Doctors tapering off as pension tax rules bite

Measures designed to limit the cost of pensions tax relief to the Treasury are having some unwelcome consequences, as some senior doctors have found their incomes disappearing.

Some members of the medical profession have found changes to legislation mean their earnings are getting swallowed up by the tax system. According to a recent Financial Times report some NHS consultants are being landed with tax bills of up to £87,000, prompting them to reduce working hours or even take early retirement.

The doctors’ problems primarily stem from the implementation of the pension annual allowance tapering rules. These have two key trigger points:

  • ‘Threshold income’ (broadly speaking total income from all sources, less personal pension contributions) exceeding £110,000; and
  • ‘Adjusted income’ (broadly total income from all sources plus employer pension contributions) exceeding £150,000.

If both levels are crossed, then the standard annual allowance for pension contributions of £40,000 is reduced by £1 for each £2 by which ‘adjusted income’ exceeds £150,000, subject to a minimum annual allowance of £10,000. The all-or-nothing nature of the triggers can mean that just an extra £1 of earnings brings the taper rules into play. That additional £1 could therefore result in an additional tax bill of much more than £1.

To complicate matters further, £110,000 sits almost in the middle of the band of income between £100,000 and £125,000 at which the personal allowance is tapered away, creating an effective marginal tax rate of up to 60% (61.5% in Scotland). Added to that will usually be 2% national insurance contributions.

The Financial Times article said that many doctors had been ‘surprised’ by their pension tax bills. This implies they had not sought personal financial advice on how the pension taper rules, introduced from April 2016, would affect them.

There are on-going discussions between the Treasury and the Department for Health and Social Care about the issue, but it seems highly unlikely the former will forgo the revenue generated by the annual allowance rules (over £560m in 2016/17). In the meantime, the episode serves as a reminder of the importance of regular financial reviews to avoid – or at least be aware of – the growing range of tax traps in the UK’s labyrinthine tax legislation.

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

How long do you want to work…?

As people are living longer, a parallel older-age profile is emerging in the labour force.

Source: National Statistics 16/4/2019

Labour market statistics for the period December 2018 to February 2019 revealed some impressive results. In the UK, employment of those aged 16–64 was running at 76.1%, the joint highest level ever and up 0.7% on a year ago.

Drill down into National Statistics numbers and some interesting facts emerge:

  • The increases are being driven by more women aged 50–64 in the workforce. At the start of the decade, 58.5% of women aged 50–64 were in employment, whereas the latest figure is 68.1%. Coincidentally in 2000, that was the male rate of employment in the 50–64 age band.
  • The proportion of men aged 50–64 in work has also risen over the same period, but less dramatically – from 71.4% in 2010 to 76.8% now.
  • At 65 and beyond, employment is reaching record levels for both men and women, as the graph shows. Women and men aged 65 and over have an employment rate of 7.9% and 14.2% respectively, compared to 5.5% (women) and 10.8% (men) in January 2010.

There are several reasons for the increase in employment beyond age 50:

  • For women – and now men – the rise of state pension age (SPA) has undoubtedly had an impact. As recently as April 2010, the SPA for a woman was 60. By October next year, both men and women will share a SPA of 66.
  • The ending of compulsory retirement ages has encouraged longer working lives.
  • The gradual disappearance of final salary pension schemes, particularly in the private sector, has forced some people to revise their retirement plans.
  • Economic conditions have played their part. Real (inflation-adjusted) wage growth has been virtually zero over the last 10 years, limiting the scope for retirement savings.

Working for longer can be beneficial to health, although the case is by no means clear cut: continuing work-related stress could be life shortening. The key is to be able to choose when to stop work, rather than have the decision forced upon you. To get into that position, there is no substitute for adequate retirement planning – preferably well before the age 50, yet alone 65, is reached.

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 lesson from the loan tax charge

The controversy surrounding the loan charge deadline is a reminder of the dangers of aggressive tax planning.

If you were offered a way of being paid a ‘salary’ that involved no income tax and no national insurance contributions (NICs), what would you think?

In the late 1990s and early 2000s, many contractors and consultants were offered the option of joining schemes which purported to make tax and NICs disappear. At the time, some decided the chance was too good to miss. Their choice was often in response to IR35, the HMRC crackdown on people sidestepping taxation as employees by claiming self-employment or operating via one-person companies. The schemes promoted had various structures, but one key factor was that they relied on earnings being replaced by low or nil-interest loans that were never intended to be repaid – hence the schemes often being described by HMRC as “Disguised Remuneration Schemes”.

HMRC never approved these schemes but took their time to act against them. Blocking legislation for new loans was announced in 2010, by which time HMRC was already challenging some schemes through the courts. However, it was not until 2016 that the then Chancellor, George Osborne, introduced legislation that treated the amount of any loans outstanding at 5 April 2019 as income. It is that measure which has recently brought the subject into the headlines. HMRC has estimated that 50,000 people face a charge averaging £64,000.

With hindsight, avoiding all tax and NICs on earnings now looks a deal too good to be true. That it seemed credible 15–20 years ago shows how attitudes to tax avoidance have changed since the turn of the century. It is also a reminder that if you are offered an avoidance scheme that appears to make your tax liability evaporate, it could be many years before you – or possibly even your executors – discover it does not.

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

Happy 20th birthday to the ISA

6 April marked the 20th birthday of the Individual Savings Account (ISA).

When the ISA was introduced in 1999, many thought it to be little more than a rebranding of the two schemes it replaced: the Personal Equity Plan (PEP) and Tax Exempt Savings Account (TESSA). The following 20 years have proved ISAs to be much more.

The latest figures from HMRC (to 5 April 2018) show that over £610,000 million is invested in ISAs. Nearly 45% of that sum is held in cash ISAs, despite the ultra-low interest rates that have prevailed over the last ten years. Since 1999, successive Chancellors have tweaked many aspects of ISAs and extended the range to include variants such as Lifetime ISAs and Help to Buy ISAs. However, three factors have remained virtually constant throughout:

  • Income, whether in the form of dividends or interest, is free of UK income tax.
  • Capital gains are similarly free of UK capital gains tax.
  • There is nothing that the individual investor has to report to HMRC.

For some investors, the advent of the personal savings allowance and the dividend allowance have eroded or even eliminated the tax benefits of using an ISA. For others, the tax advantages have increased, not least because of the higher tax levels on dividends once the dividend allowance is exceeded. A growing band of investors are also seeing benefits of a change made several years ago that allows AIM shares to be included in ISAs, creating the possibility of an ISA that is free of inheritance tax.

The contribution ceiling for all ISA contributions (other than Junior ISAs) in 2019/20 is £20,000, the same as it has been for the past two tax years. A key to making the most of the benefits of ISAs is to maximise contributions. If you had done so over the last 20 tax years, you could by now have invested over £220,000 in a stocks and shares ISA.

If you have been investing in ISAs over the years – if not the full 20 – now is probably a good time to review them, particularly if you are holding cash ISAs or have not altered your choice of investment funds from outset. Tax advantages can all too easily be countered by poor investment decisions.

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 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.

China emerges on to the investment stage

The importance of China’s stock market is set to quadruple in 2019.  

China has been at the forefront of the headlines recently, whether about the protracted trade dispute with the US, the alleged dangers of using Huawei’s 5G equipment or the first landing of a spacecraft on the far side of the moon. The ‘Middle Kingdom’, as China is sometimes called, is now the world’s second largest economy. If you adjust for the Chinese currency’s purchasing power – not something the Chinese like to do – their economy comes out at number one.

For all its apparent might, China remains classified as an ‘emerging market’ in investment terms. The overall economy may be at, or close to, the top of the charts, but when you look at economic output per head, China drops down to a ranking into the 70s – much the same as Bulgaria. That difference in ranking underlines the degree of China’s scope for growth.

In March, China’s economic status gained another leg up with an announcement from MSCI. The MSCI Emerging Markets Index (EMI) sets the benchmark for an estimated $1,900bn of funds investing in emerging markets and included shares listed in China (so-called ‘A Shares’) for the first time in 2018. Previously it had only included shares in Chinese companies listed outside China, such as Alibaba, which is listed in New York. The 2018 move was an initial step, as MSCI only gave a 5% weighting to the A Shares, meaning that they formed a miniscule part of the EMI.

MSCI’s March 2019 announcement heralds a staged increase in that weighting, which will reach 20% by November, at which point A shares will be 3.3% of the EMI. Further increases are possible later, subject to market developments in China. If – and it is a big if – China A shares eventually gain a 100% weighting, then Chinese companies (wherever they are listed) will account for over 40% of the EMI, up from 31.3% currently, as the chart below shows.

The MSCI move on China is prompting many emerging market investment managers to reassess their Chinese holdings, probably with a view to increasing them. If you want to add to or create your exposure to Chinese investments, there are a variety of options that we would be happy to discuss. If you want to avoid China, then make sure you have a good reason why – it looks set to become ever more important for investors across the globe.

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.

An overshadowed Spring Statement

The Chancellor’s Spring Statement was almost obscured by other events in mid-March.

Ever since he announced a move to an Autumn Budget in 2016, Mr Hammond has made it clear that he wanted to avoid the Spring Statement counterpart becoming a mini-Budget. His vision was that in March he would be presenting a brief response to the latest forecasts from the Office for Budget Responsibility (OBR). As the Treasury website stressed, “there will now only be one major fiscal event each year”.

Nevertheless, it is unlikely that either the Treasury or the Chancellor wanted the Spring Statement to be an event that was completely overshadowed by other parliamentary business occurring on the same day, as it was by the votes on whether to rule out a no-deal Brexit. Ironically, the Chancellor made his statement on the assumption of “a smooth and orderly exit from the EU”.

There were virtually no new tax initiatives in the Statement, although there were hints that a ‘Deal Dividend’ would help in “keeping taxes low” as well as allow increased public expenditure. In the background papers published alongside the Statement, there were reminders that the tax screw continues to be tightened in some areas. For example, Mr Hammond promised a consultation paper putting flesh on two measures announced in the October Budget, designed to restrict two long-standing capital gains tax reliefs on residential property.

The OBR’s calculations explain why Mr Hammond did not mention fresh tax cuts, as opposed to maintaining low tax levels. In this new 2019/20 financial year, government borrowing is projected to increase by £6.5bn and to still be £13.5bn by 2023/24. Income tax and national insurance contribution receipts have been rising faster than expected and are the main reason why the OBR’s overall finance figures looked rosier in March than last October.

As has been the case for some years now, if you want to see your tax bill reduce, the starting point is not to wait for government action, but to review your personal opportunities for improved tax planning

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

Inflation dips below the Bank of England’s target

UK inflation fell below 2% for the first time in two years.

January 2019 saw the lowest level of inflation since January 2017, with the rate recorded at 1.8%. The data was slightly better than had been expected, with the CPI rate falling to below the Bank of England’s 2% target for the first time in two years. One of the major contributors to the fall from December’s 2.1% rate was the drop in gas and electricity prices prompted by the introduction of the price cap on “standard variable” tariffs. The cap, operated by Ofgem, came into effect at the start of 2019.

However, shortly before the January inflation figures were released in mid-February, Ofgem announced that the utility price cap would be rising by 10.3% from April due to a rise in wholesale energy costs. The unfortunate timing was partly down to the fact that the cap has a six-month summer/winter cycle, so the initial winter cycle has an abbreviated three-month lifespan. All of the big six energy suppliers have since responded with price increases to take effect from April. All other things being equal – which they are almost certain not to be – that means a blip up in annual inflation will occur in April.

A benign outlook

Despite the vagaries of the utility pricing, the outlook for inflation is relatively benign. The Bank of England’s most recent Inflation Report, also published in February, projects a slight rise in 2020, but only to 2.3% before fading to 2.1% in 2021 and 2022. Those projections are in turn derived from market expectations for base rate, which suggest it will not be until 2021 that base rate reaches 1%.

The Bank does hedge its forecast on future interest rates, with the inevitable proviso about Brexit: “The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.” This means that the Bank of England has no pre-set plans and could move interest rates up or down. Realistically, few economists believe that rates would rise, even in the most difficult scenario.

For investors, the main conclusion to draw from all this is that short term interest rates are expected to remain well below a rate of inflation that will be around 2%. As has been the case for most of the past ten years, keeping more than needed on deposit will continue to be a way of eroding wealth.

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.

Check your April pay slip

Your April pay may look much the same as March’s, but it is worth giving your pay slip a close look.

If you are an employee, your April pay slip is always worth checking, even if you pay little attention to the other eleven you receive over a year. The items to check include:

Salary Many employers change pay rates from 1 April, often coinciding with the start of their new financial year. If you were notified of a pay increase in March, it is worth making sure the number on the April pay check agrees with what you were promised.

Tax code. Your April pay check will be the first for the 2019/20 tax year and your PAYE tax code will have almost certainly changed from what was on your March pay slip. If you are entitled to a full personal allowance and have no deductions, your code number should increase by 65, reflecting the £650 increase in the personal allowance.

If you have a company car, then it is likely to move your code in the opposite direction. For most cars (other than those with the highest emissions), the percentage of list price that is taxable rises by 3% – £300 per £10,000 of list price. A £22,000 car will therefore more than counter the rise in the personal allowance. The higher scale percentage also means a similar increase in taxable value of employer supplied fuel. In practice you might be better off paying your own fuel bills, even if your employer pays you nothing in compensation.

National insurance contributions (NICs) The primary threshold (that is, the starting point) for NICs rises by £4 a week while the upper earnings limit (the top level of earnings on which you pay full 12% NICs) jumps by £70 a week. As a result, if your annual earnings are more than £46,600 a year, you will be paying more NICs from April. If you earn over £50,000 a year, your extra NICs will be just over £28 a month.

Pension contributions These are generally linked to salary, although not necessarily your full pay, so should increase if you have an April pay increase. If you are in an automatic enrolment pension scheme, your contributions are usually based on “band earnings”, which were £6,032–£46,350 in 2018/19 and are £6,136–£50,000 in 2019/20. The contribution rate will rise, too. How much will depend upon your employer’s contributions: you might see the rate increase by two thirds to 5% of band earnings (4% after basic rate tax relief). If your pay in April is lower than in March, the auto enrolment change could be the culprit.

For more insight on the tax, NICs and pension deductions from your pay and options to limit their impact, please talk to us.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

The rise and rise of UK dividends

Dividend payments from UK companies in 2018 once again outpaced annual inflation.  

Your income could have increased by more than double the rate of CPI inflation in 2018.

Link Asset Services, a leading share registrar, reported a 5.1% growth in total dividend payments of UK companies last year. Their January dividend monitor showed that in 2018 UK companies paid out £99.8bn in dividends, £4.8bn more than in 2017.

As the graph shows, since 2012, total dividend payments have comfortably outpaced inflation. The dividend line is not as smooth as the inflation line for two reasons:

  • To a degree, what companies will pay in dividends depends upon financial conditions. The graph’s dip in 2009 and 2010 calendar years reflects the fallout from the great recession of 2007/08 when some major companies, e.g. clearing banks, suspended dividend payments completely.
  • Total dividend payments represent the addition of regular dividends – what companies pay each year – and special dividends, which are one-off payments. From year to year, the ‘specials’ vary much more than regular dividends. A good example is 2014, when Vodafone sold out its US business interests and made a one-off dividend payment of nearly £16bn.

In its latest monitor, Link notes that rising dividends and falling share prices in 2018 meant that the yield on UK shares in December 2018 hit the highest level since March 2009. The 4.8% yield recorded by Link compares with an average over the last 30 years of 3.5%. In Link’s view, that level of dividend seems ‘’overly pessimistic” and is more likely to represent an undervaluation of UK stocks due to Brexit uncertainty as well as difficulties in the global market. It is hard to disagree.

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.

Inheritance tax reductions ahead of potential reform

Inheritance tax (IHT) will be slightly reduced for some from 6 April 2019, but greater reforms may arrive soon.

The IHT residence nil rate band (RNRB) increases by £25,000, bringing it to £150,000 for the 2019/20 tax year. In theory that means a married couple can pass on up to £950,000 (2 x nil rate band of £325,000 + 2 x RNRB of £150,000) to their heirs free of tax.

In practice matters are much more complicated, as eligibility for the RNRB comes with a variety of conditions primarily designed to limit the cost to HM Treasury.

A final £25,000 increase in the RNRB happens in April 2020, increasing the available band to £175,000 and the theoretical IHT-exempt estate up to £1 million. There is some doubt, however, whether this will happen, at least as legislation currently envisages. The reason for that uncertainty is a review of IHT, which the Chancellor requested from the Office of Tax Simplification (OTS) in January 2018.

The OTS review of inheritance tax

The first part of the OTS review was published last November. It detailed over 3,000 responses to their consultation and made a range of proposals for simplifying IHT administration.

The second part of the review, which examines the “key technical and design issues” is due in spring. It would not be surprising if the OTS suggested some reform of the RNRB, which it said, “attracted a lot of comments … due to its complexity and because those who do not have children, or their own home, may not be covered by it”.

One obvious possibility would be to enlarge the nil rate band and scrap the RNRB, but as the OTS noted “any changes would of course involve an Exchequer cost”. Mr Hammond’s predecessor turned down such a suggestion, despite heavy criticism of the RNRB’s legislative complexity.

In the meantime, as the end of the tax year approaches the regular IHT exemptions need to be considered. These are currently:

  • £3,000 annual exemption for gifts;
  • £250 per person small gifts exemption; and
  • The normal expenditure exemption, which broadly speaking exempts any gifts that are:
    • made regularly;
    • made out of income; and
    • do not reduce the standard of living of the person making the gift.

For more information on the exemptions and how they can be used, please talk to us. As with much else in IHT, the exemptions contain their own traps for the unwary.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.