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The September mini-Budget

Double-digit tax increases to fund the latest social care reforms will have a ripple effect on taxpayers.

When the Chancellor announces tax rises that are measured in double-digit billions, normally you can assume he is presenting a Budget. That was not the case in September, when Rishi Sunak set out measures that will bring a net £12 billion a year into the Treasury’s coffers from next April. That sum is about the same amount as would be raised by increasing basic rate income tax from 20% to 22%. Indeed, some experts suggested that is what the Chancellor should have done. Instead, he took a politically safer route:

  • In 2022/23, all the main and higher rates of National Insurance Contributions (NICs) will rise by 1.25%. For example, if you are an employee under age 66 earning more than £50,270, then in the next tax year you will pay NICs at the rate of 13.25% (12.0% currently) on your earnings between £9,568 and £50,270 and 3.25% (2% currently) above that level. Your employer will also pay NICs on your earnings above £8,840 of 15.05% (currently 13.8%). If you earn £60,000 a year, your NICs bill will rise by £630 – about £52.50 a month.
  • In 2023/24, the NICs rates will drop back to the current level and to capture the extra 1.25%, a new, separate Health and Social Care Levy will be introduced. The net effect of this will be the same as the 2022/23 NICs increase, but with one exception: the new levy will also apply to the earnings of anyone (employed and self-employed) above State Pension Age (66 currently).
  • From 2022/23, 1.25% will be added to the tax rates that apply to dividends once the £2,000 dividend allowance is exhausted. Consequently, the top tax rate on dividends will rise to an awkward 39.35%.

The changes could have major impacts on your financial planning, particularly if you run your own business. To discuss how they affect you personally – and what actions you might be able to take – please contact us.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Paying for England’s social care reforms

In September, the government revealed its long-awaited plans to reform England’s funding of social care, but many home care residents won’t reap the benefits.

On becoming Prime Minister, Boris Johnson announced that he had “…a clear plan we have prepared” to deal with the funding of social care in England. The statement was met with a certain amount of scepticism, if only because governments of every hue had a track record of failing to produce and/or implement a social care plan.

A little over 25 months after Mr Johnson’s statement, he and his Chancellor, Rishi Sunak presented details of that ‘clear plan’, parts of which remain unclear. The main part applies only to England as the devolved nations each have their own different care funding arrangements.

The main features of the proposals are:

  • The plans will apply to anyone entering care from October 2023. Earlier entrants will continue under the current rules, even after 2023.
  • There will be a cap of £86,000 (index-linked) on the total care costs. This is not as simple as it seems: it applies only to personal care costs, not the ‘hotel costs’ of care (accommodation, food, etc.). The government’s one example of how the new regime operates was based on hotel costs of £10,000 a year – less than £28 a day.
  • The capital limit above which an individual must meet all their care costs (until the cap is reached) will rise from the current £23,250 to £100,000 – a 330% increase.
  • The corresponding lower capital limit, below which individuals are not required to use savings or the value of their home to meet care costs, will also rise, but by a more modest 40%, from £14,250 to £20,000.
  • If individuals have capital between those two limits, they will be expected to make an ‘income tariff’ contribution from that capital, which the government says will be “no more than 20 per cent”. In other words, if an individual’s capital is £70,000, they could have to contribute £10,000 in the first year (20% of [£70,000 – £20,000]).

While the proposals will save some families hundreds of thousands of pounds, for others these changes will make no difference – many care home residents will not live long enough to reach the £86,000 cap.

So, farewell then 6 April? 

The UK’s unusual tax year end date is coming under scrutiny in tandem with potential changes to the tax year basis for the self-employed.

The start of the tax year in the UK is 6 April. It is a date steeped in history – think quarter days and the introduction of the Gregorian calendar in 1752. In the age of HMRC’s Making Tax Digital programme, that 6 April legacy date looks rather bizarre. So, why not make the tax year begin on a more sensible date?

The government’s financial year (and the corporation tax year) starts on 1 April, a modern quarter day. This summer, a paper from the Office of Tax Simplification (OTS) set out details for a “high level exploration” of bringing the personal tax year into line. The OTS also promised that its work would outline the “additional broader issues” of making 1 January the tax year start date.

Self-employed year basis change?

Somewhat ironically in the following month, HMRC announced a consultation on changing the basis year period used for calculating self-employed tax liabilities. At present, if you are self-employed, you are normally taxed on the profits made in your trading year that ends in the tax year. So, for example, if your trading year ends on 30 June, then in 2021/22, it is the profits for your trading year ending on 30 June 2021 that are taxed.

HMRC wants to scrap this principle and tax the self-employed on their actual trading profits in the tax year starting from 6 April 2023. This would mean pro-rating the profits of two trading years. It also implies some difficult problems in the 2022/23 transitional year. For somebody with a 30 June year end, it could mean taxing profits from 30 June 2021 to 5 April 2023 all in the one tax year.

Fortunately, HMRC does suggest that there would be an optional spreading of “excess profits” over five years. However, the consultation paper made no reference to any revisions to the tax year end date, despite what looks like a golden opportunity…

Meanwhile, back in 2021, do not forget that if you file a paper tax return, your 2020/21 return is due by 31 October. File online and you have another three months.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Capital gains tax receipts underline tempting target for Chancellor

 New HMRC data shows that in 2019/20, £9.9 billion of capital gains tax (CGT) liabilities were created.

In July last year, the Chancellor unexpectedly asked the Office of Tax Simplification (OTS) to review “capital gains tax (CGT) and aspects of the taxation of chargeable gains in relation to individuals and smaller businesses”. The top tax rate currently sits at 28% (limited to residential property and carried interest) with 20% liability more generally.

At the time, there was speculation that Rishi Sunak was looking at CGT as a way of raising extra revenue without breaking the Conservatives’ 2019 manifesto pledge not to increase rates for income tax, VAT and National Insurance. With those receipts of nearly £10 billion, it’s certainly a tempting target.

The OTS produced its first report on simplifying the design of the tax last November, prompting the rumour mill to forecast that CGT changes would appear in the Spring Budget. However, CGT barely received a mention in March beyond the freezing of the annual exemption for five tax years at the 2020/21 level of £12,300. In May 2021, the OTS issued a second report examining “practical, technical and administrative issues” of CGT.

The focus for CGT announcements now is on the next Budget. In theory, it is due in autumn, but in practice, it could once again be delayed until spring. By then, the economic landscape should be clearer as pandemic support measures cease and we weather another winter of Covid-19.

New data released by HMRC in August shows why the Chancellor may be tempted to follow the OTS advice to:

  • Reduce the annual exemption to “a true de minimis level … in the range between £2,000 and £4,000”; and
  • More closely align CGT rates with income tax rates. The OTS reckons this could theoretically raise an extra £14 billion, although it accepted “behavioural effects” would significantly reduce this figure in practice.

If you have unrealised capital gains, it could be wise to review them before the next Budget. One option could be to ‘bed and ISA’ – selling existing investments and then reinvesting them in an ISA to shelter any future gains from CGT.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

The value of your investment and income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

A hint of rising interest rates? 

The Bank of England has suggested that interest rates may rise sooner than expected.

After its August meeting, the Bank of England (BoE) was never expected to announce any change in base rate from the 0.1% set in response to the pandemic. The BoE, like its counterparts in the US, Eurozone and Japan, wants to be convinced of the strength of the economic recovery before moving rates off the floor. However, the August meeting was not as much of a steady-as-she-goes affair as had been predicted.

For a start, the BoE revised its estimate for the peak of inflation to 4% around the end of the year. It had previously pencilled in 2.5%, but that rate was reached in June (July’s figure dropped to 2.0%, widely seen as a statistical blip). As the graph shows, the BoE expects a decline from its new peak to be almost as sharp as the inflationary rise beforehand. Cynics may note that such a trajectory is necessary to bring inflation back to its 2% target within the BoE’s forecast period.

The BoE also announced a change to its £895 billion quantitative easing policy, which has resulted in the BoE owning a significant slice of government debt (gilts). Just over three years ago, the BoE said it would start to unwind quantitative easing by not reinvesting the proceeds of its maturing gilts once the base rate had reached 1.5%. At the time, the base rate was 0.5% and heading up to 0.75% in July 2018. With a 1.5% base rate now a distant prospect, the BoE has reduced the trigger level for starting the run down of its gilt stockpile to 0.5%.

Finally, the BoE gave its first real acknowledgement that rates would rise if the economy grew in line with its central forecast: “some modest tightening of monetary policy over the forecast period is likely to be necessary”. Translated from bank-speak, that was taken to mean a 0.5% base rate by 2024.

The conclusion to draw is that inflation will continue to outpace interest rates over the next three years, eroding the value of cash deposits. If you are holding more in banks and building societies than you need as a reserve, an alternative home for the excess could make a lot of financial sense.

The value of your investment and income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  

National Savings goes green

National Savings & Investments has announced details of a new green savings product.

One of the small surprises in March’s Budget was the announcement that National Savings & Investments (NS&I) would be launching “a new, retail savings product to give all United Kingdom savers the chance to support green projects”. No further information was given at the time and little attention shown from the media. In part, that was because NS&I was under a cloud following the administration problems stemming from its action late last year in slashing Income Bond interest rates from 1.15% to just 0.01%.

More details of the new bond, to be called the Green Savings Bond, have now emerged. NS&I have listed its key features as:

  • A three-year fixed term, with no encashment during the term, beyond a 30-day cooling-off period.
  • Available to anyone aged 16 and over.
  • Purchase and management online only.
  • The investment per person will be a minimum of £100 and a maximum of £100,000. Investments can be made jointly.
  • Investors must have a UK bank account capable of receiving BACS payments.
  • The Bond will be fixed rate, with interest earned daily and added once a year on its anniversary. The Bond is therefore unsuitable if you want a regular income.
  • Interest is accumulated without deduction of tax at source. However, the interest is taxable each tax year an addition is made, not just at maturity.

The one key feature that NS&I did not reveal was the one of most interest: what return would the bond offer? NS&I unhelpfully said that this “will be available later in the year”. The rate is likely to be short of market leading. NS&I’s target for money raising in 2021/22 is £6 billion, about a quarter of what it collected in 2020/21, so it is not after massive sales. For investors reinvesting the maturity proceeds of three-year Guaranteed Growth Bonds, NS&I are currently offering a fixed rate of just 0.4%.

NS&I will be late to the green investment scene when the Green Savings Bond eventually arrives. To learn about the extensive range of green investments available today, please talk to us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

HMRC loses on child benefit tax

A recent Upper Tribunal case has raised questions about HMRC’s approach to collecting tax on child benefit.

Child benefit tax, or the High-Income Child Benefit Charge (HICBC) to use its legal name, has a chequered history. The HICBC was introduced in January 2013 as a mechanism for clawing back child benefit from high-income couples, whether married or not. From 2013, the definition of ‘high income’ has been that one (or both) of the couple has adjusted total income of over £50,000. If both cross the threshold, then the person with the highest income pays the tax.

When the HICBC was introduced, it only affected higher-rate taxpayers, but now that £50,000 threshold can also catch basic-rate taxpayers. The highest income approach means that a couple who have an evenly split income of £100,000 pay no HICBC, but their neighbours, with £60,000 of income all in one partner’s name, face the full force of the charge.

The way that HICBC is levied is unusual. The charge is calculated as 1% of the child benefit received for each £100 of income above £50,000 as the example below shows.

HICBCExample

Tom has adjusted net income of £56,000 in 2021/22 and his partner Anne has income of £25,000. They have two children for whom Anne receives Child Benefit of £35.15 per week (£1,828 a year). As Tom’s income exceeds the £50,000 threshold by £6,000, he is subject to an HICBC of 60% of what Anne receives, i.e. £1,828 x 60% = £1,097.

Although an income tax charge, technically the HICBC is not a tax on income. This distinction may seem to be arcane, but in a recent case heard by the Upper Tribunal, it meant that HMRC lost its appeal. The tribunal found that a ‘discovery assessment’, one of HMRC’s common methods of collecting HICBC from those who have not completed a self-assessment return, was invalid because it could only be used for tax due on income. There is now a major question mark over HICBC already paid by taxpayers caught by discovery assessments.

If you are within the scope of HICBC, the latest case is very unlikely to affect your future liability. For that, there are some limited mitigation opportunities we would be happy to discuss with you.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Pension lifetime allowance cuts on the horizon

New HMRC statistics show the lifetime allowance continues to be a useful revenue earner for HM Treasury, but rumoured cuts at the next Budget could be a concern for soon-to-be retirees.

Source: HMRC.

In the March Budget, the Chancellor announced that he would be freezing the pension lifetime allowance (LTA) at its 2020/21 level of £1.0731 million until the end of 2025/26. The LTA started life at £1.5 million in 2006/07 and peaked at £1.8 million in 2010/11. Since then, it has been cut three times and regularly frozen. Had the LTA merely been increased in line with the CPI since 2006, it would by now be close to £2.1 million, nearly double its current level.

The reason why the LTA has been steadily devalued is to some extent explained by the graph above, which is based on revised and updated data recently issued by HMRC. This data shows that in 2018/19 over 7,000 LTA charges on pension scheme members were reported, with total tax payments of £283 million – an average of almost £40,000 per head.

The LTA benefits the Treasury in another, more subtle way. It presents a stark disincentive to make pension contributions for anyone with retirement funds that could reach – or have already reached – the LTA. This is especially true if you have any of the various LTA transitional protections that have been introduced over the years. The rules for some types of protection are such that any fresh contribution revokes the protection. For example, if you have Fixed Protection 2012, £1 of pension contribution would mean you lose a protected LTA of £1.8 million, potentially leading to a six-figure tax bill when benefits are drawn.

In practice, it may not be possible to avoid an LTA charge. Some employers will not offer a salary alternative to a pension contribution and, in those circumstances, suffering the maximum 55% LTA charge is better than foregoing 100%. Higher than projected investment performance can also land you with an LTA charge.

There have been renewed rumours that Chancellor Rishi Sunak will cut the LTA in the next Budget, with threshold figures between £800,000 and £900,000 popular guesstimates. If that or any other aspect of the LTA concerns you, do seek professional advice on your options before taking action. The LTA is only one of many tax traps surrounding pensions.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

 

The £9 billion Child Trust Funds backwater

Over £9 billion was invested in Child Trust Funds (CTFs) as of April 2020, according to new HMRC data.

If you have a child or grandchild born between 1 September 2002 and 2 January 2011, they were almost certainly the beneficiary of a government payment – either £250 or £500 – into a CTF. The theory behind the CTF scheme was to ensure every child had some savings as they entered adulthood.

In practice, the scheme was not a great success. Nearly a third of parents ignored the CTF vouchers they received, leaving HMRC to open default CTFs from accredited providers chosen at random. The scheme survived until 2010, when the new coalition government cut payments dramatically and subsequently closed it entirely from the start of the following year. By then, there were over six million CTFs in existence.

HMRC recently published some limited data on CTFs, which revealed:

  • In April 2020, shortly before the first CTFs started to mature, there was nearly £9.2 billion invested in CTFs, with the average CTF having a value of £1,500.
  • Over 85% of CTFs had a value of less than £2,500. Strangely, HMRC did not give any more detailed breakdown of these sub-£2,500 CTFs, but some detective work suggests that their average value is below £1,000.
  • CTFs were not limited to receiving government payments and the option for top-ups remains to this day, with a current maximum of £9,000 in a tax year. However, in 2019/20, fewer than one in six plans were topped up, with the average addition being £430.

The data paints a picture of most CTFs as small, receiving no new monies and being potentially forgotten. The government tacitly acknowledges this. As part of its package for dealing with the steady flow of maturing CTFs, it launched a find-a-CTF website (https://www.gov.uk/child-trust-funds/find-a-child-trust-fund).

If your child or grandchild has a CTF, it makes sense to review it now to ensure they don’t miss out. Since April 2015, it has been possible to transfer a CTF to a Junior ISA (JISA) but not vice versa – a child can only have the one or the other. Often, a new JISA will offer much wider investment choice than the old CTF and may have lower charges.

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

The wrong type of ISA?

New statistics from HMRC show over £300bn invested in cash ISAs.

Source: HMRC.

One of the many knock-on effects of the pandemic has been that HMRC’s annual updating of statistics has suffered delays. As a result, details of ISA subscriptions and holdings for 2019/20 have only just emerged. Among many interesting facts, the data shows:

  • Despite ultra-low interest rates, the amount of money invested in cash ISAs has continued to grow. In 2019/20, £48.75 billion of subscriptions were received, more than twice as much as was invested in stocks and shares ISAs.
  • The increase in the maximum overall ISA contribution to £20,000 in 2017/18 (from £15,240) has still not driven total annual subscriptions above their 2014/15 peak.
  • Lifetime ISAs (LISAs), launched in 2017/18 to no great fanfare, have since grown in popularity, with 2019/20 subscriptions more than double those of the previous year. This jump may have been helped by the closure to new investors of the Help to Buy ISA in December 2019.
  • For the first time, over one million subscriptions were made to Junior ISAs (JISAs) in 2019/20, with total investment of £974 million.
  • The total amount invested in ISAs (excluding JISAs) in April 2020 was just under £620 billion, of which just over half was held in cash ISAs. The cash proportion would likely be substantially smaller today, as the value of stocks and shares ISAs were depressed in April 2020 when the first lockdowns got underway.

The continued dominance of cash ISAs is, at least in part, a reflection of the lack of financial planning advice received by many ISA investors. The personal savings allowance, introduced in 2016/17, means that basic rate taxpayers (calculated using UK-wide rates) pay no tax on their first £1,000 of interest and, similarly, £500 of interest is tax free for higher rate taxpayers.

At current interest rates, it takes a considerable amount of capital to exceed even the lower threshold so taking out a cash ISA could be of questionable value compared with an ordinary deposit, which might pay a higher interest rate. However, the ISA framework could be useful to you in other ways, so advice is essential before taking any action on a cash ISA.

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.