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Self-assessment taxpayers given more time

Late filing and late payment penalty waived for one month.

On 6 January, HMRC issued a press release stating that, for the second year in a row, it is waiving the late filing and late payment penalties for those who complete self-assessment tax returns, by one month. This is to give, those who file, extra time to complete their 2020/21 tax return and pay any tax due.

HMRC recognises the pressure faced due to the pandemic for taxpayers and their agents, however, is encouraging taxpayers to file and pay on time if they can. Figures show that, of the 12.2 million taxpayers who need to submit their tax return by 31 January 2022, almost 6.5 million have already done so.

The deadline to file and pay remains 31 January 2022. However, the penalty waivers mean that:

  • anyone who cannot file their return by the 31 January deadline will not receive a late filing penalty if they file online by 28 February;
  • anyone who cannot pay the tax owed by the 31 January deadline will not receive a late payment penalty if they pay their tax in full, or set up a Time to Pay arrangement, by 1 April.

Interestingly, that Christmas was a popular time to file with over 31,000 filing over the festive period, but New year proved to be even more popular, with 33,467 tax returns filed on New Year’s Eve and 14,231 tax returns filed on New Year’s Day.

The following is a useful summary of the self-assessment timeline:

  • 31 January – self-assessment deadline (filing and payment);
  • 1 February – interest accrues on any outstanding tax bills;
  • 28 February – last date to file any late online tax returns to avoid a late filing penalty;
  • 1 April – last date to pay any outstanding tax or make a Time to Pay arrangement, to avoid a late payment penalty;
  • 1 April – last date to set up a self-serve Time to Pay arrangement online.
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Sarah Walker, Financial Planning Week Tip: Putting protection at the forefront of financial planning

The foundation of all financial advice is built on protection. There is little sense in building a great wealth portfolio on shaky ground. The fuel that powers our ability to build up our investments is often reliant on our ability to generate an income. If the fuel runs out, the vehicle stops moving. Therefore, it is logical to ensure (or should that be insure?) that our client’s income continues to flow, even in the event of them being unable to continue working due to ill health, or as the result of an accident.

How well we cement our client’s ‘foundations’ is dependent on what protection is available to them. Appropriate advice obviously relies upon needs and risks being identified and discussed. However, it is also vital that an in-depth conversation about a client’s health is conducted at an early stage. There is no point in discussing a solution with a client, if the product in question would ultimately be unavailable to them, due to their medical history, or even that of their family.

Conducting detailed research before making a recommendation to a client is extremely important. It ensures that expectations are managed, and this can come in many forms:

  • The premium – will a loading be applied, and, if so, what will the final premium look like?
  • Exclusions – will any be applied to the final underwritten offer issued by the insurer? If so, they need to be discussed with the client before an application is made, to avoid any unwelcome surprises once the underwriting has been completed.
  • Declined applications – can lead to awkward conversations with a client. Adverse and unwelcome decisions can often be avoided if the fact finding and research process is thorough at the outset. In other words, by not applying for cover that was always going to be declined.

Protection isn’t complicated, but sometimes it can be. There are a lot of moving parts to stay on top of. Insurance providers regularly update their policies, particularly critical illness and income protection cover.

They also regularly update their underwriting policies – just because a particular insurer previously accepted someone with an above average BMI on standard terms, it doesn’t mean they are going to offer the same terms again.

Unless you advise and arrange protection on a very regular basis, it is easy for knowledge to slip. In our experience, many clients in the ‘wealth management space’ tend to be in their 50’s and 60’s where it’s unusual to find a client with a clean bill of health. We also find that due to their age and the sum assured required, medicals and GP reports are frequently requested. Helping a client navigate safely and efficiently through this process can also take a considerable amount of time and effort.

Broadly, we find that clients are all too ready to insure their lives and maybe even protect themselves against critical illness, but income protection often lags behind as it isn’t deemed to be a priority.

In a year when Swiss Re reported a 10% reduction in income protection policies sold, we all know that the risk of becoming too ill to work is greater than the risk of suffering a critical illness or even dying.

Yet so much is reliant upon income, such as our:

  • Lifestyle
  • Mortgage
  • Bills
  • Mental wellbeing.
  • Pension contributions.
  • Education
  • Bank of Mum and Dad.
  • Payment for health/household insurances.

Often the person who stays at home to raise the family can be completely overlooked. If that person had an accident or was too ill to be able to run the house, raise the children, cook the meals, taxi drive the children, then who would do it? And how would that be financed?

Why liquidate hard-earned savings and assets, or be forced to downsize, when they can all be protected by arranging a suitable policy whilst paying an affordable monthly premium?

What matters is your duty of care to your client and that protection is considered at the forefront of financial planning.  

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Chris Jones, Financial Planning Week tip: Making the most of pensions tax relief ahead of another Budget

As we approach another Budget there will no doubt be the usual speculation that pensions tax relief may come under attack. And with the latest HMRC statistics showing the estimated gross tax cost of pensions tax relief at £41.3bn in 2019/20, this may be too tempting for the Treasury to ignore.

Whilst wholesale changes to pension tax relief are unlikely in the short term, there may be some tinkering with allowances and reliefs. Any further changes are unlikely to make to make pension contributions more favourable. Therefore, where clients have the available funds and allowances, it may be better to make contributions sooner rather than later.

It’s worth a reminder of the limits and mechanics of the tax relief available on pension contributions to ensure clients can maximise the benefits of making any contributions.

Annual allowance

The annual allowance limits the tax benefits on the total contributions paid in a tax year. This will include contributions made by the individual, their employer, or a third party on behalf of the individual. The standard annual allowance is £40,000. High earners may have a lower tapered annual allowance, which can be as low as £4,000 and will depend on their level of earnings. Those who have accessed their pension benefits flexibly may be subject to the £4,000 money purchase annual allowance.

Where an individual exceeds their annual allowance in any tax year they are be able to carry forward any unused allowances from any of the three previous tax years.  

If, after allowing for any carry forward, the contributions exceed the individual’s annual allowance in any tax year, the individual will be subject to an annual allowance charge. The annual allowance charge aims to reclaim the tax relief received on the contribution. The excess over the annual allowance is added to the individual’s other taxable income and charged at their marginal rates of income tax. 

For example, if a higher rate taxpayer exceeds the annual allowance by £10,000 the annual allowance charge would be £4,000 assuming they remained within the higher rate band after adding the £10,000 to their other income.

Tax relief on personal contributions

Tax relievable personal contributions are limited to 100% of the individual’s relevant earnings in the tax year they are paid, which is broadly earnings from their employment or self-employment. Other types of income such as dividends or buy-to-let rental income do not count as relevant earnings. 

It is not possible to carry forward unused earnings from a previous year. If, for example, an individual has unused allowances of £90,000 and earnings of £30,000 the maximum tax relievable personal contribution is limited to £30,000.

Where an individual’s earnings are less than £3,600 they can pay and receive tax relief on contributions of up to £3,600 in any tax year. It is not possible to carry forward this allowance.

Tax relief is available on personal contributions at the individual’s highest marginal rates of tax. How the relief is applied depends on what type of scheme the contributions are paid into, either a “relief at source” scheme or “net pay scheme”. Aside from non-taxpayers (please see below), the tax relief available is the same whichever method is used.

Relief at source

Personal pensions and group personal pensions will operate as relief at source schemes. With these, the contributions are paid net of basic rate tax and the provider adds the tax relief. The provider then reclaims this directly from HMRC. Basic rate relief is added regardless of the tax rate the individual pays, even if they are non-taxpayer. Any higher rate or additional rate tax is reclaimed direct from HMRC by the individual. The relief is claimed by increasing the individual’s basic rate tax band by the gross value of the individual’s contribution.

Example

Paul earns £70,000 a year and wants to make a gross contribution of £10,000 to a relief at source scheme. He pays a contribution of £8,000 to the pension provider who add the 20% tax relief.

Paul’s basic rate tax band is then extended by £10,000. This means that £10,000 more of his income is taxable at 20% rather than 40% and so he benefits from a further £2,000 of tax relief.

Net pay schemes

Most occupational schemes operate on a “net pay” basis. With this type of scheme, the individual’s pension contributions are deducted from their pay before it is subject to tax. This means the full amount of tax relief is applied immediately by reducing the taxable pay. Note though that National Insurance contributions are still applied to the full pay before the deduction of the pension contribution.

Example

Fiona earns £80,000 a year. She pays personal contributions of £5,000 to her occupational pension scheme. The £5,000 is paid gross to the pension provider and her taxable income reduces to £75,000. The net cost to her of the £5,000 pension contribution is £3,000 so she has received 40% tax relief.

Note that because contributions simply reduce the level of taxable earnings, any non-taxpayer in a net pay scheme will not receive tax relief. This is an anomaly in the tax system and one the Government has been consulting on to resolve.

Salary sacrifice

With salary sacrifice, the employee reduces their salary in exchange for a pension contribution. Therefore, technically, the pension contribution is an employer contribution. For tax purposes it works in a similar way to a net pay scheme. However, the advantage of salary sacrifice is that it reduces the salary for all purposes, meaning that both the employer and employee also save the National Insurance on the amount sacrificed.

Tax relief on employer contributions

Employer contributions are always paid gross. As long as they are within the individual’s annual allowance there is no tax consequences on the employee. The employer can claim relief against corporation tax on the contributions as long as they meet what are known as the “wholly and exclusively” rules. Essentially this means that in order to benefit from tax relief, any contributions must be a genuine expense in the running of the business. In a normal employer/employee relationship this is unlikely to be an issue as there would usually be a genuine commercial reason for paying employer pension contributions as part of the employee’s reward structure.  

For small owner managed limited companies it can also be an extremely tax efficient way of extracting funds from the company. Again, meeting the “wholly and exclusively” condition in this type of situation is rarely a problem where the owner/director is taking on the business risks (e.g. as a shareholding director) of the company. However, issues can arise where contributions do not represent the fair market reward for a role – if, for example, a large contribution is made for the spouse of a director who has minimal duties (and that spouse is not is taking on the business risks of the company) and a pension contribution of that size would not normally be made for other employees who have similarly minimal duties.

Unlike personal contributions, employer contributions are not limited to the level of the individual’s earnings. So, for example, a director earning £10,000 could also receive an employer pension contribution of £40,000. The company will receive corporation tax relief on the contribution as long as it meets the “wholly and exclusively” rules.

Lifetime allowance

In addition to the limits on pension contributions, the lifetime allowance (LTA) sets a limit on the overall benefits that an individual can receive from all of their pension plans without suffering an additional tax charge. The LTA is currently £1,073,100 and is frozen at this level until 2025/26. Where an individual takes benefits in excess of this, or dies or reaches age 75 without taking their benefits, an LTA charge applies on the excess. The LTA charge is 55% if benefits are taken as a lump sum or 25% if the funds are used to provide an income. Any income is also subject to income tax at the point it is taken.

Where uncrystallised funds or funds in drawdown are subject to an LTA test at age 75 the tax charge on any excess is always at 25%.

With the LTA currently frozen, more and more clients are likely to be impacted by the limit and charges. This limit also needs to be considered for clients considering making further contributions.

Earlier in the year there were rumours that this limit may be reduced further, and this is one to watch out for in the Budget. The only positive news is that whenever the LTA has been reduced in the past, protection has been available to allow clients to protect the LTA at the current levels.

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Investment Bonds in Wealth Accumulation

The tax efficiencies of investment bonds in wealth accumulation.

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Reminding you of the potential tax efficiency of investment bonds

Investment bonds for tax efficiency beyond the tax “no brainers”.

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Minimising tax to maximise investment return

Smart wrapper choice incorporating and beyond the “tax no brainers”.

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Saw this and thought of you

The importance of regular, focussed, personal communication in building and developing relationships and “referability”.

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Treasury responses to the OTS reports on CGT and IHT

A period of stability in store for CGT and IHT : No material changes emerging from the OTS reports.

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The drivers for tax change in the UK

Political and financial drivers underneath tax changes announced in 2021.

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Tax change in the USA

New tax surcharge on Billionaires proposed in the USA.

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Capital Tax Reform

With no reform of CGT or IHT announced in the Autumn Budget, what is the likelihood of future reform now?

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