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Understanding the Child Benefit Charge


7 January marked the fifth anniversary of the tax on child benefits, an imposition that is still not widely understood.

The High Income Child Benefit Charge (HICBC), to give child benefit tax its correct name, was introduced in a rush by George Osborne – so much so that it began three months before the start of the 2013/14 tax year. It was, and remains, a classic example of the type of tax system tweaking beloved of Chancellors and disliked by those who have to deal with the consequences.

The HICBC represented an attempt to use the income tax system to withdraw child benefit from parent(s) (married or not) where one had income exceeding £50,000. Its introduction was poorly publicised, leaving many people – particularly PAYE earners – unaware of their potential liability.

Caught by ‘failure to notify’?

If proof were needed of the flaws in HICBC, it arrived in November 2018. That was when HMRC announced it would be reviewing ‘Failure to Notify” penalties for 2013/14, 2014/15 and 2015/16 “to customers [sic] who did not register for the High Income Child Benefit Charge” and therefore did not pay the HICBC tax. Unusually for HMRC, it is not looking for the taxpayer to provide a “reasonable excuse” before considering a refund. It may be hoping to avoid a flood of letters from those affected.

The income trigger for the HICBC remains at £50,000. That means that for 2019/20 the trigger matches the UK higher rate threshold. When it began, the charge started at over £7,500 above the then threshold.

The tax is levied in a unique way: for each £100 of income above the threshold, tax is payable equal to 1% of the child benefit received. For example, an income of £56,000 would mean an HICBC of 60% of total child benefit – 60% of £1,789 (=£1,073) for a two child family.

Failure to claim child benefit can mean a loss of national insurance credits, so it’s important to avoid this pitfall. If you or your partner are, or may be, caught by HICBC, there are several planning options to consider, which we would be happy to discuss.

 

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

Filling the pensions hole for the self-employed

The Department for Work and Pensions (DWP) is aiming to expand pension coverage among the self-employed.

 Pension automatic enrolment has become a major success since it was launched nearly seven years ago, with almost 10 million people joining a workplace pension arrangement. Take-up rates have been much higher than some pundits had forecast – the latest calculation from the DWP showed that in 2016/17 the overall opt out rate was just 9%.

However, there is one group of people that the automatic enrolment regime completely misses: the self-employed. According to the DWP, the self-employed account for about 15% of the UK workforce – 4.7 5 million people. Private pension coverage in this sector is low, despite the tax benefits on offer. The DWP has calculated that in 2016/17, only about 1 in 7 of the self-employed were saving into a pension.

Encouraging pension saving

In December the DWP announced that it would be running a programme of trials aimed at encouraging the self-employed to start saving. These trials will involve a range of trade bodies and financial services organisations, including the main government initiated auto-enrolment scheme, NEST, which now has over seven million members.

If you are self-employed and one of the 6 in 7 who is not yet saving for your retirement, you should not wait for the DWP to find ways to nudge you into action. The hard fact is that with no private pension provision, your retirement pension will simply be the new state pension – £168.60 a week (£8,767 a year) from April. Remember too that the state pension is only payable from state pension age, which is now in the process of rising to 66 by October 2020 and 67 by April 2028.

If you want a higher pension, and/or you do not want to wait until the state decides it is time for you to retire, then the sooner you begin to consider your retirement planning, the better. Talk to us about your options now – these could well include routes other than pure pension arrangements.

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.

Shake up your New Year’s resolutions

The time to resolve has returned.

Have your New Year resolutions fallen by the wayside yet? You know, the ones about eating better, drinking less and exercising more. The problem is they all require you to make a change to your lifestyle, which is never easy, particularly in the dark days of mid-winter.

Some people prefer to talk about intentions rather than resolutions. And to try to look beyond the short-term goals to longer term outcomes to boost the likelihood of sticking to them.

Here are four simple financial New Year’s resolutions. They need only one-off actions, so they should be easier to stick to. And they could provide long term benefits:

  1. Make a will. If you don’t have a will, you have no say in how your estate is distributed. That may not matter if the laws of intestacy match your wishes, but often the two diverge considerably, leaving difficult issues for your dependants. If you have made a will, you are not completely off the hook: resolve to look at it and make sure it is still the right will for your current circumstances.
  2. Set up lasting powers of attorney. Who would make decisions about your finances and medical treatment if you were unable to do so? Just as with a will, a lasting power of attorney lets you decide the answer rather than falling back on what the state determines or leaving your family without the ability to really help you.
  3. Check what you are earning on your deposits. Many banks and building societies continue to pay negligible rates on accounts that are “no longer available” to new savers. Just because an account has ‘gold’ in its title is no guarantee that it won’t be paying a mere 0.1%.
  4. Check your state pension entitlement. This is easy to do online (https://www.gov.uk/check-state-pension) and shows both what you should receive based on current rates and when you should start to receive it. The projection will also indicate any scope you have for increasing your state pension.

For help with any of these resolutions (not the food, drink and exercise ones), 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 or trust advice.

The 2018 investment year

The world’s share markets mostly saw falls in 2018.

Index 2018 Change
FTSE 100 -12.5%
FTSE All-Share -13.0%
Dow Jones Industrial -5.6%
Standard & Poor’s 500 -6.2%
Nikkei 225 -12.1%
Euro Stoxx 50 (€) -14.3%
Shanghai Composite -24.6%
MSCI Emerging Markets (£) -11.5%

2018 was a very different year for investors from 2017. During that year, the share markets generally produced positive returns with very little volatility. Both years had their fair share of dramas, with Brexit and Donald Trump sources of concern across the 24 months. However, whereas in 2017 stock markets seemed relatively unphased by events, the opposite was true in 2018.

In sterling terms, the MSCI World Index was down 4.9%, much less than the main UK indices. However, this hides two factors:

  1. The US stock market, which forms about half of the World Index, was relatively strong. Strip that out and the MSCI World Index ex-USA was down 11.2% in sterling terms, only marginally less than the main UK indices.
  2. The Brexit-battered pound was weak during 2018, which flattered overseas returns.

In the UK, the main indices produced their worst annual return since the financial crisis year of 2008. As a result, the UK stock market now has an average dividend yield of nearly 4.5%, the highest level since 2009.

If you are investing for income that yield is undoubtedly attractive. We’re always here to discuss your portfolio and options – and 2019 is going to be an interesting year.

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.

Index-linked savings certificates

The popular National Savings & Investments (NS&I) savings certificates will be indexed to CPI instead of RPI from next year.

The certificates have not been on sale since 2011, but NS&I allow existing certificate holders to reinvest in new series of certificates when their old ones mature. The terms have gradually worsened over the years and at present reinvestment promises a return of RPI inflation +0.01% a year. For certificates maturing from 1 May 2019, the basis of indexation will change from RPI to CPI.

The change was not picked up by newspapers at the time because they were released the Friday before the 2018 Budget, held on the Monday. Government departments are often accused of burying bad news, and the downgrading of the NS&I index-linked savings certificates is certainly bad news for affected investors.

RPI or CPI?

The government now generally only uses RPI where it benefits, for example as the basis for interest levied on student loans or for annual rail fare increases. CPI is used to index many – but not all – income tax bands and allowances.

NS&I said, ‘This change recognises the reduced use of RPI by successive governments and is in line with NS&I’s need to balance the interests of its savers, the cost to the taxpayer, and the stability of the broader financial services sector.’

As the graph shows, the move from RPI to CPI will cut returns by about 0.8% a year based on data since 2010. In their widely-missed press release, NS&I note that, ‘The cost to the taxpayer is forecast to reduce by £610 million over the next five years’. That ‘cost to the taxpayer’ could also be read as, ‘return to the investors’.

If you hold any issues of index-linked certificates, think about whether you definitely want to reinvest when they next mature, rather than letting inertia (and automatic reinvestment) take its course.

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.

 

Office of Tax Simplification’s first report on inheritance tax

The Office of Tax Simplification (OTS) has published the first part of its inheritance tax (IHT) simplification review.

The report highlights a variety of issues with the current IHT system:

  • IHT returns are submitted for about half of all estates, even though tax is paid by less than 5%;
  • Most of the paperwork cannot be completed and submitted online and is far from user-friendly;
  • Probate is not normally granted until IHT has been paid, which can create difficulty for executors;
  • The residence nil rate band, introduced in 2017/18, was widely criticised as being ‘very complex’, and disadvantaging those who do not have children and those who have not owned their own home.

The OTS made a key administrative recommendation: ‘The government should implement a fully integrated digital system for Inheritance Tax, ideally including the ability to complete and submit a probate application’. HMRC have already started such a project in 2014, and in April 2018 announced it would be delayed, choosing instead to focus on the short IHT205 form which applies to certain estates where no IHT is payable.

The OTS review timetable

The Chancellor asked the OTS to undertake its review of IHT in January 2018. The instruction was, ‘to identify opportunities and develop recommendations for simplifying IHT from both a tax technical and an administrative standpoint’.

The OTS originally indicated it would publish a report ahead of the Autumn Budget, but Mr Hammond brought the Autumn Budget forward to October and nothing emerged from the OTS in time.

In late November, about the time the Budget would normally have arrived, the OTS published the first half of its review. Such was the response to the OTS consultation document, the organisation has decided to produce two reports. The first covers ‘administrative issues’ while the second will explore ‘key technical and design issues’.

The second report is due in spring, and could herald changes to tax rules, instead of the administrative framework. The result may be less generous than the current system, meaning it could be wise to review your estate planning opportunities now.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax or trust advice.

UK dividends remain strong despite volatile markets


UK dividends are continuing to grow faster than inflation, according to the latest quarterly data from Link Asset Service.

Source: Link Asset Services, FTSE

The latest UK Dividend Monitor (UKDM) shows that in the third quarter of 2018 dividend payments were 4.1% up on the previous year, comfortably above the current rate of inflation. Looking over the 10-year period from the end of 2007 to the end of 2017, total dividend payments have risen by an average of 5.1% while CPI inflation has averaged 2.4%.

The UKDM is published by Link Asset Services (formerly produced by Capita) and totals the dividends paid out on the ordinary shares of companies listed on the UK Main Market every quarter – excluding investment companies, to avoid double counting. It captures both regular dividends and one-off special dividends, which often stem from takeovers or other corporate restructurings.

As the graph shows, over the last ten years, the amount paid out in dividends has grown faster than the capital value of shares. There are still dips, but between 2007 and 2017 the regular dividend total dropped only once, in the wake of the global financial crisis. The jump and dive between 2013 and 2015 is an aberration caused by a one-off £15.9 billion special dividend paid by Vodafone in 2014.

Unpredictable markets

Despite increasing dividend payments, there has been considerable volatility in UK share prices throughout 2018. Little more than five months, and over 1,000 points, separate the FTSE 100’s high and low marks for the year to date. But whilst the FTSE tracks capital values, it does not account for dividends, which are ignored in the calculations of most equity market indices.

If you are investing for income the data is a reminder that, for all the fluctuations in capital values, shares have continued to provide real dividend growth.

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.

New probate fees to affect many estates

The government has revived plans to raise probate fees in England and Wales.

A new, banded structure for probate fees in England and Wales is to be introduced, according to a written statement issued a week after the 2018 Budget by the Parliamentary Under Secretary of State for Justice.

The announcement comes after the absence of inheritance tax (IHT) reforms in the Budget, despite the Chancellor commissioning a review by the Office of Tax Simplification in January 2018. The only change to IHT announced in October was a small adjustment to the legislation for the residence nil rate band – this being such a complex piece of legislation, it had been wrongly drafted.

New fee structure

If new probate fees sound familiar, it is because a very similar announcement was made in March 2017. At the time the proposal provoked widespread criticism, because the higher levels were seen to be more of a new tax than a simple fee adjustment. In the event the planned change fell victim to the legislative logjam around the last General Election and disappeared.

Since then, the government has taken on board some of the original criticism and cut the fees they are proposing, particularly for larger estates:

Value of estate Old Proposal New Legislation
Up to £50,000 or exempt from requiring a grant of probate Nil Nil
£50,001 – £300,000 £300 £250
£300,001 – £500,000 £1,000 £750
£500,001 – £1,000,000 £4,000 £2,500
£1,000,000 – £1,600,000 £8,000 £4,000
£1,600,001 – £2,000,000 £12,000 £5,000
Over £2,000,000 £20,000 £6,000

The current fees are £215 for individual applications and £155 via a solicitor, with nothing payable if the estate value is up to £5,000. Under the new banding, there is a maximum effective charge for probate of 0.5% of the estate, which is triggered at £50,000 (a £250 fee) and £500,000 (a £2,500 fee).

The new fees are currently scheduled to come into effect 21 days after the legislation is passed, and there is very little that can be done to mitigate the impact. They are payable even if the estate passes with no IHT liability, as is usually the case on the first death of a married couple or civil partners, or if the value of the estate is covered by the available nil rate and residence nil rate bands.

There are still opportunities to save IHT with careful planning and, as the Budget made no significant changes, there remains a window of opportunity before any reforms are introduced.

If you would like help updating your estate plans ahead of the review publication please get in touch.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax or trust advice.

State pension sees rise thanks to the triple lock

A 2.6% rise in the single tier state pension was announced in the 2018 Budget.

The increase to the single tier state pension, and its predecessor the basic state pension, will apply from next April. Other state pensions, such as the State Earnings Related Pensions Scheme (SERPS), will rise by 2.4%.

The higher increases for the two main pension benefits are the result of the ‘triple lock’, which requires the annual uplift to be greatest of:

  • CPI inflation (2.4% in September 2018);
  • Earnings inflation (2.6% for average weekly earnings to July 2018); and
  • 2.5%.

The increased payment – £4.30 a week for the single tier pension – is often presented as extra money for pensioners. However, it is doing little more than maintaining the state pension’s buying power against inflation.

Earnings and CPI inflation have been roughly in line with each other for some time, which can be linked to any discussion about the lack of real wage growth. Had September’s annual inflation figure come in at 2.6%, as expected by many pundits, it would once again have been the triple lock winner, albeit matched by earnings.

Triple lock guarantee

The triple lock is only guaranteed until the end of the current parliament (2022, at the latest) after which its future is in doubt. There have been many calls for the triple lock to be scrapped, including from the House of Commons Work & Pensions Select Committee.

The problem with the triple lock is its cost, which is greater than a pure link to earnings or a simple price inflation.

To see how expensive providing only inflation proofing is you can look at pension annuity rates. For a 65-year-old, an RPI-linked annuity costs approximately two thirds more than an annuity which does not increase over time. While annuities are not as popular these days, that 66% difference is a fair indicator of how much more it costs to build inflation protection into your retirement planning.

If you would like to discuss your retirement plans in light of these developments, please get in touch.

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

 

Inflation eating into the value of savings

Inflation still outpaces nearly all available deposit rates.

Source: ONS, Bank of England

At the end of September, the US bank, Goldman Sachs, launched a new online easy-access savings account in the UK under the name of Marcus. It has offered a similar account in its home territory since 2016, gaining over 1.5 million customers according to the bank’s second quarter results. In the UK, 50,000 Marcus accounts were opened in the first fortnight after its introduction.

Marcus gained heavy press coverage at launch, not least because the interest rate on offer was – and at the time of writing, still is – top of the instant access league tables. The headline rate is 1.5%, but that is not quite the whole story. The rate is actually a variable 1.35%, plus a 0.15% ‘bonus’ payable for the first 12 months. However, even the 1.35% would leave Marcus very close to the top of the league tables.

UK banking history is littered with new-name deposit accounts that were league-topping at launch, only to disappear without trace a few years down the line, such as ING Direct or Cahoot. The strategy Goldman Sachs has adopted with Marcus in the US, however, has so far kept the account in a leading position: it is paying 1.95% against a national savings rate average of just 0.32%.

However, to paraphrase a common warning, past performance (in the States) is not necessarily a guide to the future (in the UK).

In the UK, Marcus’s 1.5% interest rate is still 0.9% below September’s CPI inflation figure of 2.4% or, if you prefer the old RPI measure, 1.8% short. Short-term interest rates, as measured by the Bank of England Base rate, have been below CPI inflation for much of the last 10 years. Even if you had an account consistently paying 0.75% above base rate (the dotted line), as Marcus is currently, your cash would still have lost buying power – and that is before considering any tax on interest.

There is no argument that Marcus is a competitive account, but it is perhaps not a long-term investment choice. If you would like to discuss your investment options, please get in touch.

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.