understanding of risk is exactly how you're able to price certain decisions that you make along the way to actually get that wealth and that success. But I know most people don't want to quit their job and start a risky, stressful business. Most YouTubers and influencers push that messaging, which is so fucking stupid. It's not a solution for most people. There is one solution though, and I've briefly touched on it already. If you wanna work a job like you always have, but still escape this middle class trap, then you really need to pay attention. What you need to be doing is making decisions weekly and monthly as to what your portfolio looks like, and also having a systemized process to be able to sort of judge what decisions you need to make along the way, whether it's down to your risk management, whether it's down to your investment size, which sector you're looking you're looking at, whether a certain sector is priced under another one, or whether there's a certain trade-off coming, what certain macro risks might look like, but all within a system so you can step up and know exactly what you're doing whenever you look at your computer. Now, taking this more active investment style versus a normal investor can reap much, much greater rewards because most normal investors these days are very, very passive. And there's various fund managers at the moment complaining about the passive investment strategies. 70 to 80% of all money in the market is now passive, which is quite insane to me. This means the likes of BlackRock and Vanguard and other ETF providers are taking all of that cash and then just going buying the single stocks themselves. It's really beneficial for the everyday person to do because then you don't have to go and buy 500 stocks yourself to make up the S&P 500. They just do it on your behalf and for super cheap cost. However, by remaining passive, you're probably gonna achieve a little bit of a lower return, i.e., the S&P 500 benchmark, if you're invested in the S&P 500, than you would do by being more active, whereby you have more flexibility over what you are doing and you can have more risk management at your fingertips. Now look, we run a model portfolio and we've run this relatively passively, but not in the same way as passive index investing. And we haven't changed anything since January. We've had about 12 investments since February 2024, and we keep it super, super low turnover because I know what I'm like. If I do more than I'm going to fuck something up. And this is how most people should invest, not just, you know, throwing money into the S&P 500 each month. Do that, do part of it like that. But for the rest of it, we want to juice our returns, but we don't want to juice our returns through day trading, through swing trading, any kind of bullshit like that, because that is stressful, anxiety-inducing, and usually doesn't reap any rewards. No, what we want to play on is certain factors of the market that we know make money. Look, stocks are designed to go up. Companies make more revenue each year, which can then return more money to shareholders from hopefully the profits that they make from that revenue. You know, if US growth is going up, it means the corporate earnings are going up, which then means that shareholders are going to make more money. So what we sort of need to do is do what a lot of businesses do these days. They have treasury management, which means that they might go and invest some of their balance sheet in certain assets to be able to bring back money and bring back a better return on invested capital. Apple, for instance, own a hell of a lot of US Treasuries. Now, why do they do that? Because they have so many dollars and they see US Treasuries as being a fine investment to retain that yield from the US government. However, we aren't Apple. We don't have $400 billion in our balance sheet. What we are looking to do is grow our portfolios, whether it's a pension, you know, SIP, ISA, so that we have certain amounts of money in say 5, 10 years. What we are looking to do is to grease that cog, that extra income. How do we multiply it by a certain factor? And you can do that by doing a couple of key things in the market and recognizing what actually makes money. Momentum, trend, and good risk management is exactly how you do that. And of course, picking the right sectors and the right countries to invest in at the same time with some other magic dotted in as well. You always need that added magic, which in the Academy we teach you exactly how to do all of this. Look, if you found this video insightful, I'd really appreciate a like. And if you'd subscribe, these videos do take a lot of effort to make, and I want to spread the word to more people like you.