Contact us: 01799 543222

£2,000 of Employment Allowance

Archive for June, 2014

£2,000 of Employment Allowance

Monday, June 30th, 2014

If you are an employer, you’re almost certainly receiving what is effectively a free gift from the Government worth up to £2,000, as part of an initiative to help smaller businesses.

With a few exceptions most employers qualify for the new Employment Allowance. This provides up to £2,000 a year off employers’ class 1 national insurance contributions – the 13.8% payroll charge on employee earnings over £153 a week.

While you could simply ‘bank’ the savings, you might also consider using the money to improve your business. The £2,000 allowance could provide the seed corn for employee benefits such as additional pension contributions, health insurance or life cover for employees.

You could consider providing private medical insurance on either a group or individual basis. Private hospitals can treat problems without long waiting lists – again improving staff morale and reducing time off. Life cover offers peace of mind to employees who may never choose it for themselves. But bear in mind that choosing the right plan for your purpose, working out the cost and tax considerations can be a minefield; so you’ll need some expert financial advice.

If your organisation is approaching your staging date for auto-enrolment or if you are in the throes of introducing this pensions innovation, there can be extra costs. You might well need to find the extra funds to help smooth the path.

Auto-enrolment should not present too many difficulties with good preparation, but it does
need to be taken seriously and you are likely to need specialist help.

Or if things are going well, you could spend the money on a morale-boosting social event. These can help lift employee spirits and provided the total of such events cost under £150 per employee in a tax year, there should be no tax or national insurance charges to pay.

 

 

The 2014 Budget – beneath the surface

Monday, June 30th, 2014

As usual, the Budget small print revealed plenty of changes.Big ben

Income tax: For next tax year, i.e. 2015/16:

  •  The personal allowance will rise to £10,500
  •  The higher rate threshold – the point at which you start paying higher rate tax – will rise to £42,285
  •  The transferable tax allowance will begin for married couples and civil partners. To be eligible, neither you nor your partner may be higher or additional rate taxpayers
  •  The starting rate band for savings income will be increased from £2,880 to £5,000 and the rate of tax will be cut from 10% to 0%

Capital taxes:  There were a few small changes here, including:

  •  The capital gains tax annual exempt amount will increase to £11,100 for 2015/16
  •  The final period residential property exemption, which applies when a home is sold, has been reduced from 36 months to 18 months, from 6 April 2014. The longer period will still apply for people moving into care

Tax avoidance: If you use a complex tax avoidance scheme, you will normally have to make an upfront payment to HMRC of the tax you hope to avoid.

Other taxes and measures:  There was an important change on the business tax front, with the annual investment allowance (AIA) being increased from £250,000 to £500,000 from April 2014 until the end of 2015.

To learn more about how these changes could affect you, 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.

2015: Time to rethink retirement planning?

Thursday, June 26th, 2014

pension-clock-red-text-31707942The last Budget delivered the biggest shake up to retirement planning for decades. It has changed peoples’ perceptions of pension savings and it will change the advice they need in the run up to retirement and beyond. People will need to think differently about their retirement saving. Have a look at this video from Aviva  to see what ‘the sandwich generation’ are thinking then consider the 10 key areas below for a reality check:

1. Pensions are now easy access tax friendly savings
Easy access from age 55 makes pension pots feel a lot more like other savings; almost like a ‘Super ISA’. The rule changes will remove some major psychological barriers to saving into a pension; pension funds will no longer be viewed as locked away and out of reach and there will be no need for anyone to buy an annuity.

Even some of those who previously had little regard for pension saving are warming to the benefits of the new flexibility. For instance, many ‘buy to let’ property owners view their rental income as their ‘pension’ but some can now see the opportunities the new pension rules provide. For example, a pension plan can now offer flexibility to plug income gaps when properties are unoccupied and easy access to funds to pay for unexpected repair bills.

2. Pensions are still the most tax privileged savings
Pensions still offer the best tax breaks for mainstream savings. Where else can you get tax relief on contributions, tax free investment returns and take 25% out tax free? For a higher-rate taxpayer this means a £1,000 pension pot costs a net £600 – a 66% upfront boost. And only 75% of the pension fund is taxed when they take an income, at which point they could be a basic rate taxpayer or even be paying no tax at all.

3. How much do you need to save for retirement
Almost three quarters * of under 45s with pensions have no idea what their pension pots are currently worth and nearly four out of five say they don’t know what income they’re expecting when they retire.

Pension savers need to understand just how big a pot they’ll need to see them through retirement. Fewer and fewer people will be retiring with company sponsored  schemes with income based on final salary  and as the number of those with money purchase pensions continues to grow, they are likely to need help to realise that what seems a lot today might not be anything like enough to support them throughout retirement.

Life expectancy is on the rise; one in three children born this year are expected to reach their 100th birthday. So there are good reasons why annuities cost what they do. It would currently cost in the region of £825,000 for a healthy 65 year old to buy an inflation-linked annuity equal to the average gross UK income of £27,000**. While clients may have other investments and incomes at retirement, the annuity cost gives a reality check on the sort of wealth needed to provide an ‘average’ income from 65.

4. Keeping track of retirement goals
Research shows that most people don’t really know the value of their pension until they’re older and in the run up to retirement, despite the fact that they’re likely to be receiving annual pension statements.

This isn’t helped if there are multiple pension pots and it is all too easy to lose touch with old pension schemes. Failure to regularly review your pension investment strategy can prove a costly mistake. Consolidating existing pensions into a single scheme makes it easier to track progress towards retirement goals and improves engagement. However, transferring pensions undoubtedly requires advice to ensure that the benefit of consolidating isn’t outweighed by the loss of any guarantees, protected tax free cash, or early retirement ages.

5. Don’t rely on the state
The flat rate State pension needs to be factored in to financial plans. It’s worth remembering that the proposed £144 a week (in 2012/13 terms) is only equal to around 2/3rds of the minimum wage, so it’s certainly no substitute for private pension provision. However, it can provide a secure guaranteed baseline income to pay the bills which dovetails nicely with the new personal pension flexibility to meet those additional expenditure items.

6. Understanding just how long retirement could last
Life after work costs a lot more than most people think. According to the Institute of Fiscal Studies, 58.5%*** of workers haven’t given any thought to how long their retirement could last. A 65 year old can now typically expect to live for another 20 years. That means the number of ‘retired years’ is inching closer to the years spent working. Individuals need to think of their pension savings as deferred pay.

7. Making pension funds last
People will need support on using retirement savings to provide a sustainable income throughout their lives. Getting the investment strategy right is integral to achieving sustainability. We can support you in selecting funds to provide the desired investment returns while limiting volatility. Tax planning goes hand in hand with the investment advice and limiting how much tax is paid can really help funds go further. Making full use of the array of tax allowances available instantly demonstrates the value of advice.

8. Just because you can doesn’t mean you should
From April 2015, money purchase pensions will become very much like easy access bank accounts for the over 55s.  The new freedom will bring temptation and a lot of new responsibility. There’s a danger that some pension savers will draw their pension savings at the first opportunity and, as a result, will be hit with a large income tax bill; potentially much larger than the bill for only taking what they needed when they needed it.

There is, of course, a danger that some may fritter it all away without any constraints to hold them back. Equally, there will be those who will be tempted to stick it all in the bank but they do so at their peril as the long term effects of inflation may erode their funds spending power.

9. Retirement isn’t just a pension
Clients will need help to think differently about their goals for later life and how they want to finance them. The traditional view is that their pension is the provider of their retirement income and other investments are often viewed as ‘rainy day’ funds. Flexible access to money purchase pensions should change this perception of retirement savings.

Retirement income doesn’t have to come from the pension alone. Having a variety of different savings and investments can achieve the optimum tax efficient income. Taking it across a portfolio of investments ensures the fullest advantage can be made of the tax allowances on offer. The flexibility to draw as much or as little, or even nothing at all, from money purchase pensions will be centrepiece for achieving a tax efficient income.

10. Guidance Guarantee may be too little too late
The promised ‘Guidance Guarantee’ in the Budget will help retirees understand their options but it won’t necessarily give them the answer. It’s no substitute for financial advice and the guidance won’t address the fact that many haven’t saved anything like enough to enjoy a comfortable retirement.

* All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 2018 adults, of which 1361 have a pension. Fieldwork was undertaken between 9th – 12th August 2013. The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+).

** http://www.ons.gov.uk/ons/rel/ashe/annual-survey-of-hours-and-earnings/2013-provisional-results/stb-ashe-statistical-bulletin-2013.html

*** http://www.ifs.org.uk/elsa/report10/ch2.pdf

Our thanks to Standard Life technical department for the input behind this article.

Image: www.freeimages.co.uk

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

Tax by design

Wednesday, June 25th, 2014

TaxThe director of the Institute for Fiscal Studies (IFS) has bitterly criticised the structure of the UK tax system.

In May the director of the IFS, Paul Johnson, gave the annual Chartered Tax Adviser address. The essence of what he said grabbed a few press headlines in the national press but was deserving of more coverage.

Mr Johnson highlighted the “complexity and uncertainty” created by the poor tax policies introduced by the current coalition government “as well as those of its predecessor (and often earlier governments too)”. Among his criticisms were:

  • The existence of a 60% income tax band, which is created by the tapering away of the personal allowance once income exceeds £100,000. This band is now £20,000 wide, after which the marginal rate drops down to 40% for the next £30,000 before rising to 45%. As Mr Johnson said, “It’s hard to make much sense of that.”
  • A trend “which has fundamentally altered the nature of our system of income tax, namely a continued increase in the number of higher rate taxpayers.” Mr Johnson noted that, “Numbers have risen from less than 2 million in 1990 to nearly 4 million in 2007 and well over 5 million by 2015”, and that the change “has never been announced or properly debated.”
  • The structure of Stamp Duty Land Tax (SDLT), which Mr Johnson said was “one of the worst designed and most damaging of all taxes.” At the extreme, a £1 increase in the sale price of a home can now trigger an additional £40,000 SDLT bill.
  • Sharp increases in income tax personal allowances have not been matched by the threshold for National Insurance Contributions (NICs), a tax on income in all but name. In contrast to the politician’s emphasis on the numbers removed from income tax, Mr Johnson remarked that there were now over one million low paid workers who pay NICs, but no income tax.

A former US Treasury Secretary once said that a tax system should look “like someone designed it on purpose.” There appears little chance of that happening in the UK soon, whatever the outcome of the General Election in less than a year’s time.

 Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

A sacrifice worth making

Wednesday, June 18th, 2014

The promised new pension flexibility from 2015 has reignited interest in paying more into pensions. One way of getting more bang for every buck is to use a ‘salary sacrifice’ arrangement to fund your pension. Doing so could result in :

  • The same take home payTax
  • A boosted pension contribution
  • Instant tax relief (not a year later via self assessment)
  • possibly no need for a self assessment return

Take a look at this example – with thanks to Standard Life technical department for the briefing:

The client

Eric is aged 45 and has a gross annual salary of £75,000. He normally saves £10,800 from his post tax earnings into his pension plan. This requires him to initially pay £14,400 from his bank account, which is grossed up by basic rate tax. £18,000 will be credited to his pension and £3,600 higher rate tax relief can be claimed via self-assessment, making the net cost £10,800.

The salary sacrifice solution

Having heard about the benefits of salary sacrifice, Eric agrees with his employer to contractually reduce his salary to £56,379 (we will do these calculations for you). At this level, his take home pay will be the same as it is currently. In return, his employer will pay £18,000 plus the National Insurance saved into Eric’s pension. The employer is happy as there is no change in costs for them. Eric’s pension contribution will be boosted by £3,190 as follows (based on tax an NI rates for 2014/15 tax year). So, nearly an 18% increase in pension savings  at no cost to Eric or his employer. Significant in anyone’s language.

Before sacrifice

Note:

Income tax bands

  • £1 to £31,865 @ 20%
  • £31,866 to £150,000 @ 40%
  • Over £150,000 @ 45%
  • Employees pay NI at 12% on earnings between £7,956 (earnings threshold) and £41,865 (upper earnings limit), and 2% on earnings over £41,865.
  •  Employers pay NI at 13.8% on all earnings above £7,956.

Any reference to legislation and tax is based on our  understanding of law and tax practice in the UK at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments nor are we responsible for the completion of any tax returns on the basis of this briefing.

Taking the heat out of the housing market

Friday, June 13th, 2014

Concerns have grown about an overheated residential property market.

It is hard to avoid the press headlines about an overheating housing market in the UK. The latest data from Nationwide says that prices were up 10.9% in the year to April, the first time double digit growth has been recorded in four years. However, as the graph above shows, the focus on the last 12 months means that the bigger picture is ignored:

House graph

  • Average UK house prices have changed less than 1.5% over the last seven years. The average price in the first quarter of this year was £178,124 against £175,554 in Q1 2007.
  • The fall in house prices from their peak in the third quarter of 2007 to the first quarter of 2009 was, with the exception of Northern Ireland, quite similar across the UK.
  • The recovery since 2009 has been most marked in London, as shown by the widening gap between the green and blue lines. London has dragged up the overall UK figure as in the regions away from the south of England, house prices remain below their 2007 peak levels. Northern Ireland has been particularly hard hit, with house prices at less than 60% of their 2007 levels.
  • None of these numbers take any account of inflation, which over the past seven years (to April 2014) has amounted to 24.5% (RPI) and 22.6% (CPI).

The government has been accused of pushing up house prices through its Help to Buy scheme, designed to assist homebuyers with small deposits. However, Mr Cameron has made clear that the task of controlling the property market rests with the Bank of England and, in particular, with its relatively new Financial Policy Committee (FPC).  The indications are that the FPC will tighten mortgage lending by ‘macroeconomic’ measures, such as requiring mortgage lenders to hold more capital against property loans or capping loan/income or loan/value ratios. It is possible the FPC could also ask the Government to reduce the £600,000 ceiling on Help to Buy purchases, although the most recent evidence suggests this is not driving the London-centric price rises.

The Bank does not want to use a rise in interest rates as its first line of defence on rising property prices, as it still wants to keep rates unchanged for about another year. Whether it can maintain that stance is the subject of some debate: the contents of the FPC’s macroeconomic toolkit are untried in recent times.

 

 

 

 

Another £10,000 flutter?

Thursday, June 5th, 2014

The investment limit for premium bonds has increased by £10,000.NSI

One of the minor surprises of this year’s Budget was the Chancellor’s rediscovery of National Savings & Investments (NS&I) as a way of raising money. In past years NS&I had been largely neglected, not least because it was cheaper to raise the billions the government needed by selling gilts to institutional investors.

Cynics might remark that the Chancellor’s new interest in individual savers has more to do with the approaching General Election than financing the Treasury’s black hole, but anything which brings a little more competition into the deposit market is to be welcomed. June marks the start of three initiatives focused on Premium Bonds, with the investment limit being increased from £30,000 to £40,000. In August the number of £1 million monthly draws will double – to two – and in the next tax year the investment limit will be upped again, to £50,000.

Before you rush off to top up your holdings, it is worth noting a few points which probably will not be included in NS&I’s promotion of the increased limit:

  • The underlying prize rate is 1.3%. That is tax free, so it is quite attractive if you pay tax at more than basic rate and have average luck with your holding. Nevertheless, 1.3% is still below the current rate of inflation, whether you choose CPI or RPI.
  • The odds of a single bond winning any prize in the monthly draw are 1 in 26,000.
  • The chances of a single bond winning the £1 million jackpot are currently about 1 in 47,650,000,000, although this should roughly halve in August.
  • Of the 1,832,557 prizes selected by ERNIE in May 2014, 1,804,263 (98.46%) were £25.

With an ISA cash limit more than doubling to £15,000 a year from 1 July, it will be interesting to see how much NS&I can attract in new bond holdings.