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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The lifetime allowance was abolished on 5 April 2024. However, there are instead new rules limiting the tax-free lump sum payments from pensions both in lifetime and on death.

As part of the changes HMRC provided the option to apply for a Transitional Tax-Free Amount Certificate to have lump sums previously taken assessed under the new rules, as a monetary amount, rather than under the Lifetime Allowance standard transitional calculations. The standard transitional calculation based the deemed amount used on 25% of the Lifetime allowance used at previous crystallisations.

Who can apply?

The legislation and HMRC guidance states that anyone can apply provided they have an LTA % used. This will be everyone who experienced a BCE from 6^th April 2006 to 5^th April 2024.

This rules-out those who only took benefits before 6^th April 2006 because those benefits won’t have been tested against the Lifetime Allowance.

It also rules out those who haven’t crystallised any benefits too, but there is nothing to test so there could be no benefit anyway.

Even if the member has used 100% of their LTA then they can apply if it is beneficial for them.

Who can you rule out quickly?

1. Anyone who has no uncrystallised funds on 6^th April 2024 and does not plan to make any further contributions.
2. Anyone that only took benefits from when the LTA was £1,073,100 ie from 6 April 2020 onwards (or after the date of their protection certificate) and took their full entitlement to tax free cash from those crystallisations each time. This is because the standard calculations will mirror what has happened and as such no benefit will be gained from applying for a certificate. (if 100% of LTA see next section)
3. Anyone that took benefits when the LTA was higher than £1,073,100 ie between 6 April 2006 and 5 April 2016 and took their full entitlement to tax free cash from those crystallisations each time. Again, the standard calculation will mirror this.
4. Anyone where their current LSA and LSDBA give plenty of headroom against the availability of future benefits. This could mean that their total benefits are such that they will never be able to use the full remaining LSA or LSDBA based on the standard transitional calculations. This is of course a judgement call based on their age, fund value and plans in the future.

Exceptions to the rule

The one exception to all of these rules is that if the client has used 100% of the LTA then they won’t be entitled to any LSA or LSDBA without a certificate.

So even if there is no benefit for them to apply with regards to tax free cash, it will reinstate some of their LSDBA for the purposes of paying tax free lump sums on death or in serious ill health.  However, as above, if they have no remaining uncrystallised funds at 6/4/2024 and don’t plan to make further contributions, there is still no benefit in the TTFAC.

Who may benefit from applying for a TTFAC?

The key potential beneficiaries are those who have or are likely to have funds with a total value in excess of £1,073,100 or their own protected higher lifetime allowance and any of the following.

• Took benefits between 6 April 2006 and 5 April 2024 without their full tax-free cash entitlement.
• Took benefits during tax years 2016/17 – 2019/20, ie when the lifetime allowance was less than £1,073,100, without any lifetime allowance protection.
• Reached age 75 before 6 April 2024 with uncrystallised funds and have not since taken their tax-free cash entitlement
• Transferred funds to QROPS
• Took benefits that contained a disqualifying pension credit
• Took benefits that contained a GMP which restricted their cash to less than 25%

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Despite its widespread administrative difficulties, the arrival of the new tax year has seen HMRC promptly issue reminders to its ‘customers’ about the need to complete a tax return. But what about those who were dragged into tax in 2023/24 or will be in the current tax year by the cuts to the dividend allowance and/or the capital gains tax annual exempt amount and/or our old friend, fiscal drag?

Dividend allowance

The dividend allowance was £1,000 in 2023/24 and has reduced to £500 for 2024/25. At the time the cuts were announced, in the 2022 Autumn Statement, an HMRC policy paper said ‘It is estimated that this will affect 3,235,000 individuals in the year 2023/24 and 4,405,000 individuals in the year 2024/25. Around 46% of those with taxable dividend income will be unaffected by this measure in the year 2023/24, falling to 27% in the year 2024/25.’

About 65% of taxpayers are outside the self-assessment regime and some of them will have tax to pay on their 2023/24 dividends for the first time. If such a taxpayer runs through the HMRC ‘Check if you need to send a Self Assessment tax return’ webtool, they will probably reach a page which says ‘Based on your answers, you do not need to send a return for 2023 to 2024.’ It then goes on to say:

Why the page still refers to £2,000 of dividend income is unclear – it looks suspiciously like a lack of updating from 2022/23. The ‘check your Income Tax” option needs the individual to sign in to their personal tax account using their Government Gateway user ID and password. Many outside self-assessment will, therefore, need to create a personal tax account first, before going any further. In theory the taxpayer also has the option of filing a self-assessment return – something that might be quicker than calling HMRC. However, online self-assessment also requires a personal tax account as paper returns cannot be downloaded from the internet. They can be requested from HMRC, but, in theory, HMRC will want a reason why the individual cannot file online.

Capital gains tax

The annual exempt amount was £6,000 in 2023/24 and has reduced to £3,000 for 2024/25. In the 2022 Autumn Statement, HMRC’s policy paper said ‘it is estimated that for the year 2023/24 around 500,000 individuals and trusts per year could be affected, increasing on a cumulative basis to 570,000 in 2024/25. Of this group, by 2024/25, it is estimated that 260,000 individuals and trusts will be brought into the scope of CGT for the first-time.’

The HMRC self-assessment webtool  asks ‘Do you need to pay any Capital Gains Tax?’ Unhelpfully, it also says ‘You usually have to pay Capital Gains Tax when you sell or give away most personal possessions worth £6,000 or more (apart from your car) or any other assets, such as shares or a holiday home’ without mentioning the annual exemption or anchoring the instruction to the gain that you make rather than the amount you receive or are deemed to receive. Answer ‘yes’ to the question and the result is:

The contrast between ‘may need to’ and ‘must’ register is an odd one, as is the fact that there is different treatment of capital gains in the webtool and self-assessment:

• In the webtool, the question is about whether there is capital gains tax to pay.
• In self-assessment, the requirement to complete the capital gains tax pages (SA108) is triggered if:
  • disposals exceed £50,000; or
  • gains before losses exceed the annual exemption.

In practice, the safety-first approach would be to follow the SA108 trigger, even if net gains are below the annual exemption. It is better to give HMRC too much information rather than rely on a defence of ‘I was following the webtool’ when HMRC start asking questions.  

Fiscal drag

The Office for Budget Responsibility (OBR) has calculated that, in 2023/24, there were 36.2 million taxpayers, 1.9 million more than if the personal allowance had been indexed. For 2024/25, the corresponding figures are 37.2 million and 3.2 million. Many of those will be dragged into tax because of:

• Rises in State or other pensions, or
• Interest income exceeding their personal savings allowance (and any available starting rate for savings band) because of rising interest rates since the end of 2021.

As far as State Pensions are concerned, the DWP supplies HMRC with details of payments (including in advance, so that tax codes can be determined). Where there is a tax liability arising as the result of a State Pension and tax cannot be collected via a PAYE code from other (non-State) pensions or earnings, then HMRC will issue a Simple Assessment with a demand to pay. This will be happening more frequently now, even though both the old State Pension (£8,814 in 2024/25) and new State Pension (£11,502 in 2024/25) are below the personal allowance. Extra State Pension entitlements, mostly from the pre-2016 additional pension, are the reason for total benefits exceeding the £12,570 of the personal allowance.

New tax liabilities on non-State pensions are normally automatically dealt with via the PAYE code. If the tax liability arises because of investment income, then the process is the same as outlined above for dividends – the taxpayer needs to inform HMRC.   

Comment

The Government has loaded more tax collection work onto HMRC and has done little to reduce it beyond raising the automatic threshold for self-assessment from £100,000 to £150,000 for 2023/24 onwards. That move has itself been criticised because of the importance of the £100,000 threshold in terms of the personal allowance and tax-free childcare.

HM Treasury is consulting on changes to the MLRs as part of a wider programme of work aimed at reducing money laundering, which was set out in the Economic Crime Plan 2023-26. This consultation principally covers issues with the MLRs already identified by HM Treasury, for example in the 2022 Review of the UK’s anti-money laundering and counter-terrorist financing regulatory and supervisory regime. This review found that, while the core requirements of the regulations were mostly fit for purpose, there were potentially a number of technical changes that could be made to increase effectiveness and ensure proportionality for both regulated firms and customers. The consultation also includes issues put forward by key stakeholders, such as the anti-money laundering/counter terrorist financing supervisors, the regulated industries and their representative bodies, which could reduce burdens and make the regulations more effective at tackling economic crime.

The consultation covers four core themes:

1. Making customer due diligence more proportionate and effective;
2. Strengthening system coordination;
3. Providing clarity on scope of the MLRs; and
4. Reforming registration requirements for the Trust Registration Service (TRS).

The Treasury says that it is keen to hear from a wide range of stakeholders in response to the consultation, including regulated businesses and their customers, supervisory bodies, law enforcement agencies, civil society organisations and members of the public. The consultation document sets out a number of ways to respond to the consultation. This includes answering the questions via the online ‘Improving the Effectiveness of the Money Laundering Regulations’ form.

What TRS changes are being consulted on?

The TRS was introduced in 2017 to increase the transparency of trust ownership by providing a central register of the beneficial ownership of taxable trusts. Changes to the MLRs since then mean that the TRS now is a register of most types of UK express trusts and some non-UK express trusts. Please see our Trust Registration Service area on Techlink and HMRC’s guidance Register a trust as a trustee.

The purpose of the TRS is to document information about trusts and to make it available to law enforcement agencies to assist with their investigations. Since 1 September 2022, individuals and organisations can also access TRS information in certain limited circumstances. All individuals and organisations can access trust data where a trust has a controlling interest in an ‘offshore company’. Access to all other trust data requires the requester to have a “legitimate interest” in that trust information. A legitimate interest is demonstrated through evidence including an individual or organisation being involved in an investigation into money laundering and terrorist financing.

HMRC has overall responsibility for the TRS. Trustees have a responsibility to register their trusts, if they fall within the registration rules, and to keep the trust information up to date. Trustees of registrable trusts must also provide proof of registration to certain ‘relevant persons’, as set out in the MLRs. Relevant persons are advised not to do business with registerable trusts that fail to show proof of registration and must report to HMRC any material discrepancies between the information they hold on the trust and the information held on the TRS.

The Government is reviewing the operation and scope of the TRS: the role of the TRS in the investigation of money laundering and terrorist financing; the registration responsibility on trustees; and the changing international and national objectives to increase transparency of trusts. The purpose of the review is to identify areas where the TRS could be improved to continue meeting key policy objectives and to provide consistency and simplicity.

The Government says that it wants a targeted approach to trust registration requirements, to focus the requirements on the highest risk trusts. The Government proposes to make changes to the TRS to include:

• requiring the registration of all non-UK express trusts with no UK trustees, that own UK land, regardless of when the land was acquired;
• sharing trust information of non-UK express trusts with no UK trustees that own UK land by making these trusts subject to the current Trust Data Sharing process;
• aligning the registration requirements of some trusts required to register following the death of a settlor;
• clarifying that Scottish survivorship destination trusts are not required to register;
• introducing a de minimis level for trust registration.

Registration of non-UK express trusts with no UK trustees, that own UK land

The Government recognises that there is currently a reporting gap of direct UK land ownership by wholly non-UK trusts. Since 6 October 2020, the MLRs have required non-UK express trusts, with no UK trustees, to register on the TRS if the trustees acquire land in the UK. However, non-resident trusts that acquired UK land or property before 6 October 2020 are not currently registered on the TRS unless the land ownership is creating tax liabilities for the trustees (for example, through letting). The Government therefore proposes to extend the requirement to register on the TRS to include express (i.e. non-taxable) trusts that acquired UK land before 6 October 2020.

In addition, a Trust Data Request cannot currently be made to access information held on non-UK express trusts, with no UK trustees, that have acquired UK land. In other words, this information cannot be shared with persons outside of law enforcement agencies. The Government is proposing to extend the TRS trust data sharing rules to include these trusts.

The National Risk Assessment (NRA) for Money Laundering and Terrorist Financing 2020 observed that the property sector faces a high risk from money laundering, due to the large amounts of cash that can be moved / invested in the sector and that non-UK trusts “…are likely to be more attractive for illicit purposes as they can offer better levels of secrecy and tax advantages compared to UK-based trusts”.

The Government says that it is against this backdrop that it seeks to improve the transparency of UK land ownership by non-UK trusts through increasing the scope of trusts that are required to be registered on the TRS.

Trusts required to register following a death

Currently will trusts are excluded from registering on the TRS for a period of two years from the date of death. However, there are other types of trust that become registrable on the death of an individual with different deadlines for registration on the TRS. Some of these are existing trusts which were not required to register on the TRS when the person was alive and some are trusts created as part of the estate administration process, namely:

• co-ownership property trusts currently must be registered on the TRS within 90 days of a person’s death;
• trusts created by deed of variation currently must be registered on the TRS within 90 days of being created.

The Government believes that a common registration deadline for those trusts associated with the estate of a deceased person will enable better compliance with the registration requirements.

The Government is therefore proposing to exclude co-ownership property trusts that would become registrable upon death from registration for two years from the date of death. This will align the timing of registration with will trusts that become registrable on death. Co-ownership property trusts are trusts of jointly held property. In cases where the trustees and beneficiaries (i.e the legal and beneficial owners) are the same persons, such trusts are excluded from registration. These trusts often arise in the purchasing of land and property in England and Wales. However, upon the death of one of the parties, as the trustees are no longer the same as the beneficiaries, the trust becomes registrable.

The Government is also proposing to exclude all trusts created by deed of variation that would become registrable upon death from registration for two years from the date of death. This will align the timing of registration with will trusts that become registrable on death. 

Scottish survivorship destination trusts

In Scotland it is possible for property to be owned jointly by property owners where the title to the property contains a special destination, known as a survivorship clause or survivorship destination. This clause directs that the property is held equally for the owners and the survivor. To revoke the survivorship destination after the property has been registered in the Land Register of Scotland, the property owners may either register a new deed in the land register where they will incur registration fees or create a trust that records that the survivorship destination has been revoked and sets out the new beneficiary of the property. Where a trust is created to revoke a special destination, this is an express trust, and it is therefore currently registrable on the TRS. Under English and Welsh Law, achieving this outcome would not result in a registrable trust. The Government is proposing to exclude Scottish survivorship destination trusts from the TRS registration.

De minimis exemption for registration

The government proposes to introduce a de minimis exemption for trusts required to register on the TRS. The de minimis exemption seeks to differentiate between small low value trusts and the higher risk trusts that hold property. Responsibility to determine whether a trust qualifies as being de minimis would fall to the trustees. The Government is proposing to exclude from registration a trust that meets all of the following tests:

• the trust is not liable for relevant UK taxes;
• the trust does not own or have an interest, in whole or in part, in UK land/real property;
• the trust does not hold more than £5,000 in assets;
• the trust does not distribute more than £2,000 in assets and expenses (combined) in any 12-month period.

Once a trust exceeds any of the threshold amounts, the trust would become registerable and remain registerable. For instance, were the value of a trust’s assets to be above £5,000 and then fall below this amount, then the trust would remain registerable.

From tax year 2024/25 a new tax rule will take trusts out of income tax where their income is less than £500, allowing more trusts to meet the first test. The Government similarly recognises that some settlors may attempt to create multiple trusts in order to meet the proposed de minimis criteria for registration above. To this end the Government proposes to put restrictions in place to prevent this from happening.

(The rule for income tax is set to be that where a settlor has created a number of trusts, the £500 limit will be proportionately reduced for accumulation & maintenance trusts and discretionary trusts by the total number of the current trusts to a minimum of £100. Interest in possession trusts, settlor-interested trusts, vulnerable beneficiary trusts, heritage maintenance trusts and certain pension schemes will not be taken into account.)

This consultation closes at 11:59pm on 9 June 2024.

In parallel with this consultation, HM Treasury is running a survey on the cost of compliance with the MLRs. The Treasury says that this will help it to understand better how regulated businesses comply with the regulations and to assess the impact of future changes to the MLRs. The Treasury is keen to receive responses from a wide range of regulated businesses, including large firms, SMEs and sole traders. You can see and respond to the survey at the Cost of compliance with the Money Laundering Regulations – survey for regulated businesses.

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