An England and Wales High Court (EWHC) case in which it was decided that a woman who partially tore up her will on her deathbed had intended to revoke the document and thus prevent her extended family inheriting her £800K estate.

In this case, Crew & Anor v Oakley & Ors [2024] EWHC 2847 (Ch), Carry Keats was 92 when she died in February 2022.

She had made six wills in all, her first being a mutual will with Ron in 2003, by Kirklands Solicitors, who prepared all of her wills. By her second will, in 2013, drafted by Mrs Haffwen Webb, she appointed David and partners from Kirklands as her executors. A third one in identical terms (the second was invalid) was made in April 2013, and then a fourth in February 2016. Mrs Webb became a partner in Kirklands in February 2022. Ms Keats became Mrs Webb’s client as, at some point, Mr Michael Joy, a partner in Kirklands, handed her matters over to her. Mrs Webb also prepared the fifth will in August 2018. In September 2019, Ms Keats appointed her cousins (once removed) Angela and David Crew as her Attorneys under a Lasting Power of Attorney.

In July 2020 Ms Keats instructed Mrs Webb again, with regard to what became her sixth and final will. Instructions were taken by telephone due to the pandemic. The Crews were to be executors. They were also given a caravan and 25% each of the residuary estate with the balance to Kevin Whitehorn (25%) and Jason and Leon Whitehorn (12.5% each), Ms Keats’ cousins twice removed. Ms Keats was driven to Kirkland’s car park by the Crews who, at Mrs Webb’s request, went for a walk. Then Mrs Webb went through the terms with Ms Keats who executed that will in the car on 21 September 2020.There appears to be no question of testamentary capacity at the time of this will’s execution.

On the 16 November 2021, Ms Keats explained to her solicitor how she had fallen out with David and Angela as they indicated they would put her in a nursing home if she had another fall. She was, in Mrs Webb’s word, adamant that she wanted to revoke her 21 September 2020 will as she did not want the Crews to benefit. Nor were they to be her executors.

On 6 January 2022, Josephine Oakley called Mrs Webb and told her that Ms Keats was in hospital.

On 9 January 2022, a Mental Capacity Assessment completed by an Occupational Therapist for discharge noted that Ms Keats could not retain information long enough to make a decision nor could she weigh up the information. On 17 January 2022, in response to a question on a form “Does the patient have capacity? (informal assessment)” the “No” box was ticked. The hospital records then state, on 21January 2022, “Patient confused”. Under Nursing Notes it records that the staff declined to witness Ms Keats signing some documents produced by Josephine due to “…Carry’s fluctuating capacity. Unclear if she signed whilst we were not present”.

Mrs Webb telephoned the hospital on 25 January. The ward staff told her no visits were allowed due to the pandemic but on hearing she was a solicitor and it was to finalise Ms Keats’ will she was told a formal attendance was permissible. Mrs Webb tried to call Ms Keats. Amazingly, as she put it, Ms Keats answered but had little idea how to hold the ‘phone and was: “…very disorientated…didn’t give clear instructions about being to update her Will. She was very muddled. HW [the solicitor] uncertain if Carry would be able to give instructions. However, Carry confirmed that she would like HW to go and see her and to attend tomorrow.”

The dispute arose from events that occurred on 26 January 2022, when the solicitor visited Ms Keats in hospital. A detailed attendance note made by the solicitor set out the course of these events. Ms Keats had had a serious falling-out with Angela and David Crew about their alleged plans to move her into a nursing home and, while in the hospital, she wanted to make a new will leaving her estate to her sister Josephine Oakley. The solicitor had no doubts about Ms Keats’ testamentary capacity at that meeting, despite the earlier notes made by hospital staff which had described her as confused and not having capacity.

The solicitor told Ms Keats that, if she was adamant that she did not want Angela and David Crew to deal with the administration and to inherit from her estate, she could tear up the original of her existing will, which the solicitor had brought with her. According to the solicitor’s attendance notes, ‘…Carry was happy to do this. Carry was able to tear around three quarters of the way through and then HW [the solicitor] helped her tear up the rest of it.’ The solicitor had also brought a new draft will with her, but Ms Keats was not able to execute it as she was falling asleep due to some pain medication she had been given.

Ms Keats died on 15 February 2022, never having executed the new draft will. However, her destruction of the old will, if valid, meant she died intestate. In that case, her sister Josephine would inherit the majority of her estate. Josephine Oakley duly applied for letters of administration. Angela and David Crew challenged this, and proceedings then commenced on 23 June 2023.

The agreed points of issue were: whether the will was sufficiently destroyed to amount to revocation; whether Ms Keats had authorised her solicitor to complete its destruction; and whether Ms Keats had the requisite intention and mental capacity to destroy the will.

The case came before the EWHC, which found that Ms Keats did sufficiently destroy the will as it was entirely torn in half as she intended. Moreover, she had properly authorised her solicitor to complete the destruction of the will by a nod of the head, that was not a mere acquiescence but a ‘positive and discernible’ non-verbal communication. Further, the evidence of the solicitor showed there was sufficient intent on the part of Ms Keats to destroy the will, because the solicitor had just specifically advised her of how destruction would remove Angela and David Crew from the will. This accorded with the draft will that the solicitor prepared in accordance with Ms Keats’ instructions at a previous meeting, which she never countermanded.

The most difficult issue was that of capacity, given that medical evidence showed that Ms Keats had had several episodes of delirium while in hospital. Ultimately, the EWHC found the solicitor’s evidence as to the bed side meeting recorded in her attendance note so convincing that it was clear that Ms Keats had met the Banks v Goodfellow test, Goodfellow (1870) LR 5 QB 549, and therefore had the requisite mental capacity to revoke her will. In that case, Cockburn CJ stated that to establish capacity it was essential:

“…that a testator shall understand the nature of the act and its effects; shall understand the extent of the property of which he is disposing; shall be able to comprehend and appreciate the claims to which he ought to give effect; and, with a view to the latter object, that no disorder of the mind shall poison his affections, pervert his sense of right, or prevent the exercise of his natural faculties – that no insane delusion shall influence his will in disposing of his property and bring about a disposal of it which, if the mind had been sound, would not have been made.”

The EWCH found that Ms Keats had ‘a sufficiently lucid interval during which the revocation took place’. Ms Keats therefore had the requisite mental capacity to revoke her will.

The EWHC concluded that the will had been validly revoked and Ms Keats died intestate. It accordingly dismissed Angela and David Crew’s arguments and found for the sister’s counterclaim.

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Employer’s National Insurance Contributions (NICs), which it is looking increasingly likely will be increased in the Budget. It looks an easy revenue-raiser, but is it?

Here is the paragraph on page 21 of the Labour manifesto which is currently causing what might be described as a certain amount of controversy:

It is the only mention of the words ‘National Insurance’ in the entire manifesto. Labour’s stance is that the reference to ‘working people’ means that it is clear the pledge is not referring to employer’s NICs.

While the Conservatives are now disputing that claimed clarity, during the election campaign the then Chief Secretary to the Treasury, Laura Trott (now the Shadow), flagged up the possibility of employer’s NIC rises in a document entitled ‘Labour’s 18 Tax Rises’. In response, Labour’s shadow ministers refused to make a commitment to keep employer’s NICs rates unchanged.  

Leaving aside the political gaming, what would be the effect of a rise in employer’s NICs?

• HMRC’s ready reckoner says an extra one percentage point on the employer’s Class 1 rate in 2024/25 (taking it to a main rate of 14.8%) would raise £8.45bn in 2025/26 and £8.9bn in 2027/28.
• The impact of applying employer’s NICs to employer pension contributions is not covered by the ready reckoner. HMRC data puts the total employer NIC savings/relief on employer’s contributions at £15.4bn in 2022/23. This suggests that each one percentage point of NIC on pension contributions would yield £1.1bn-1.2bn.
• There is a major qualification to both these estimates: the biggest single UK employer is the government. Thus, an increase in employer’s NICs would lead to higher departmental expenditure requirements or, if it was not compensated for, spending cuts. On the pension front the impact is very significant: £5.3bn of the employer’s NICs relief related to public sector pension schemes.
• Just to muddy the water a little more, the HMRC data shows that £2.6bn (17%) of all employer’s relief related to salary sacrifice contributions. £2.3bn related to the private sector.
• From an economic viewpoint, raising employer’s NICs is generally considered to ultimately impact on employees, making the ‘not increase taxes on working people’ an awkward statement for the Government to justify.
• For proof, look no further than the Office for Budget Responsibility (OBR)’s Economic and Fiscal Outlook for October 2021 and its comments on Rishi’s Sunak’s introduction of a brief 1.25% NICs rise followed by the short-lived Health and Social Security Levy:

The OBR’s views were reinforced at the time by the then Shadow Chancellor, Rachel Reeves:

• A further economic criticism is that if only employer’s NICs were increased, this would add to the distortions in the tax system between salary, dividends and self-employed earnings. These have been shrinking as a consequence of the employee and self employed NICs reductions.

Comment

We have said before that the great political advantage of NICs is that the Great British public does not understand them. This has been well demonstrated by the cuts to employee’s NICs, which were equivalent to 4p off the basic rate of tax but produced no obvious political advantage for the last Government.

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With fractional shares, rather than owning a share in a company, individuals own fractions of one or more shares. This could be useful, where, for example, the price per whole share in a company is prohibitively high, or a whole share would cost more than the £20,000 annual ISA subscription.

The emergence of fractional shares post-dates the ISA regulations. Last October, HMRC issued a definitive answer on the topic of fractional shares in ISAs, by way of its tax-free savings newsletter.

At that time, HMRC said, a fraction of a share is not a share and therefore cannot be held in ISAs. ‘Shares’, as referred to in paragraph 7(2)(a) of the ISA Regulations, refers only to whole shares and not parts or derivatives thereof. A fraction of a share does not give the investor the same legal rights as a whole share does. Fractional shares could only qualify for inclusion in ISAs if the ISA Regulations were amended to allow them.

HMRC’s newsletter went on to say that, where fractional shares are an underlying investment in a collective investment scheme or fund (for example an exchange traded fund), they are not subject to the same restrictions.

At that time, HMRC said that any ISA managers who allow fractional shares to be purchased or held within their ISAs as a qualifying investment under Regulation 7(2)(a) should contact HMRC by email at savings.compliance@hmrc.gov.uk.

Then, after considerable public pressure, the previous Government announced, in the November 2023 Autumn Statement, that it intended to “permit certain fractional shares contracts as eligible ISA investments” and would engage with stakeholders on the implementation of new legislation. This commitment was repeated in the March 2024 Spring Budget, with it saying that it was “working as quickly as possible to bring forward legislation by the end of the summer”. This was then put on hold by the general election in July.

However, according to a recent AccountingWEB article, a spokesperson for the new Government has now said: “We have committed to changing the ISA rules to allow certain fractional shares. Taking a pragmatic approach, HMRC will not raise an assessment on managers or investors for fractional shares acquired before these changes are made.”

The department is working with the industry to make clear what the new regulations require of them and the timeframe for implementation. The amended regulations will be publicly available in advance of coming into force, to give ISA managers and investors time to assimilate the new legislation into their processes.

In other ISA news, the Financial Times has reported that plans for the new UK ISA have been shelved. At the time of writing, this has not been confirmed by HMRC, which maintains that the option is still on the table, so, we may have to wait until the 30 October Autumn Statement to find out more.

Please look out for information on Techlink on any developments regarding the above.

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A new paper from a Labour-supporting think tank, which has called on Rachel Reeves to make reform of pension tax relief a priority.

What sort of organisation publishes a paper on Bank Holiday Monday calling for the reform of pension tax relief? The answer is ‘a democratically governed socialist society, a Labour affiliate and one of the party’s original founders’ – the Fabian Society.

In a paper entitled ‘Expensive and Unequal’, the Society’s general secretary has called on Rachel Reeves to consider a radical restructuring of the pension tax landscape. None of the proposals are new, but as we head towards the ‘difficult decisions’ of 30 October, they are worth noting. Although, we should make it clear, this isn’t a Government-sanctioned paper. It’s just some ideas put forward by a Labour-supporting think tank:

a) Reform income tax relief on pension contributions

• Create a single flat rate of tax relief for individual pension contributions. The paper is vague about the actual rate, initially giving an example of 30% as midway between 20% and 40%. It then suggests ‘…a lower rate could be set to generate rather than recycle revenue, for example 25%’. The Society’s estimate for tax savings on these two rates are £1.4bn and £5bn, based on applying an estimate from a June 2020 Pension Policy Institute paper to recently published HMRC data for 2022/23. The Institute for Fiscal Studies (IFS) recently calculated that a 30% rate of relief would raise £3bn a year in the long run.
• The same flat rate would apply to employer contributions, which would become taxable income. However, the paper says it would be necessary to ‘consider special arrangements for defined benefit schemes.’
• Rebadge tax relief as ‘a simple top-up credit on pension contributions (e.g. a £1 match for every £3 of contributions after tax)’, echoing the approach for Lifetime ISAs.

b) Consider increasing taxes on pensions in retirement

• Revise the taxation of pension lump sums, for example, by reducing the maximum pension commencement lump sum (PCLS) to the lower of £100,000 or 25% of pension value.
• Charge employee national insurance (NICs) on private pension incomes, with an annual allowance (matching the personal allowance) that would exempt small pensions. The paper says the measure should be introduced instead of means-testing the Winter Fuel Payment, albeit, on its calculation, such a move would have produced £2.5bn extra revenue in 2021/22 against the projected Winter Fuel Payment saving of £1.5bn in 2025/26.
• Make pension assets subject to inheritance tax and levy income tax on all inherited pensions. This echoes a frequent IFS proposal and, on its estimates, would raise about £1.9bn a year in the long term.

c) Consult on reforms to NICs for pension contributions

• The paper gives the example of replacing the current NICs exemption for employer contributions with ‘a clearer cashback scheme that rewards employers only for making voluntary contributions beyond the auto enrolment minimum’.
• It also suggests levying employee NICs on employer contributions, in exchange for a higher flat-rate pension tax credit on the first tranche of annual pension saving (e.g. £1 match for every £2 of contributions after tax on the first £7,500 of contribution).

d) Recycle some of the savings into improving support for under-pensioned groups

• Increase minimum employer contributions under automatic enrolment from 3% to 7% of earnings. On its own this would represent revenue loss to the Treasury due to increased tax relief, but the paper notes that ‘This could easily be absorbed as part of a comprehensive reform package that reduced the overall cost of pension tax relief, largely targeting high earners’. The paper does not put any numbers on this or consider the impact of such an increase on the Government’s economic growth goals.
• Develop a new opt-out pension for the self-employed with tax relief designed to match what employees receive (income tax and NICs). This would add to expenditure, both because of the greater total relief and more encouragement to make pension savings.
• Consider providing pension credits to people out of work because they are caring for young children or disabled people.

The paper says that ‘even if only a sub-set [of its measures] were progressed there would be ample scope to generate £10bn per year in extra tax revenues.’

Comment

Pensions tax relief has been the ‘low-hanging fruit’ of nearly every journalist’s pre-Budget copy for years. 2024 might just be their last opportunity to recycle the story.

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Updated interest rates for inheritance tax (IHT), published by HMRC.

HMRC has published updated interest rates for IHT. As of 20 August 2024, interest on late payments of IHT has decreased from 7.75% to 7.5%. Interest on IHT overpayments has decreased from 4.25% to 4% from the same date.

Where IHT is paid in instalments, interest will not be charged on the first instalment unless it is paid late. On each later instalment interest must be paid on both of the following:

• the full outstanding tax balance;
• the instalment itself, from the date it’s due to the date of payment (if it’s paid late).

The first instalment is due at the end of the sixth month after the death (for example if the deceased died on 2 June 2024, the first instalment would be due by 31 December 2024). This is the due date and payments are then due every year on that date.

Assets on which IHT can be paid in instalments

• Houses – individuals can pay 10% and the interest each year if they decide to keep the house to live in.
  
• Shares and securities – individuals can pay in instalments if the shares or securities allowed the deceased to control more than 50% of a company.
  
• Unlisted shares and securities – individuals can pay in instalments for ‘unlisted’ shares or securities (ones not traded on a recognised stock exchange) if they’re worth more than £20,000 and either of these apply:
  
  • they represent 10% of the total value of the shares in the company, at the price they were first sold at (known as the ‘nominal’ value or ‘face value’. The face value of a share, and whether it’s an ordinary share, can be found on the share certificate).
  • they represent 10% of the total value of ordinary shares held in the company, at the price they were first sold at.

• Businesses run for profit – individuals can pay in instalments on the net value of a business, but not its assets. 
  
• Agricultural land and property.
  
• Gifts – donees can pay in instalments if there is still IHT to pay and they were given: buildings; shares or securities; or part or all of a business. If the gift was an unlisted share or security, it must still have been unlisted at the time of the death.

Individuals can also pay in instalments if either of these apply:

• at least 20% of the total IHT the estate owes is on assets that qualify for payment by instalments;
• paying IHT on them in one lump sum will cause financial difficulties.

More information on paying IHT in instalments can be found here.

HMRC also previously announced that it was reducing interest rates by .25%, to 7.5% for late payments of income tax, National Insurance, capital gains tax, Stamp Duty Land Tax, Stamp Duty, Stamp Duty Reserve Tax and corporation tax, and decreasing repayment interest rates for these taxes from 4.25% to 4%, also from 20 August 2024. Please see our earlier Bulletin.

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The DWP’s Legal Entitlements and Administrative Practice (LEAP) exercise to correct underpayments of the State Pension.

People who reached State Pension Age (SPA) before April 2016 can claim basic State Pension. To get the full basic State Pension an individual needs a total of 30 qualifying years of National Insurance (NI) contributions or credits. When someone has less than 30 qualifying years, their basic State Pension will be less than this amount. There were different rules in place for those who reached SPA before 6 April 2010.

If an individual, who reached State Pension age before 6 April 2016, has insufficient NI contributions themselves to qualify for a basic State Pension, they may be able to derive entitlement from their spouse or civil partner (an uplift based on their partner’s NI contributions called a Category BL State Pension).

Those who are widowed, and are getting a basic State Pension of less than £169.50 a week (in 2024/25), can also derive basic State Pension from their late spouse or civil partner. This may give them a basic State Pension of up to £169.50 a week. They can also inherit between 50% and 100% of any additional State Pension and 50% of any Graduated Retirement Benefit. The category of people whose State Pension was not increased to include any amounts they are entitled to inherit from their late husband, wife or civil partner is described as ‘Missed conversions’.

People who reach age 80 and are getting no basic State Pension or a basic State Pension amount of less than £101.55 a week (in 2024/25), may, subject to satisfying the appropriate residency conditions, qualify for a Category D State Pension of £101.55 a week.

In 2020, the Department for Work and Pensions (DWP) became aware of a number of individuals who had not had their State Pension increased, in accordance with the law, automatically when this should have occurred. This prompted the department to take action to investigate the extent of the problem. This publication includes information on the progress of the LEAP exercise to check and correct individual cases, and the amount of arrears repaid to 31 March 2024. It says that the LEAP exercise has now completed two of the three customer groups: the Cat BL and Cat D cases. It says that those remaining are cases where DWP is awaiting further information from a customer or a third party, and these will be cleared on receipt. The expectation is for the exercise to be completed for the third group, ‘Missed conversions’, by the end of 2024. Customers have up to two years to return information, so there may continue to be a small number of Cat BL and Cat D cases through to 2025 and missed conversions to 2026.

It has identified 860,271 cases that need to be reviewed and has reviewed 731,717 of those cases to 31 March 2024. The checking process has identified 99,558 underpayments, and State Pension underpayments made to married individuals, widows/widowers and people who have reached age 80 who are being underpaid State Pension because their current payment does not include additional entitlement, total £594m between 11 January 2021 and to 31 March 2024.

The table below shows progress by category:

Notes to the table:

1. Cases may be checked for more than one potential cause of error; therefore, an individual State Pension claim may be counted in more than one category.
2. Cases reviewed includes cases which have been deemed out of scope of the LEAP exercise through an automated process.
3. These are cases for which a current or historical underpayment of State Pension has been identified. This may include cases for which a corresponding overpayment of another benefit (for example, Pension Credit) has occurred as a result, meaning that there was no net underpayment to the individual as well as some cases where the customer is deceased, and DWP has so far been unable to identify an estate to which to pay the arrears due.
4. This average includes cases where the arrears amount owed is £0 due to offset of another benefit already paid such as Pension Credit. Current estimates of the total arrears due is £970 million to 133,000 pensioners and recognised a provision of £369 million, reflecting the outstanding amounts it still expects to repay. Last year it was estimated that DWP underpaid £1.17 billion to 170,000 pensioners. The final total value of the underpayments will only be confirmed by the completion of the exercise.

In addition, the DWP’s report lists issues identified with cases of State Pension awards which appear to have arisen from historic recording of Home Responsibilities Protection (HRP) (administered by HMRC) on claimants’ NI records. HRP was a scheme to help protect parents’ and carers’ State Pensions, reducing the number of qualifying years needed for the full basic State Pension. It has identified 194,000 cases that need to be reviewed and has reviewed 419 of those cases to 31 March 2024. Underpayments made total £2.2m to 31 March 2024.

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HMRC has published revised taxpayer data.

Source: HMRC

‘Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.’ Labour manifesto 2024

‘As well as cutting National Insurance for 29 million people, we will also not raise the rate of income tax or VAT.’ Conservative manifesto 2024

Those two statements have drawn scorn from some quarters for unnecessarily constraining the future Chancellor and ignoring the difficult spending decisions that must be made by the end of this year. They have also attracted criticism for the way in which they elude the reality of tax increases cloaked in fiscal drag.

As if to underline the latter point, HMRC has just published its annual update on taxpayer numbers, including estimates for the current tax year, 2024/25. The highlights to emerge include:

• Since 2020/21, the number of UK taxpayers is projected to have risen from 31.7m to 37.4m, a 18% increase at a time when the population rose by about 1.3%. Between 2010/11 and 2019/20 taxpayer numbers grew by just 0.2m.
• Over the same four-year period from 2020/21 the higher rate taxpaying population is projected to have grown from 3.98m to 6.31m, an increase of 58.5% according to HMRC. This statistic measures only marginal higher rate taxpayers, ignoring those who also pay additional rate.
• Additional rate taxpayer numbers over the four years are projected to have leapt from 433,000 to 1,130,000, thanks to that lowering of the additional rate threshold in 2023/24. As a result, 3.0% of taxpayers are projected to be in this category in 2024/25 against just 0.75% when additional rate first appeared in 2010/11.
• Adding higher rate and additional rate taxpayers together, they are projected be 19.9% of the 2024/25 taxpaying population against 13.9% in 2020/21.
• Income tax receipts remain highly skewed towards those facing higher and additional tax rates. That 3% of income taxpayers who pay additional rate is projected to contribute 41.2% of the income tax total in 2024/25, while the (marginal) higher rate population is projected to supply a further 31.1% of the total. The corollary is that 30m basic and savings rate taxpayer population represent 27.7% of the income tax pot. In 2021/22 they supplied 31.6% of income tax receipts.

Comment

The higher and additional rate shares of the taxpayer population are only going to increase further as (manifesto unmentioned) fiscal drag continues. The OBR’s March projections suggest that by 2028/29 the higher rate taxpayer proportion will be 18.5% and additional rate proportion 3.3%, taking the combined figure to 21.8%.   

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The income threshold for filing a self-assessment tax return increases from £100,000 to £150,000, with effect from the 2023/24 tax year. Please see our earlier Bulletin. The threshold will be removed completely for 2024/25 and beyond.

When interest was paid by banks and building societies net of basic rate tax and dividends were deemed to be received net of a notional 10% tax credit: basic rate taxpayers were treated as having had the correct tax deducted at source; higher/additional rate taxpayers would have had to pay additional tax on this income; and non-taxpayers could have claimed repayments of tax on the interest, but could not reclaim the 10% dividend tax credit .

Since 6 April 2016, such interest and dividends are paid gross. The personal savings allowance (PSA) and dividend allowance operate by taxing income falling within them at a rate of 0%, so no income tax is suffered directly on income falling within the allowances. Since it was introduced, the PSA has been set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, but £Nil for additional rate taxpayers. The dividend allowance is currently just £500 for all taxpayers, having been £5,000 when it was first introduced.

These allowances are helpful for taxpayers who receive small amounts of interest and dividends, although the combination of rising interest rates and drastic reductions to the dividend allowance now mean that more and more taxpayers will find that these allowances are no longer sufficient to cover all of their interest and/or dividends. At an interest rate of 4%, a deposit of £25,000 is enough to reach the £1,000 personal savings allowance. At a dividend yield of 3.5%, a £15,000 shareholding will produce dividends greater than the £500 dividend allowance.

Also, the way these allowances work is often misunderstood, giving rise to several problem areas for taxpayers. Many taxpayers, who understand that income falling within these allowances is taxed at 0%, assume that they do not incur any tax on savings or dividend income of less than the allowances. Unfortunately, this is not always true, because income falling within them still counts as part of an individual’s adjusted net income. Adjusted net income is important because it is used to determine: 

• what rate of income tax an individual will pay, which subsequently determines their entitlement to the PSA and the marriage allowance;
• what rate of capital gains tax an individual will pay;
• whether an individual will incur the high income child benefit charge (HICBC); and
• whether an individual’s personal allowance will be tapered.

For the current tax year, there are three occasions where small amounts of dividend or savings income could result in significant changes to an individual’s tax position.

Firstly, the normal higher rate income tax threshold of £50,270 is a key area, as it may impact an individual’s entitlement to both the PSA and the marriage allowance (although a lower threshold of £43,662 may apply to Scottish residents wishing to claim the marriage allowance, due to Scottish rates of income tax). This creates a cliff-edge where just a few pounds of savings income or dividend income can result in an increased tax liability of hundreds of pounds.

Secondly, individuals with adjusted net income of between £60,000 – £80,000 may incur the HICBC. The charge effectively claws back 1% of a household’s Child Benefit receipts in a tax year for every £200 of the household’s higher earner’s adjusted net income in that £20,000 income bracket. Savings and dividend income falling within the PSA and dividend allowance may still result in an individual incurring a higher tax bill due to an increased HICBC.

Thirdly, individuals with adjusted net income of between £100,000 and £125,140 are subject to the highest marginal income tax rates, due to the tapering of the personal allowance. The personal allowance is tapered by £1 for every £2 of adjusted net income in that £25,140 income bracket, meaning that an individual can incur a higher tax bill due to the receipt of a minor amount of savings and dividend income.

Additionally, individuals with adjusted net income in excess of £125,140 are not entitled to the PSA, so the receipt of savings income could result in a surprising tax charge due to the resulting loss of entitlement to this allowance.

Individuals who are not required to file a self-assessment tax return should consider if they will need to report their savings and dividend income to HMRC, if it may impact their overall tax position. And it should be borne in mind that reporting estimated figures to HMRC, on the assumption that it will have no impact on their tax position due to the availability of the PSA and dividend allowance, could cause unexpected and incorrect tax bills.

Please see our earlier Bulletin to find out more about self-assessment and how to file a tax return.

Now might be a good time to consider reinvestment in tax-free investments, such as an ISA, so that taxable income is replaced with tax-free income, or in tax-efficient investments that generate no income, such as:

• Unit trusts/OEICs geared to producing capital growth. (But not where dividends are reinvested, or accumulation unit trusts/OEICs, as the dividends still count as income, and will be included in adjusted net income, even though they are not received by the investor.)
• Investment bonds from which a 5% tax-deferred withdrawal may be taken each year, for 20 years, without being included in adjusted net income.

Also, it should be noted that, subject to generous limits, dividends from qualifying VCT investments are tax free, and VCTs offer income tax relief at 30% on fresh investment, regardless of the investor’s personal tax rate and freedom from CGT on any profits. It is important to note that investing in a VCT will not help to reinstate allowances by reducing an individual’s income. This is because tax relief on investment in a VCT is given by a reduction in the tax bill and not by a reduction in total income.

Comment

The receipt of a small amount of savings or dividend income is unlikely to result in a significant tax liability for most individuals. Given that HMRC is known to be having resource issues, the tax that may be collected due to a misunderstanding of these allowances may present as much of a headache to HMRC staff as it does to taxpayers. It has been suggested that a future Government could consider revising the operation of the PSA and the dividend allowance so that income within these allowances does not impact an individual’s adjusted net income and therefore does not give rise to tax traps such as those mentioned above. Income falling within two similar personal tax allowances, the property allowance and trading allowance, does not impact an individual’s adjusted net income, so this change may not be particularly difficult to legislate for.

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The 7th June was the day of Labour’s ‘Clause V’ meeting at which, according to Politico, nearly 100 senior party personnel signed off the election manifesto ahead of its publication on Thursday 13 June. Allowing that number of people sight of any document, yet alone one as sensitive as a manifesto, increases the chance of leaks and that is what appears to have happened over the weekend.

A report on the Financial Times website on late Sunday evening said that the manifesto would not contain plans to reinstate the pension lifetime allowance (LTA). While there are only a few days to go before we discover the veracity of the FT’s apparent scoop, there are good reasons to believe it may be true:

• The original LTA reinstatement pledge was made in response to the March 2023 Budget. At the time Rachel Reeves described Hunt’s moves as ‘…the wrong priority, at the wrong time, for the wrong people’. Since then, nothing of any significance about LTA reinstatement has emerged from Reeves or other Treasury shadows.
• Earlier this year there were press reports that Labour was considering carve outs for the NHS and, subsequently, the civil service. These were followed by suggestions that nobody would escape LTA Mk II. Carve outs always looked difficult, e.g. in terms of employment definition and handling job changes. However, the issue of NHS staff has not gone away, as the BMA underlined in a May press release commenting on Labour’s pledge to reduce waiting times.
• The complexity of the task of removing the LTA became apparent and with it the corollary of the legislative challenge of reversing the process. Sunak’s surprise election call meant the Finance (No 2) Act rapidly became law with outstanding legislation to correct errors in its predecessor left it limbo. These glitches are already stalling some transfers. Any move to revive the LTA would face the issue of dealing with the existing incorrect drafting.
• The timing of the election also presented an obstacle for LTA reinstatement. As Steve Webb recently pointed out, it would be virtually impossible for Reeves to bring in a fresh LTA before April 2026, given her first Budget will not be until at least mid-September. A 21-month gap between election day and a new A-Day could well see a pre-emptive wave of large pension top ups and NHS retirements.
• As we mentioned in our recent Bulletin on the IFS’s LTA and other pension proposals, the estimated £800m medium term revenue gain from unwinding Hunt’s 2023 LTA announcement was never included in Labour’s list of new tax revenue, so its disappearance does not create another black hole (no doubt to be filled by cracking down on tax avoidance…).

Maintaining the current LTA-free structure does not mean that pensions escape other potential tax-raising measures. These could include:

• The IFS favourite of bringing into the inheritance tax (IHT) net unused funds at death.
• Reducing the maximum tax free cash.
• Moving to a flat rate of income tax relief.
• Scrapping employer’s National Insurance (NIC) relief on pension contributions.
• Applying NICs, probably at an initially reduced rate, to pension income.

Comment

In the end it may have been the sheer practical difficulties of LTA reinstatement which sunk the idea. Thursday might provide some enlightenment.  

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The numbers of taxpayers who filed their self-assessment tax return in the week starting 6 April, and the requirement to complete a tax return.

According to HMRC, almost 300,000 taxpayers filed their self-assessment tax return in the first week of the new tax year. Almost 70,000 people filed their return on the opening day this year (6 April).

Please see here to find out more about self-assessment and how to file a tax return.

HMRC says that, in recent years, it has seen more and more taxpayers file their tax returns early. Last year, more than 246,000 people submitted their self-assessment returns between 6 and 12 April 2023.

HMRC is encouraging people to file their tax returns early and not to leave it until January 2025 and it has updated its guidance on filing tax returns early and help around paying tax bills. As the 31 January payment deadline approaches, there is not always time for anyone who is new to self-assessment to obtain a unique taxpayer reference (UTR) needed to file a tax return online. 

Anyone who is new to self-assessment and thinks they might need to complete a tax return for the 2023/24 tax year can use HMRC’s self-assessment online tool to check whether they need to register for self-assessment and submit a return. However, as mentioned in our earlier Bulletin, there are more than a few issues with this tool.

People may need to complete a tax return for the 2023/24 tax year and pay any tax owed if, in the tax year 2023/24:

• they were a self-employed individual with an income over £1,000;
• they received any untaxed income over £2,500;
• they were renting out one or more properties. (Although, HMRC’s latest Press Release doesn’t mention it, there is a £1,000 allowance, so a return may not be required if total property income was below that amount. Please see here);
• they claimed Child Benefit and they or their partner had an income above £50,000 (although this figure increased to £60,000 per annum from 6 April 2024, HMRC’s Press Release correctly refers to the £50,000 per annum figure that applied up to 5 April 2024, as this was the figure that applied for the 2023/24 tax return);
• they were a partner in a partnership;
• they have income from savings and investments on which tax is due. (At the time of writing, HMRC’s Press Release, quite confusingly, refers to a £10,000 personal savings allowance, whereas the allowance is £1,000 for a basic rate taxpayer, £500 for a higher rate taxpayer and £nil for an additional rate taxpayer. HMRC will usually change an individual’s tax code automatically to take extra tax from their income where savings interest is up to £10,000. HMRC will tell anyone who is not employed, does not get a pension or does not complete self-assessment, how much interest they received at the end of the year, if they need to pay tax and how to pay it. Someone who earns more than £10,000 from savings and investments will need to complete a self-assessment tax return. Please see here);
• they have income from dividends in excess of the £1,000 dividend allowance for the 2023/24 tax year. (HMRC’s Press Release refers to a £10,000 figure, because it’s possible for individuals to pay tax on up to £10,000 in dividends by contacting the helpline and asking HMRC to change their tax code, where relevant, so the tax will be taken from their wages or pension. Please see here);
• they have income for the tax year that exceeded £150,000. (This is aimed at employees, since the self-employed are already required to file a return. If the individual’s income is less than the threshold, they are still required to file a return if they fall into any other category (e.g. they have untaxed income);
• they have annual trust or settlement income on which tax is still due;
• they have income from the estate of a deceased person on which tax is still due;
• they have income from overseas sources that is liable to UK tax;
• they were non-resident, dual resident or not domiciled in the UK and it affected their UK tax position (e.g. UK income received by a non-UK resident);
• they made disposals of assets chargeable to capital gains tax that exceeded £50,000, or gains before losses exceeded the 2023/24 annual exemption of £6,000. Please see here. (At the time of writing, HMRC’s Press Release, quite confusingly, says “they have paid Capital Gains Tax on assets that were sold for a profit above the Capital Gains threshold.”)

A full list of who needs to complete a tax return is available on GOV.UK.

Other HMRC guidance says the following also need to complete a tax return:

• a minister of religion (any faith);
• a name or member of Lloyd’s;
• an examiner, exam moderator or invigilator;
• a share fisherman.

In addition, the following may need to submit a tax return:

• those wanting to make a claim for certain employment expenses;
• those wanting to make a claim for tax reliefs (such as enterprise investment scheme income tax relief);
• those who owe tax and it cannot be collected via PAYE or the taxpayer does not want it to be collected via PAYE.

The list above and HMRC’s interactive decision tree tool are designed to help taxpayers to decide whether or not they should contact HMRC regarding the completion of a tax return. The actual need to file depends on the taxpayer’s circumstances.

Pensioners are required to pay income tax on any taxable income, including their pension income, above their personal allowance threshold. There are different ways to pay any tax owed, depending on the individual’s circumstances, including:

• if they already complete a self-assessment tax return, they will need to report and pay via this route;
• if they have a PAYE tax code, HMRC will automatically collect any tax through their tax code.

Alternatively, if a pensioner does not already pay tax via self-assessment or PAYE, HMRC will send them a Simple Assessment summary. The Simple Assessment will tell them how much income tax they need to pay and the deadline – usually by 31 January following the end of the tax year. HMRC produces the Simple Assessment from the information it already holds, so people do not need to do anything – there is no form to complete. Please see Simple Assessment for more information.

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