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“UK Tax system is unfair,” say small businesses

Archive for May, 2019

“UK Tax system is unfair,” say small businesses

Wednesday, May 15th, 2019

The British Chamber of Commerce (BCC) conducted a tax survey throughout January and February of 2019 that produced some interesting findings. The survey covered more than 1,000 businesses across the UK, 96 per cent of which were SMEs with fewer than 250 employees; 68 per cent of the businesses were in the service sector and 32 per cent in manufacturing.

Undertaken to discover how fair respondents believed the UK tax system to be in a number of different situations, the results show that faith in the integrity of the system aren’t exactly high. 58 per cent of respondents felt that businesses like theirs were not treated fairly by the tax regime. 6 per cent of respondents did not believe that tax rules are applied fairly across all sizes of business by HMRC. Smaller businesses are more likely to hold that view, at 70 per cent, but it’s still the view held by the majority of medium and large businesses, at 59 per cent.

When asked whether they agree that HMRC applies tax rules fairly regardless of where a business is based geographically, 64 per cent of respondents did not agree. The trend of smaller businesses being more likely to feel this way continues, with 67 per cent of small businesses believing this, as opposed to 59 per cent of medium and large.

It isn’t just how fairly the rules were applied that come under fire in the results of this survey, however. The quality of service that the HMRC provides, and the support they offer to ensure that businesses remain compliant, is considered insufficient by 51 per cent of small businesses. This figure still sits at 42 per cent for medium and larger companies, with an overall average of 49 per cent of respondents finding it unsatisfactory.

As the tax system becomes ever more complex, firms are suggesting that sufficient support needs to be provided to ensure that they can keep up with regulations and remain compliant. The BCC are taking this call one step further, and pushing for the HMRC to take action by providing the same level of investment into support and tax advice for businesses as it puts into tax avoidance work.

Head of Economics at the BCC, Suren Thiru, sees it like this; “HMRC must step up efforts to provide better support to smaller businesses to get their tax right, rather than simply pursuing and enforcing penalties. This should include matching investment in frontline HMRC help towards SMEs, with their work on non-compliance and tax evasion. More also needs to be done to address the escalating burden of upfront costs and taxes to provide firms with much-needed headroom to get on and invest, train their staff, and compete on the global stage.”

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Defined Contribution vs Defined Benefit

Wednesday, May 15th, 2019

As defined contribution pension plans overtake defined benefit (in terms of money paid into schemes) for the first time ever, more and more people are taking an interest in how the two differ and the relationship between them. The Office of National Statistics (ONS) has reported that in 2018, employee contributions for defined contribution pension pots reached £4.1bn, compared to the £3.2bn that employees contributed to DB schemes.

With April 2019’s increase to minimum contributions for DC schemes seeing employer contribution hitting 3% and employees contributing 5% towards their pension, the trend of DC contribution increases in relation to DB isn’t set to slow any time soon.

So before DB Pensions become a distant memory, let’s take a look at exactly what they are. A defined benefit pension, which is sometimes referred to as a final salary pension scheme, promises to pay a guaranteed income to the scheme holder, for life, once they reach the age of retirement set by the scheme. Generally, the payout is based on an accrual rate; a fraction of the member’s terminal earnings (or final salary), which is then multiplied by the number of years the employee has been a scheme member.

A DB scheme is different from a DC scheme in that your payout is calculated by the contributions made to it by both yourself and your employer, and is dependent on how those contributions perform as an investment and the decisions you make upon retirement. The fund, made of contributions that the scheme member and their employer make, is usually invested in stocks and shares while the scheme member works. There is a level of risk, as with any investments, but the goal is to see the fund grow.

Upon retirement, the scheme member has a decision to make with how they access their pension. They can take their whole pension as a lump sum, with 25% being free from tax. They can take lump sums from their pension as and when they wish. They can take 25% of their pension tax free, receiving the remainder as regular taxable income for as long as it lasts, or they can take the 25% and convert the rest into an annuity.

One of the reasons for DB schemes becoming more scarce is that higher life expectancies mean employers face higher unpredictability and thus riskier, more expensive pensions. This is a trend that looks likely to continue. If you’re unsure of how to make the most of your pension plan, it’s recommended to consult with a professional.

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Auto-Enrolment changes put pressure on SMBs

Wednesday, May 15th, 2019

April 2019 saw the increase of minimum contributions to auto-enrolment pensions from 5 per cent of wages to 8 per cent. With employers now required to contribute 3 per cent, rather than their previous 1 per cent, the Federation for Small Businesses (FSB) has warned that this could put “substantial” pressure on small businesses.

The Institute of Fiscal Studies (IFS) has reported an increase of workplace pension participation amongst small business employees of around 45% as a result of auto-enrolment. That means that businesses who employ between 2 and 29 workers will be seeing a significant extra cost towards pension schemes. These costs aren’t necessarily as daunting for larger businesses, but in the words of Mike Cherry, National Chairman of the FSB, “The costs involved for smaller employers are substantial, in terms of both expenditure and indeed their time, as they have grappled with finding a good provider and setting up whole new systems. Now that the 3 per cent rate has hit, the burden will be greater still.”

But with 70 per cent of UK workers employed by small businesses now on workplace pensions as a direct result of auto-enrolment (first introduced in 2012), employees seem to consider it as an attractive prospect. They too have seen an increase in their minimum contributions, from 3 per cent to 5, and so sacrificing a higher portion of their monthly wages has been accepted as a move that does come with its own benefits. Predictions from investment firm Hargreaves Lansdown state that in real terms, the average employer will see £30 of their monthly wages go towards their pension pot which, on average, results in total pension savings increasing by around £55,000.

Employers, on average, are predicted to now contribute £55 a month to the average employee’s pension pot, an increase from the pre-April figure of £37. These increases aren’t all bad news for employers however; Guy Opperman, Minister of Pensions, sees them as the opposite. “Automatic enrolment has been an extraordinary success, transforming pension saving and improving the retirement prospects of more than 10 million workers already. The increased cost on employers has been phased in over time so firms have had the opportunity to adapt. Pension contributions are a valuable employee benefit which firms use to attract and retain good people. This is true of small and large firms alike.”

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House of Lords urges Government to scrap triple lock

Wednesday, May 8th, 2019

The triple lock guarantee currently secures the rise of state pension payments at the beginning of each tax year. However, after an investigation by the Select Committee on Intergenerational Fairness and Provision, a case has been made for the removal of the guarantee.

In its report, Tackling Intergenerational Unfairness, the committee outlined that the maintenance of the guarantee was “unsustainable.” After a consultation, the TaxPayers Alliance told the committee that the current process was “egregiously unfair,” that the state pension was rising rapidly “at a time of spending restrictions on young people” and due to the deficit in public spending, state pension rises were being paid for by future generations. The pressure group then urged the government to put a freeze on state pensions.

The Select Committee conceded that there was in fact a case for spending restraint, although later in the report it stated that “it does not seem fair for people reliant on the state pension to fall behind working people.” It continued: “Nor, on the other hand, is it fair for them to have their incomes lifted at a faster rate than that experienced by working people.”

Another criticism was made by the committee in reference to the National Insurance (NI) system, mentioning that: “The reality of longer working lives should prompt the government to rethink the NI system” as NI contributions do not fund state pensions, despite being used as a criteria for eligibility. The age at which contributions are made was also scrutinised, with the committee stating: “It is not fair that only individuals under the state pension age pay this tax.”

In his summary, the committee chair, Lord True, declared, “both young and older people recognise the contribution the other makes and the challenges they face,” going on to criticise the government, saying that the understanding between generations “could be undermined if the government does not get a grip on key issues such as access to housing, secure employment and fairness in tax and benefits.”

The committee has called upon the government to “take steps to deliver a fairer society” and now awaits a reply from the Treasury.

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6 bad habits to avoid during retirement

Wednesday, May 8th, 2019

Planning for retirement can be complicated, as anyone approaching the end of their working life will tell you. However, navigating the myriad of choices, both financially and socially, doesn’t have to be such an enigma. Here are a few tips to help you avoid common bad habits that retirees often fall into:

1. Spending your pension fund money

Yes, that’s right. If you delay spending your pension and spend other available cash and investments first, you could keep your money safe from the taxman. Not spending your pension fund money until you have to may also help the beneficiaries of your estate avoid a large inheritance tax bill.

2. Taking the full brunt of inheritance tax

Inheritance tax can cost your loved ones vast sums if you were to pass away. There are plenty of ways to protect them from losing a large portion of your estate. Strategies such as making gifts or leaving assets to your spouse are an effective way to avoid the tax, among other valuable strategies.

3. Failing to have a plan

Many retirees have multiple avenues of income to provide for them during retirement. Making the most out of those streams of revenue is key to a stress free retirement, as unwise investment or poor planning can lead to unnecessary worries. We recommend contacting a financial adviser in order to set out a plan that’ll let you focus less on worrying about income and more on enjoying your well-earned retirement.

4. Not taking advantage of the discounts

There is an absolute boatload of price slashes available to retirees over a certain age. This ranges from discounts on train fares to reduced prices of cinema tickets. We recommend that all pensioners takes full advantage of these discounts as every penny saved provides more financial security for yourself and your loved ones.

5. Thinking property is the only asset worth having

Property can be a valuable source of retirement revenue, but it’s not the only way to create more income. Property can often incur maintenance expenses for landlords and take up time to resolve that could be spent making the most out of your retirement (though there are many pros and cons to the pension vs property discussion).

6. Buying into scams

When you retire, it seems that all kinds of people come crawling out of the woodwork to give you a “great” investment opportunity or insurance policy. Tactics can include contact out of the blue with promises of high / guaranteed returns and pressure to act quickly. The pensions regulator has a comprehensive pensions scam guide that’s definitely worth a read.

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April markets in brief

Wednesday, May 8th, 2019

April was, on the whole, a positive month for global stock markets. All major stock markets gained over the month, with the notable exception of China. The thawing of Chinese-American trade relations and the expectation of a recovery of growth in China has meant that global markets saw a largely buoyant month overall.

UK

Despite the political turmoil at the beginning of the month, there was plenty of good news. The EU agreed to a flexible Brexit extension until 31st October, taking some of the pressure off firms who would be hit hard by a ‘no deal’ scenario. The manufacturing PMI jumped to 55.1, its highest reading in a year and Britain’s labour market remained in fine form, with unemployment staying at 3.9% and basic wages rising 3.4% year on year. The FTSE rose by a buoyant 2%, up at 7,418.

Europe

The continental markets enjoyed a strong month. However, there were some worrying signs for the French and German economies. French President Macron finally agreed to cut taxes following the Yellow Jacket protest which have caused widespread disruption across the country. Worryingly, French public debt is soaring – the country is on course to overtake Italy as the world’s fourth most indebted country.

The news was also concerning in France’s eastern neighbour. Germany’s growth forecast has been slashed to 0.5% and the country’s usually robust car industry looks like it could suffer over the coming years. Worrying news indeed for Europe’s strongest economy.

These dark clouds on the horizon did little to hinder the countries’ stock markets. The German DAX was up 7% in April to end at 12,344 and the French stock market was up 4% to 5,586.

US

The first two months of the year showed some worrying signs in the American economy, prompting many to fear a coming recession as the government shutdown and cold weather hit economic data. However, the March labour report helped to calm these fears somewhat. 196,000 jobs were added in March and year on year wage growth stands at 3.3%. On Wall Street, the Dow Jones index enjoyed a healthy month, rising by 3% to close the month at 26,593.

The Far East

After being hit hard by heightening trade tensions with America, the Chinese economy appears to be en route to recovery. Official manufacturing figures indicated a boost in activity and overall production rose from 5.3% to 8.5% in March, compared to a year previously. The Chinese economy grew by 6.4% in the first three months of the year, slightly higher than predictions.

As we previously mentioned, China’s Shanghai Composite Index didn’t gain over the month, and dropped 13 points back to 3,078. The other major Far Eastern stock markets enjoyed a strong month. The market in South Korea was up 3% to 2,204 and the Hong Kong index rose 2% to 29,699.

Whatever you’re doing in May, we hope you have a pleasant month and enjoy the (hopefully!) warmer weather. If you have any questions about the latest stock market news, please get in touch.

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The UK is struggling to save; what are the implications?

Wednesday, May 8th, 2019

A study found in 2018 that one in four adults have no savings. Many residents in the UK wish that they had cash to save, however high monthly outgoings and debt clearance seem to take priority. Saving for the little curveballs that life throws your way is a good way to maintain a sound mind, but poor money management and large monthly payments can get in the way. So is this issue localised to the UK, or is the struggle to save an international issue?

Across the pond

Households in the US are currently able to save 6.5% of their disposable income, down from the previous figure of 7.3% after estimates were made by Trading Economics. However, earlier in 2018 a report was made, finding that 40% of US adults don’t have enough savings to cover a $400 (est £307) emergency.

The current UK savings figure sits at 4.8%, one of the lowest since records began in 1963. The Office for National Statistics has come up with an even lower figure of 3.9%, which actually is the lowest recorded. Further to this, a report was also made by the Financial Conduct Authority in 2017 that millions of UK residents would find it difficult to pay an unexpected bill of £50 at the end of the month, and little has changed since then.

Closer to home

In France and Germany, the savings ratio sits at 15.25% and 10.9% respectively, that’s triple the UK’s value for France and over double for Germany! The Managing Director of Sparkasse bank points to cultural idealsas the main influencers for the high German saving rate, saying that: “Saving is seen as the morally right thing to do. It is more than simple financial strategy.” This stance seems typical for the country that’s home to the first ever savings bank, opening in Hamburg in 1778.

Why do we not save as much as we used to?

The idea of saving for a rainy day in the UK may not be totally lost but for many, the rainy days are happening as we speak. Another reason relates to the tendency of UK households to borrow more money in order to maintain lifestyle choices. For all quarters in 2018, households were net borrowers, drawing on loans and savings to fund spending and investment decisions.

Comments have been made referring to current Brexit uncertainty as a reason for the change, alongside rising rental prices and increased costs of living. Whether this new change in spending and saving is wholly due to current cultural or economic factors is yet to be confirmed. Another case has been made for poor interest rates making it a less lucrative option for savers to save.

Be it cultural or economic, it is undeniable that the country has lost faith in the ethos of saving their pennies. In the end, as more and more studies come to light, it seems that only time will tell.

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Equity release is popular but is this a good move?

Wednesday, May 1st, 2019

Equity release is no longer the niche lending area it once was. More and more homeowners over 55 are choosing to release cash tied up in their homes and there are few signs of this trend subsiding.

Lending in 2018 increased by 27% compared to the previous year and is now nearly double what it was in 2016. It’s likely that the UK’s growing elderly population, where many don’t have the pension security of generations past, is partly behind this expansion. The growing variety of equity release products on the market could also be a factor. Newer products mean that homeowners are able to gradually release money from their property, rather than taking it as a lump sum.

Is it a risky option?

Equity release doesn’t exactly have a squeaky clean reputation. There have been past accusations of mis-selling and there are occasions where relatives find themselves receiving less inheritance than they might have expected.

Because of the way interest accumulates over the years, people can end up owing a large amount of money that is paid back from the value of the property when a person dies or goes into care.

Whether equity release is a suitable solution really depends on a person’s individual financial and personal circumstances.

As well as getting sound financial advice beforehand, it’s always best to be open with loved ones about releasing equity from your property. Two in three complaints to the Financial Ombudsman about equity release come from relatives of people who have died or gone into care. It can save a lot of upset later on to be open about releasing cash from a property when you do it, rather than further down the line.

The bottom line is that equity release can play a crucial role in supporting a full retirement, alongside pensions, savings and other assets, for the right homeowner. Since homes are most people’s largest asset, it makes sense to at least consider how this asset can be used to fund retirement. Downsizing in later life is another way of releasing money from your home. If you have any questions about ways you can increase your financial security in later life, please get in touch with us directly.

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