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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.

ISAs and CTFs – an update from HMRC

This newsletter has been published by HMRC to update stakeholders on the latest news for Individual Savings Account (ISA) managers and Child Trust Fund (CTF) providers. It includes articles on:

  • additional permitted subscriptions;
  • National Insurance numbers;
  • Repair of an ISA account where the overall subscription has exceeded the legislative limit;
  • Partial transfers of current year subscriptions;
  • European Economic Area (EEA) Undertakings for Collective Investment in Transferable Securities (UCITS) and the Overseas Funds Regime (OFR); and
  • Extended period for issuing tax calculation (P800) letters.

Key areas of interest:

Additional permitted subscriptions

Since April 2015, spouses or civil partners of deceased ISA savers have been eligible for an additional ISA allowance, the Additional Permitted Subscription (APS), for deaths on or after 3 December 2014. For deaths on or before 5 April 2018, the allowance transferred to the surviving spouse/civil partner was equal to the value of the ISA on the date of death. However, for deaths on or after 6 April 2018, the APS can be either the value of the deceased’s ISA at their date of death or the point the ISA ceased to be a ‘continuing account of a deceased investor’, whichever is higher. For more information on this, please see Death of an ISA investor.

HMRC’s latest update says that, where an APS allowance based on the value at date of death was transferred but not used, and the continuing account of the deceased investor was not closed, there may be a higher additional permitted subscription allowance to which the spouse or civil partner is entitled when the estate is finalised. 

The transferring manager will be unaware if there has been an APS with the receiving manager. Similarly, the receiving manager will be unaware if there has been an increase in value when the estate is finalised.

There is no expectation from HMRC that the receiving manager will request a second APS value from the transferring manager, unless instructed to do so by the investor. Similarly, there is no expectation that the transferring manager will provide a second APS value to the receiving manager unless it has been requested by the investor or the receiving manager.

National Insurance number

Broadly, an individual will have, or is eligible to apply for, a National Insurance number if they are over the age of 16 and:

  • are planning to (and have the right to) work and have a UK National Insurance liability;
  • are claiming benefits;
  • applied for a student loan;
  • is paying Class 3 voluntary National Insurance contributions.

The Model Application Form is due to be updated. ISA managers are reminded the model form is an example only, and exact replication is not mandatory providing all the regulatory obligations are met. If the investor is eligible and does have their National Insurance number, the form will allow them to confirm this and provide the information. The form will also provide the relevant link where the investor can check if they are eligible for a National Insurance number. If the investor is eligible and does not yet have a National Insurance number, the form will allow them to confirm eligibility and direct them to where to apply for their National Insurance number. If the investor is not eligible for a National Insurance number, they can confirm this and continue to open an ISA providing other required conditions are met. The form will be amended to read: 

‘Please click on this link Apply for a National Insurance Number for information on National Insurance number which includes a section on who can apply.’

From 6 April 2025, managers can no longer accept an ISA application with a missing or dummy National Insurance number for new accounts. There is no change to the guidance for provisionally opening an ISA where all the required information is not provided straight away.

Repair of an ISA account where the overall subscription has exceeded the legislative limit

Previous year subscriptions

HMRC says that it has updated its guidance for invalid ISA accounts where the investor has exceeded the overall subscription limit in previous years. This is effective on all repair action taken from 6 December 2024. Only invalid investments in a repairable ISA will lose their tax exemption. This will be from the date of the first invalid subscription up to the date of repair (and could include current year investments). These dates are specified in a notice of discovery from HMRC to the ISA manager and the valid investments in a repaired ISA account may keep their tax exemption. Subscriptions to a repaired ISA for years other than that covered by the notice of discovery are not affected by that notice.

Current year subscriptions

If an ISA manager knows the investor has exceeded the subscription limit with the information they hold, they can void the invalid subscriptions. If the ISA manager is informed by the investor about the oversubscriptions, (for example, they’ve subscribed to accounts elsewhere) ISA managers should keep records. HMRC says that a phone call is acceptable if a record of the call is held.

European Economic Area (EEA) Undertakings for Collective Investment in Transferable Securities (UCITS) and the Overseas Funds Regime (OFR)

HMRC says that it is currently discussing with Financial Conduct Authority (FCA) the timetable for transitioning to OFR and the implications for funds which do not apply for OFR recognition. The outcome of those discussions will inform future newsletters. In the interim, managers should take no action regarding funds where OFR recognition had not been sought or has been denied.

Extended period for issuing tax calculation (P800) letters

In relation to non-ISA accounts, HMRC is reminding people that, due to higher than expected volumes, some individuals may have to wait until the new year to receive their P800s. This includes those who think they may have additional tax to pay on savings for the year ending 5 April 2024.

This is slightly longer than in previous years, where HMRC has aimed to complete most end-of-year PAYE reconciliations by the end of November. HMRC says that this process will be complete by the end of March 2025 and PAYE taxpayers are kindly asked not to chase until after that point. GOV.UK guidance is being updated to this effect. Please also see how to contact HMRC regarding income tax enquiries and our earlier Bulletin.

This is an example of one of the recent news bulletins that was posted on our Techlink website.  Signing up to Techlink will give you access to original articles, like this, on a daily basis.  Techlink also provides you with a comprehensive (and searchable) library of information, daily bulletins on developments of relevance to the industry, multimedia learning and professional development tools. Techlink can also be your ‘gateway’ for accessing consultancy through our ‘ASK’ service which enables you to receive responses to your technical questions from our highly trained technical consultants.

You can sign up for a free 30 day trial of Techlink at anytime.  For more information go to www.techlink.co.uk.

Salary sacrifice traps highlighted by a recent tax case

A recent First-tier Tribunal (FTT) case in which the employer company failed to show reasonable care.

A salary sacrifice / exchange happens when an employee gives up the right to part of the cash remuneration due under their contract of employment. Usually, the sacrifice is made in return for the employer’s agreement to provide the employee with some form of non-cash benefit, i.e. a pension contribution. The sacrifice is achieved by varying the employee’s terms and conditions of employment relating to remuneration. Please see Salary sacrifice and pension contributions.

From 6 April 2017, the income tax and national insurance contributions (NICs) advantages where benefits in kind are provided through salary sacrifice arrangements (described in the Finance Act 2017 as “optional remuneration arrangements”) are largely withdrawn, apart from for certain exceptions, such as for pension contributions. Guidance on the changes from 6 April 2017 starts at EIM44000.

The FTT case of The Best Connection Group (TBC) Ltd v HMRC concerned two travel and subsistence payment arrangement schemes for its employees, both via salary sacrifice. The scheme in question was the BestPay Salary Sacrifice scheme (or the “BSS”). It was made available to the company’s temporary employees whose salaries generally exceeded the National Minimum Wage (NMW) by £1. This category of employees comprised HGV drivers and skilled industrial workers.

Over the period 2006 to 2009, the company had become aware that a number of its competitors had implemented salary sacrifice schemes for dealing with the travel and subsistence expenses of their employees and was concerned that it was falling behind the market in not offering the same facility to its employees. Accordingly, it sought advice from Aspire Business Partnership LLP on how to implement its own scheme of that nature. Mr Andrew Sweeney was the Chief Executive and a part owner of the company. He was in charge of finance at the company at all times relevant to the appeals and was responsible for liaising with the company’s advisers in relation to the creation and continuing operation of the BSS.

The dispute between the parties concerned the appropriate income tax and NICs treatment of three different categories of payment which were made by the employer company to employees participating in the BSS over the four tax years ending 5 April 2013 to 5 April 2016 (both inclusive), namely:

(1) payments in respect of mileage undertaken by the participants in going to and from their temporary places of work by car, motorcycle or bicycle;

(2) payments in respect of expenses incurred by the participants in going to and from their temporary places of work by public transport; and

(3) payments in respect of expenses incurred by the participants on food and drink while they were away from home in the course of their employment.

The employer company considered that it did not have to account for income tax or NICs on any of the above payments because, in the case of the payments in respect of mileage, the payments were exempt and because, in the case of the other two categories of payments, the payments fell within the terms of a dispensation that was given to the employer company by HMRC and which covered those payments.

The employer company believed that, in consequence of the above, and the fact that each participant gave up part of their salary in return for the relevant payment:

(1) the relevant participant was better off because:

(a) in contrast to the receipt of salary, no deduction of income tax or employee NICs was required in respect of the relevant payment; and

(b) there was no need for the relevant participant to claim a deduction for the expenses in question in his or her tax return; and

(2) The employer company was better off because, in contrast to paying salary, it did not have to account for employer NICs in respect of the relevant payment.

HMRC did not agree and said that the employer company should have accounted for income tax and NICs on all of the payments.

In addition to the above, the employer company argued that, without prejudice to its submissions on the tax implications of the payments, even if HMRC were found to be correct in their analysis of those tax implications, that it took reasonable care to comply with its obligations to account for income tax in respect of the payments and its failure to do so was due to an error made in good faith. However, HMRC did not agree and argued that the company did not take reasonable care to comply with its obligations to account for income tax in respect of the payments.

HMRC argued that the company had failed to show reasonable care in two respects as follows:

(1) first, it had failed to operate the BSS in the manner that the scheme had been explained to HMRC in applying for the dispensation; and

(2) secondly, in any event, the scheme as operated did not ensure that participants received payments under the scheme only if they had actually incurred mileage or subsistence expenses or public transport expenses. Mr Sweeney, the company’s Chief Executive, had known of this at the time, as he had admitted in giving his evidence. Moreover, he had allowed the scheme to proceed on that flawed basis despite knowing of the importance to HMRC of compliance in relation to payments in respect of expenses.

The FTT considered whether:

  • the provision relating to the salary sacrifice was a valid contractual term despite the fact that some matters of detail were not spelled out – and it decided that it was;
  • the payments in question were “round sum allowances” by virtue of there being an insufficient causal link between the expenses in question and the making of the payments – and it decided yes, in relation to the payments in respect of subsistence and no, in relation to the payments in respect of travel;
  • based on the evidence, it was possible to conclude on the balance of probabilities that all or a specified percentage of the payments in any category related to mileage or expenses that had actually been incurred – and it decided that there was insufficient evidence to reach that conclusion and, instead, the onus was on the employer company to show in the case of any particular payment that the relevant payment met that description;
  • the payments in respect of subsistence or public transport were covered by the dispensation given by HMRC – and it decided no, because they fell outside the terms of the dispensation;
  • the employer company was entitled to a direction [under Regulation 72 of the PAYE Regulations] that it was not liable to pay the income tax on the basis that it had exercised reasonable care to comply with the PAYE Regulations and its failure to account for income tax was due to an error made in good faith – and it decided no, because the employer company had not exercised reasonable care.

The FTT decided that the Mr Sweeney did take reasonable care to comply with the PAYE Regulations insofar as he:

(1) took comfort from the fact that other employers operated travel schemes involving salary sacrifice; and

(2) relied on Aspire, as experts in the area, to create a scheme that would be lawful and tax effective.

However, in the FTT’s view, Mr Sweeney did not take reasonable care to comply with the PAYE Regulations when he:

(1) did not ask to see a copy of the opinion of leading tax counsel on the tax–effectiveness of the scheme. Although he was relying on Aspire as the relevant experts, it was incumbent on him to read the legal advice on which Aspire said it was relying;

(2) took comfort from the fact that neither BDO nor KPMG had raised issues in relation to the BSS in the course of their audits. This is because those firms had not been asked for their advice in relation to the scheme and therefore their failure to raise issues hardly amounted to a compelling endorsement of the scheme;

(3) apparently did not enquire why the way in which the BSS was set up – with a system of declaration on first registration and then subsequent notification and audit – differed from the system used by Aspire’s other clients;

(4) did not notice that the second stage in the process of dealing with HMRC in relation to the scheme, as outlined in the Aspire letter of engagement, was meant to be obtaining a clearance in relation to the scheme from HMRC and that that clearance had not been sought or obtained; and

(5) did not ensure that the scheme was operated in accordance with what was said to HMRC in the correspondence leading to the issue of the dispensation, particularly given that he was aware of the importance to HMRC of compliance in connection with expenses payments.

The judgement is 82 pages long, and the case has still not been fully resolved. However, there are few key points for employers to consider:

  • The payment and deduction arrangement in this case was quite complicated and the employer failed to deduct the correct amount of tax and NICs and pay this over to HMRC. Employers should check that the contractual arrangement is replicated correctly in their payroll software.
  • Once the contractual arrangements are in place and payroll software effects this when the employee is paid, the employer is legislatively required to take ‘reasonable care’, i.e. operationally, do all they can to collect the statutory deductions and pay these over to HMRC. In this regard, the term reasonable care is wide and open to interpretation. Yet it is important, as an employer who takes reasonable care is then able to say that they have a reasonable excuse for any non-compliance that may result. 
  • In this case, the employer was judged not have to have taken reasonable care in the operation of their scheme and the ruling pointed to the payroll system set-up as being one of the reasons. This highlights why, all processes need to work effectively together across HR and payroll software. Although, of course, software is often only as good as the information that is entered.
  • Finally, an effective audit process did not appear to be in place at this company. The first audit did not take place until 18 months after the scheme was introduced and the auditors had not been asked for their advice in relation to the scheme. An effective audit process should help an employer to understand if they are operating in accordance with the law.

This is an example of one of the recent news bulletins that was posted on our Techlink website.  Signing up to Techlink will give you access to original articles, like this, on a daily basis.  Techlink also provides you with a comprehensive (and searchable) library of information, daily bulletins on developments of relevance to the industry, multimedia learning and professional development tools. Techlink can also be your ‘gateway’ for accessing consultancy through our ‘ASK’ service which enables you to receive responses to your technical questions from our highly trained technical consultants.

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A view of the markets since the start of 2020

A five-year view, which shows the dominance of the US stock market since the start of the decade.

 31/12/201931/12/2024Five-year change
FTSE 1007542.448173.028.36%
FTSE 25021883.4220622.61-5.76%
FTSE 350 Higher Yield3653.23799.734.01%
FTSE 350 Lower Yield4512.454784.066.02%
FTSE All-Share4196.474467.806.47%
S&P 5003230.785881.6382.05%
Euro Stoxx 50 (€)3745.154895.9830.73%
Nikkei 22523656.5239894.5468.64%
Shanghai Composite3050.123351.769.89%
MSCI Em Markets (£)1574.2911606.6972.06%
UK Bank base rate0.75%4.75% 
US Fed funds rate1.5%-1.75%4.25%-4.50% 
ECB deposit rate-0.50%3.00% 
Two-yr UK Gilt yield0.65%4.37% 
Ten-yr UK Gilt yield0.76%4.57% 
Two-yr US T-bond yield1.59%4.24% 
Ten-yr US T-bond yield1.92%4.57% 
Two-yr German Bund Yield-0.64%2.08% 
Ten-yr German Bund Yield-0.19%2.36% 
£/$1.32471.2524-5.46%
£/€1.18021.20952.48%
£/¥143.9671196.826436.72%
Brent Crude ($)66.0274.6513.07%
Gold ($)1519.52609.171.71%
Iron Ore ($)92100.739.49%
Copper ($)61568811.543.14%

We recently issued a Bulletin headlined with the perhaps surprising fact that the FTSE 100 had just achieved its fourth successive calendar year of growth. That set us pondering what global investment performance would look like from the viewpoint of the start of the decade, which we will take – perhaps controversially – to be where the markets started 2020. The table above provides one answer, while the graph below offers a more limited but quicker to grasp view:

The table and graph highlight several factors:

  • Interest rates, whether dictated by the central banks or measured by Government bonds, have increased significantly across the half decade. The start of the period was very much the closing era of ZIRP (zero interest rate policy). The 0%ish world survived until 2022, at which point Covid related inflation prompted central banks into action.
  • The US stock market (orange line) is the standout performer. A significant slice of this is down to the Magnificent Seven, as discussed in our earlier Bulletin. Even so, the equal weighted S&P 500 was up 51.4% over the period.
  • The second place (grey line), for Japan’s Nikkei 225 hides the miserable performance of the Yen in the 2020s. Against the mighty US Dollar the Yen fell by almost 31% from the start of 2020, meaning that, in US Dollar terms, the Nikkei 225 rose just 16.6% across the five years.
  • Sterling and the Euro both also fell against the US Dollar, by 5.5% and 7.7% respectively. In US Dollar terms, that meant the Footsie was up 2.4% over the five years although, as we remarked in our earlier Bulletin, higher UK dividend yields would narrow the total return gap to a small degree.
  • The MSCI ACWI, a global equity index, rose by 57.5% over the five years in Sterling terms (48.9% in US Dollar terms). Unsurprisingly, a good slice of that was due to US equities.
  • Gold was a strong performer, mostly in the second half of the period. However, it was overshadowed by the price of its supposed digital counterpart, Bitcoin, which rose by just over 1,200%.

Comment

The first half of the 2020s has belonged to the US stock market and US currency. Can that momentum can continue for the next five years or does reversion to mean bite at some stage?

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Deathbed destruction of a will

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 and the Budget

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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ISAs and fractional shares – an update

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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Pension tax relief – ideas for reform

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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IHT interest rates – latest update

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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State Pension underpayments – latest progress on cases reviewed

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 updates taxpayer numbers

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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