A Private Members Bill aiming to expand the scope of automatic enrolment has received Royal Assent.  

The new legislation provides powers to abolish the Lower Earnings Limit for contributions and reduce the age for being automatically enrolled from 22 to 18.

The DWP press release states that the changes mean that millions more people including younger and lower earning workers will be helped to save more into their pensions. It also states that these changes combined with the Mansion House Reforms announced by the Chancellor in July, mean that a minimum wage earner could see their pension pot increase by over 85%.

Minister for Pensions, Laura Trott, said:

“Automatic enrolment has been a phenomenal success, and we are determined to go further. It’s great news that the Private Members’ Bill has successfully passed through Parliament and received Royal Assent.

This will mean younger workers and those in lower paid employment will be able to fully participate in Automatic Enrolment. For the first time, every eligible worker will benefit from an employer contribution from the first pound earned – which will make a huge difference to their eventual pension.”

Importantly, the new legislation will not result in any immediate change. It simply provides the powers to amend the age limit and lower the qualifying earnings limit for automatic enrolment. Any changes will be subject to consultation before implementation. The consultation is expected to be issued shortly. However, employers are expected to be given significant notice before the changes need to be implemented.

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We noted in a recent Bulletin that the May-July earnings growth figure implies an 8.5% rise in the New and old (Basic) State Pension, assuming that an untweaked Triple Lock formula is applied with effect from April 2024. That assumption, which is beginning to look a little shaky, would have some interesting consequences:

The amounts. The Institute for Fiscal Studies (IFS) calculates that the old State Pension should rise from £156.20 per week to £169.50 and the New State Pension from £203.85 per week to £221.20. Those State Pension benefits that are not Triple Locked (e.g. Additional Pension) look set to see smaller percentage increases – probably around 7% based on September’s CPI figure (due 18 October). In April 2023, the CPI was the Triple Lock factor of choice, so all State Pension elements rose at the same rate.

Treasury cost. The Office for Budget Responsibility (OBR)’s estimate for the 2024 Triple Lock increase, included in the March 2023 Economic and Fiscal Outlook (EFO) was 6.2%. The IFS calculates the extra 2.3% will add £2bn to State Pension spending in 2024/25. That is arguably at least £2bn a year extra as the ratchet effect means that the 2025 increase will start from the 2024 pension level.  

Income tax. We commented in an earlier Bulletin on the interaction of the Triple Lock and the frozen personal allowance. The 8.5% adds a further twist. If in 2024/25 the New State Pension is £11,502.40 a year, it will be £1,068 below the personal allowance. From there increases averaging just over 3.0% a year are needed for the New State Pension to exceed the frozen personal allowance by 2027/28, the (currently scheduled) last year of the six-year allowance freeze.

If the Triple Lock remains after the election – a big if – then once the pension/allowance crossover happens it will take above-inflation increases to the personal allowance to reverse the situation. The Government is dragging a growing number of people into tax – an extra 3.2m over the period of the personal allowance freeze, according to the March 2023 EFO. HMRC is already creaking, so how it will deal with a large influx of new ‘customers’ ought to be a concern for the Treasury. Alongside the rise in State Pension income is the substantial jump in interest rates, which will also create more taxpayers given the personal savings allowance is still at its initial 2016 level.

Intergenerational fairness. A possible 8.5% increase for pensioners inevitably raises the topic of intergenerational fairness, particularly when there is also talk that in-work benefits may rise by 1% below CPI inflation to provide scope for tax cuts. In March 2023, the Low Pay Commission estimated that the National Living Wage (NLW – currently £10.42 a hour) would need to be between £10.90 (+4.6%) and £11.43 (+9.7%) in 2024/25 to meet the Government’s target of the NLW equaling two thirds of median hourly pay by October 2024. The Commission’s central case was £11.16 (+7.1%).

However, those calculations were based on 5.0% earnings growth in 2023 – the OBR projection. The difference between outcome and projections points to a possible NLW rise of around 10%, which is not a figure either the Chancellor or the Bank of England would wish to see. More detail should become clear next month, when the Commission is due to makes its recommendation for 2024.

The first Budget after an election is generally the one that contains the largest tax increases. The next Budget première may be the one that finally kills off the Triple Lock – if neither of the parties puts its preservation in their manifestos. That in turn could become a game of publication date chicken: whoever prints first will effectively make the decision for both parties.

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If you have been wondering why the Link Asset Services Dividend Monitor figures seem to have disappeared, the answer is in the first word: Link. In April 2023, the Link Group agreed the sale of its UK business to finance FCA mandated compensation for Link’s involvement in the collapse of the Woodford funds in 2019. The quarterly Dividend Monitor has now moved under Computershare’s wing.

Computershare has recently published its Q2 2023 UK dividend monitor, showing what appears to be bad news: a second quarter fall of 9.0% in headline dividend payments. However, as is often the case with one set of figures, the context is all important:

• In Q2 2022, there was a bumper crop of special dividends. These one-off payments totalled £5.0bn, of which nearly 80% originated from just three companies; Aviva, Rio Tinto and Anglo American. In Q2 2023, the special dividend feast turned to famine, with the one-off total down over 80% at £704 million.
• The loss of £4.3bn of special dividends between Q2 2022 and Q2 2023 meant that total dividends payouts were £3.2bn lower (9.0%) in 2023 at £32.8bn.
• Underlying (regular) dividends were £32.2bn, up 3.5% on 2022, although this was a decline from the first quarter’s rise of 5.2%.
• Computershare notes that ‘By far the biggest contribution came from the banks which have been reporting very strong profits. They paid £7.8bn, up by three fifths year-on-year.’ A good example is HSBC, which paid a dividend of 18.0c in April 2022. In 2023 the bank paid 23.0c in April, followed by another 10.0c in June as it resumed quarterly payments that had been suspended in response to the pandemic.
• The Bank sector saw headline dividends up by 59.3%, although in terms of growth (but not total payments) it was beaten by 63.5% growth in dividends from Airlines, Leisure & Travel sector. There were some significant falls too, in part associated with the lack of special dividends. Thus, the General and Life Insurance sector saw a 57.8% decline and mining recorded a 32.7% headline drop.  
• Payouts from the Top 100 companies fell 8.1% year-on-year on a headline basis, for which special dividends can again take the blame. On an underlying basis dividends grew by 5.8%, with banks being the biggest driver. The Top 100 companies accounted for 89% of all dividend payments in Q2 2023, 1% more than in 2022. Mid-cap payments fell in Q2 2023, due to the takeover and delisting by private equity groups of Direct Line Insurance and Homeserve and the takeover of Micro Focus International. Exclude these three, and underlying payments would have been around 3% up year-on-year.
• The concentration of dividend payouts in a handful of companies decreased in comparison with Q2 2022, again due to disappearing special dividends. Nevertheless, the top five payers (HSBC, Rio Tinto, Glencore, Shell and British American Tobacco) accounted for 34.8% (cf 37.3%) of total payments. The next ten companies accounted for 27.6%, (cf 25.1%%) meaning that just 15 companies were responsible for 62.4% of all UK dividends in the quarter, the same proportion as a year ago.
• Computershare has upgraded its dividend forecast for 2023, but still sees a headline decline of 1.7% because of the drop in special dividends. On an underlying basis it is forecasting 6.1% growth.

Comment

Computershare makes the point that, while the prospective yield for the top 100 companies increased to 4.0% in Q2, yields in other asset classes rose faster during the quarter. Ten-year gilts (4.66%) and the best instant access savings account (4.35%) were both offering better-than-equity yields by the end of June.

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Child Benefit is paid upon a claim to the parent or carer of a child up to the age of 16, or 20 if in approved education or training.

The HICBC, introduced in January 2013, remains a prime example of how not to design and operate a tax. As a reminder, the aim of HICBC is to make any Child Benefit recipient repay some or all of their Child Benefit back (as tax) if they or their partner has an individual adjusted net income exceeding £50,000 per year. The repayment is at the rate of 1% of total benefit paid for each £100 of income above the threshold, up to £60,000, at which point the tax charge matches the total benefit.

The Low Incomes Tax Reform Group (LITRG) has published a warning to separated couples following a recent First-tier Tribunal decision (Meades v HMRC) that a parent was liable for the HICBC, despite the fact that the benefit was paid to their former partner. In this case, Mr Meades had separated from his ex-wife in 2017. He was found liable for a £1,076 HICBC for the 2019/20 tax year even though the Child Benefit payments were made to his ex-wife, because he was the Child Benefit claimant, and, in that tax year, his adjusted net income was higher than £50,000.

The LITRG has also been contacted by others in a similar position and has published information on what claimants can do if faced with this situation.

Child Benefit is always claimed by an individual, not a couple. The claimant is the person who completes and signs the form to make the claim, even if they choose for their partner to receive the benefit payments. As some years may have passed between the original Child Benefit claim being made and the separation, it’s possible that people may have forgotten who the claimant originally was and assume it is the person getting the payments.

If a couple separates, the claimant could become liable for the HICBC if their adjusted net income later exceeds the £50,000 threshold, even if the payments are paid into their former partner’s account. It is also possible that any new partner of the claimant might become liable to the HICBC if they exceed the threshold and are the higher earner, even if they had nothing to do with the original claim. This is because the way the charge is worked out initially looks at the adjusted net income of the person who made the claim and any partner they have. (A ‘partner’ for HICBC purposes means a spouse or civil partner (unless separated), or someone with whom the person is living together as if married or in a civil partnership).

The LITRG is urging child benefit claimants to review their Child Benefit arrangements if they have separated from the partner they had when the claim was originally made. In doing this, claimants should check that these arrangements continue to be appropriate to their circumstances and to avoid being unwittingly exposed to the HICBC.

Some separated couples may decide they want the person who made the original claim to continue doing so, even if the Child Benefit payments are being paid to the other parent or carer (for example, a claimant who is not receiving the payments themselves may require the National Insurance credits awarded with a Child Benefit claim for their own State Pension), while others may seek a new arrangement – particularly in cases where the HICBC would otherwise be payable by the claimant.

The LITRG says that it understands that it is not possible to retrospectively change the name of the person claiming Child Benefit to avoid the HICBC, but it is possible to end the claim for Child Benefit and for the former partner to make a new claim. However, this could mean that the former partner (or any new partner they may have) may be liable to the HICBC themselves if they earn above the HICBC threshold.

If taxpayers are found to be liable for the HICBC, but have failed to notify HMRC, they may be charged penalties – although, if they have a reasonable excuse for the failure then the penalties can be appealed.

Claiming child benefit can also impact a person’s entitlement to a State Pension, as it attracts National Insurance credits. While these can be transferred to the other parent or carer, deadlines and conditions apply.

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