A Budget for earners and savers – but what of the lowest paid?
For individual taxpayers, the cornerstone of the Chancellor’s 2014 Budget speech was ‘hard-working people [keeping] more of what they earn and more of what they save’. What about those on the lowest incomes?
A few measures, such as the further increase in the personal tax allowance, are a step towards the former objective for some; the latter is well served by today’s announcements on the 10% savings rate, the new ISA and the notable flexibility in the new pension draw-down arrangements – at least for certain types of pension savings.
As against those positive measures, there was every sign that austerity will continue for those who rely to some extent on working age benefits. This includes many workers on low wages who (typically) claim tax credits and possibly housing benefit, and will in due course receive Universal Credit. It is hard to see an end in the short-term to the struggles now endured by households on very low incomes.
We have carefully analysed all of today’s announcements to see how they will affect the household finances of those on low to modest incomes and whether people will indeed keep more of what they earn and more of what they save once all of the measures are considered together across the tax and benefits systems.
Personal allowances 2015/16
The personal allowance is the amount of income you can have in a tax year before you become liable to income tax. It was announced in Budget 2013 that the personal allowance would increase to £10,000 from 6 April 2014 and today’s Budget announced a further increase to £10,500 from April 2015.
Although a welcome move, we in LITRG believe that raising the tax allowance is not necessarily the most efficient way of improving the financial position of people on low incomes given its difficult interaction with most means tested benefits. For many people, the increase will be worth £100 in basic terms, however where people pay tax and receive certain means-tested benefits they may find that by paying less tax they receive less benefits. For example, those in receipt of Universal Credit who are basic rate taxpayers will be only £35 better off whereas non-benefit claimants will benefit by the full £100.
The further increase to £10,500 also means another step has been taken towards the simplification of pensioner taxation. We noted after last year’s Budget that the removal of age allowances would have to wait another few years until the basic allowance caught up with the higher age allowances, but the further £500 increase means that those pensioners born between 6 April 1938 and 5 April 1948 are now getting the same personal allowance as those born after 5 April 1948. However, age allowances will not disappear altogether for another couple of years as those born before 6 April 1938 will keep their age allowance of £10,660.
The 10% savings rate
From 6 April 2015, the starting rate of tax for savings income (such as bank or building society interest) will be reduced from 10% to 0%, and the maximum amount of taxable savings income that can be eligible for this starting rate will be increased from £2,880 to £5,000.
This 0% band, when added to the increased tax-free personal allowance, means that most savers in 2015/16 will not be liable for tax on any interest they receive if their total taxable income is less than £15,500 (this figure may be higher for people born before 6 April 1938 or those entitled to Married Couple's Allowance or Blind Person's Allowance). In addition, tax-advantaged accounts such as ISAs can still be held.
Savers who do not expect to be liable to tax on any of their savings income in the tax year will be able to complete a form R85 – the form used to register with a bank or building society for interest to be paid gross (i.e. without 20% tax deducted at source). This is an easement on the current R85 position which says that form R85 can only be completed by a saver whose total taxable income for the tax year is below their tax-free personal allowance.
This means that many more taxpayers should be able to avoid paying tax upfront only to have to reclaim it later. However, people will only complete form R85 if they know about it and understand that they are eligible, so the onus is now on banks, building societies and HMRC to ensure that the R85 system is better publicised.
As previously announced, up to £1,050 of a spouse’s or civil partner’s unused personal allowance may be transferred to the other spouse or civil partner as of 6 April 2015. This will mean a possible annual tax saving of £210 to couples.
It is only possible where neither of the couple is a higher rate or additional rate taxpayer and must be claimed. Nor is it available to couples where the Married Couple’s Allowance is claimed.
Tax free childcare
Ahead of today’s announcements came welcome news that the new tax-free childcare scheme is to be launched in Autumn 2015 and will be extended to cover childcare for children up to age 12 (17 for disabled children) in the first 12 months. From Autumn 2015, eligible parents will get the equivalent of 20% basic rate tax relief on their childcare costs worth up to £2,000 a year per child, an increase from the ceiling of £1,200 initially suggested. We also welcome the commitment to extend childcare cost support to 85% for all Universal Credit claimants. We will be analysing the detail in the coming weeks.
Collection of tax and tax credits debts
HMRC debt recovery
The Chancellor has announced unprecedented new powers which will allow HMRC to recover debts directly from individuals’ bank accounts. The initiative will apply where HMRC have exhausted multiple attempts to contact the individual to discuss repayment and their debt to HMRC is at least £1,000, with the restriction that following the recovery action, the individual must be left with at least £5,000 across the aggregate of all their bank accounts (including ISAs). There are some clear concerns with this approach, not least that this may substantially add to other difficulties the individual is experiencing. There must also be safeguards or recourse to the courts to protect the individual and not flout the rule of law in a manner unworthy of a public service body. Besides, it would allow HMRC to steal a march on other creditors in the event of a bankruptcy, something which was abandoned long ago with the abolition of Crown preference in bankruptcy proceedings. The Government also announced it will consult on this measure shortly and LITRG will make further representations during that consultation.
Ongoing tax credits debt recovery
From April 2016, the rate at which tax credits overpayments can be recovered from ongoing awards is to be increased from 25% to 50%. This is a substantial change to these long-established recovery rates, with the most obvious benefit to HMRC that some overpayments will be repaid much quicker. However, while this increase is limited to those households with annual income of over £20,000 it may still lead to hardship for claimants (especially where much of the award is comprised of childcare costs) and therefore robust processes need to be in place to deal with hardship requests to lower the percentage rate in individual cases (as is possible currently with the 25% rate).
Pensions and tax
Radical changes to the ability of individuals to take increased sums from their pension savings have been proposed to take place from April 2015. Broadly these will let most people who are not in a defined benefit (“final salary”) scheme choose how much they want to withdraw from their pension savings each year – as an alternative to buying an annuity that guarantees income for life. Although individuals can choose this option at the moment, there are strict limits on the amounts that can be withdrawn on an annual basis.
As now, 25% of the value of the fund can be taken tax-free, while the balance will be taxed at the individual’s marginal tax rates when it is withdrawn from the pension scheme.
Further, small pension scheme savings may currently be taken as a lump sum up to a value of £2,000 – this is to be increased to £10,000 from 27 March 2014. Additionally, the number of schemes that can be taken in this way is to increase from two to three. This forms part of a very welcome overall increase in the limit on pension savings that can be taken as a lump sum (trivial commutation) which has increased from £18,000 to £30,000.
The vastly more flexible rules for drawing down pensions without necessarily taking out an annuity should force providers to be more competitive in what they are prepared to offer pension savers. In addition, the pensions liberation industry will take a knock – if savers are able to make better use of their pensions savings when they reach pension age without tax penalty, there will be less temptation to withdraw their funds earlier on pain of losing much or most of it in fees and extra tax.
But we are concerned that individuals may not fully understand the implications of taking money from their pension earlier. While all such individuals must be given “free and impartial face–to–face guidance”, it is crucial that the financial services industry is ready for this challenge and that the advice given is absolutely clear
Class 2 National Insurance contributions
The self-employed pay two different types of National Insurance contributions (NIC) – Class 2 and Class 4 – which are currently collected and paid at different times.
Currently Class 2 NIC is charged weekly (£2.75) if a business makes annual profits above £5,885 (or below that level but does not claim the small earnings exception) and is usually paid either monthly or six-monthly. Class 4 NIC is calculated and paid via the self-assessment system and is calculated as 9% on profits between £7,956 and £41,865.
The Chancellor has announced that from April 2016 the collection of Class 2 NIC will also be through self-assessment with the aim of simplifying how this NIC is calculated and paid.
LITRG expressed concerns about this proposal in our response to the consultation about the new proposals and especially how it will affect low income self-employed people who may also be claiming benefits such as Universal Credit. We await further detail to see whether these concerns have been addressed.
OTS review of employment expenses
Following the Office of Tax Simplification’s Final Report on Employee Benefits and Expenses, it has been announced that the government will consult on four simplifications including:
- abolishing the £8,500 threshold
- voluntary payrolling of benefits
- a trivial benefits exemption
- a general exemption for non-taxable expenses.
LITRG provided input and comments to the OTS during the preparation phase of the Employee Benefits and Expenses report and will be responding to the consultations that follow on these matters. The government will also be issuing a call for evidence on remuneration practices in connection with travel and subsistence to inform any future reforms to the rules underlying the tax treatment.
We understand that part of this will be to look at the abolition of the ability of employees to claim tax relief on unreimbursed expenses (yet retain the ability for them to be allowable against tax when paid/reimbursed by an employer). LITRG will, of course, make the necessary representations on behalf of low paid taxpayers, many of whom will not receive any reimbursement from their employer and therefore rely on the current tax reliefs available for unreimbursed expenses.
Individual Savings Accounts (ISAs) and Junior ISAs
Significant changes to ISAs were announced today. New ISAs (NISAs) will be available from 1 July 2014, and will allow savers to choose to invest, tax-free, in either cash or stocks and shares or any combination up to an annual limit of £15,000. However, savers will only be able to set up one cash NISA and one stocks and shares NISA each tax year.
Existing ISAs will also become NISAs from 1 July 2014 and savers will have increased flexibility to invest their ISAs from previous tax years (for example, ISAs set up before 6 April 2014) in a mixture of cash or stocks and shares if they choose to and if it is allowed by the terms and conditions on their NISA account.
It will still be possible to invest in a new ISA after 6 April 2014 but before 1 July 2014 when the NISAs become available, but this investment will count towards your NISA subscription limit of £15,000 in the 2014/15 tax year and savers will not be able to set up a NISA of the same type as their ISA until the following tax year. The investment limits for ISAs set up between 6 April and 30 June 2014 will be £5,940 and a combined limit for cash and stocks and shares of £11,880.
There will not be the flexibility for ISAs set up between 6 April and 30 June 2014 to be split in a NISA between cash or stocks and shares as only the whole amount can be transferred – therefore savers need to consider their financial plans before deciding to set up an ISA between 6 April and 1 July as they could have less flexibility and may want to consider obtaining professional advice.
Savers aged between 16 and 18 will be able to save up to £15,000 each year but only in cash NISAs; this is in addition to the investment limits on any Junior ISAs held.
The investment limits on Junior ISAs and Child Trust funds have also increased from £3,720 to £4,000, from 1 July 2014.
The announcement of an extra £85million in 2014-15 and 2015-16 to provide over 100,000 Apprenticeship Grants for Employers is to be welcomed, against the back drop of concerns for youth unemployment and together with the recently announced increase of the National Minimum Wage rates this should prove to be a positive step. It is important that clear and accurate information is provided to apprentices about their tax and benefit position.
We have welcomed a number of changes in this year’s Budget that certainly contribute to allowing people to keep more of what they earn and save. However careful consideration needs to be given across systems, for example how tax changes impact on the benefits people claim. We are also concerned by some of today’s announcements and will be putting forward those concerns when each of the measures are consulted upon.