Personal Finance Society news update from 12 August 2015 - 25
August 2015 on taxation, retirement planning, and investments.
Taxation and Trusts
Lower rate of inheritance tax has slow start
(AF1, RO3, JO2)
Latest statistics from HMRC show that the number of estates
where 10% or more of the net chargeable estate passes to charity is
low compared to the number of estates chargeable to inheritance
The reduced rate of inheritance tax at 36% applies where 10% or
more of the net chargeable estate is left to charity. This reduced
rate has applied since 6 April 2012 and, although the rules are
somewhat complex, there is the potential to make tax savings where
an individual wishes or is willing to leave part of their estate to
charity. Furthermore, saving IHT in this way provides a legitimate
means of planning which is worth considering.
As a brief reminder, let's assume Frederick has a net chargeable
estate of £500,000. Under the terms of his will he leaves his
entire estate equally to his two adult nephews. In this case,
inheritance tax will be payable on the whole amount at 40%, i.e
£500,000 @ 40% = £200,000. His nephews will therefore benefit from
Had Frederick decided to leave 10% (i.e £50,000) of his net
chargeable estate to charity to take advantage of the reduced rate
of inheritance tax on his estate, inheritance tax would have been
payable at 36% based on £450,000 (i.e £500,000 - £50,000). This
amounts to £162,000.
While this means that the estate available to the nephews
reduces by £12,000 to £288,000 (£450,000 - £162,000), Frederick's
estate benefits from a significant inheritance tax saving of
HMRC statistics show that of the 16,412 cases
which were chargeable to inheritance tax in 2012/13 only 1,558
(about 9.5%) benefited from the reduced rate of 36% where more than
10% of their value was left to charity - 2012/2013 being the first
tax year in which the lower rate of 36% was introduced. While this
resulted in an inheritance tax saving of £27 million, it is a small
fraction compared with the total inheritance tax payable of £3,501
As can be seen from the above, advisers should take the
opportunity to remind clients that by leaving 10% or more of their
net chargeable estate to charity, the estate will suffer a reduced
rate of inheritance tax on their subsequent death. Financial
advisers will need to bear in mind the reduced rate in calculating
the potential inheritance tax liability on somebody's taxable
estate for life cover purposes.
The residence nil rate band - The main points
(AF1, RO3, JO2)
The residence nil rate band was announced in the Summer Finance Bill 2015. This article gives
an overview of the rules.
A new dedicated "residence nil rate band" (RNRB),
in addition to the existing £325,000 standard nil rate band, will
be introduced from April 2017 specifically to protect the family
home from inheritance tax. Salient features of the new nil
rate band are as follows:-
- It will be phased in gradually between 6 April 2017 and 6 April
2020 on the following basis:
- £100,000 for the tax year 2017/18
- £125,000 for the tax year 2018/19
- £150,000 for the tax year 2019/20
- £175,000 for the tax year 2020/21 and will increase in line
with the CPI in subsequent years.
- The RNRB can be offset against the value of property which at
some point has been occupied as the family home. The RNRB
will be available when an owner dies on or after 6 April 2017 and
the family home is transferred on death to the direct descendants
of the deceased. A direct descendant is a child (including
step-child, adopted child or foster child) and grandchildren.
- The transfer must be on death and can be made by will, under
intestacy or as a result of the rule of survivorship.
- In general, the transfer must be outright but certain other
transfers on death into trust are permitted, eg
- transfers into bare trusts
- transfers into IPDI trusts and
- transfers into 18-25 trusts and trusts for bereaved minors
- Special rules will be introduced to protect those who
downsize. How this will work in practice will be subject to
- Where the value of the deceased's estate (after deducting
liabilities but before reliefs and exemptions) exceeds £2 million
then, broadly, the RNRB will be reduced by £1 for every £2 excess
value. This means, for example, that by 2020/21 there will be
no RNRB available on first death if the net value of the deceased's
estate exceeds £2.35 million. This figure will be £2.7
million on the death of a surviving spouse when a full RNRB is
available to the surviving spouse (see below).
- The £2 million threshold and the RNRB are due to increase in
line with the CPI from 6 April 2021.
- Where death occurs after 5 April 2017, the deceased's RNRB will
be set off against any chargeable transfers of a family home before
the set off against the standard nil rate band.
- Any RNRB that is not used on first death can be transferred to
a surviving spouse or civil partner. This is the case regardless of
whether the deceased could have used his/her RNRB or not. The
amount unused (expressed as a percentage of the amount available)
will be applied to uplift the survivor's RNRB entitlement on second
- H dies in 2020/21 and leaves their family home valued at
£87,500 to children; balance to spouse
- £87,500 of £175,000 RNRB set off against transfer
- Extra 50% RNRB to widow for possible set off on her subsequent
- Full standard NRB and transferable standard NRB also
- Where the first death occurredbefore 6 April 2017(i.e. before
the RNRB actually existed);both the amount available for carry
forward and the RNRB at the time of first death are deemed to be
£100,000, thereby ensuring that in these circumstances the
residence nil-rate band is always increased by 100% on second death
unless the estate of the first to die exceeded the taper threshold
(see below). This is the case regardless of whether or not the
estate of the first to die included a qualifying residential
interest and irrespective of what dispositions occurred on their
- When the first to die dies with an estate of more than £2
million, entitlement to the RNRB is tapered away at the rate of £1
for every £2 of excess value. This applies on the first or
second death and regardless of whether first death occurred before
6 or after 5 April 2017.
- H dies in 2021/22 with an estate valued at £2.2 million
- Leaves all estate (including an interest in the family home to
- RNRB on first death is reduced by £100,000 (4/7) or 57.2%
- Transferable RNRB is 42.8%
- On subsequent death of spouse with an estate of £1.5m, that
spouse can use all standard NRB, 100% transferable NRB, full RNRB
and 42.8% transferable RNRB
- If both deaths occur before 6 April 2017, no RNRB is available
to offset against the deceased's estate.
- If first death occurs before 6 April 2017, RNRB is available
for transfer if the subsequent death occurs after 5 April
Judicial review of Partnership Payment
A challenge by way of judicial review to Partnership Payment
Notices (PPNs) issued by HMRC requiring "accelerated payment" of
tax pending the outcome of a tax dispute has failed. (Nigel
Rowe and Others v HMRC  EWHC 2293 (Admin).
A judicial review took place following an application on behalf
of investors in three partnerships, Ingenious Film Partners 1 and 2
and Ingenious Games. The notices for payment issued in these
cases were PPNs (Partnership Payment Notices) - basically similar
to Accelerated Payment Notices (APNs) issued to individuals.
It was argued on behalf of the taxpayers that the PPNs were
unreasonable and illegal; and that they undermined the claimant's
"legitimate expectations" not to pay tax on the arrangements in
question in the event of a dispute until the outcome of a Tribunal
hearing and any subsequent appeal that may subsequently take
The firm representing the taxpayers said that the individuals
had claimed that the notices were not issued lawfully because
"despite the statutory language, no real discretion had been
exercised by HMRC, who had adopted an industrialised process for
issuing notices - based on "when" not "whether"
The individuals had argued that in issuing the notices, "HMRC
gave no consideration to relevant circumstances - such as the fact
that the legislation was designed to address situations where HMRC
had no pre-existing power to hold onto cash pending the outcome of
the tax dispute - which was not the case here where HMRC checked
the claims over 10 years ago and could have refused to repay them
at the time pending further investigations, but chose instead to
As stated above, the individuals also argued that the notices
were given in breach of their legitimate expectation that they
would not have to pay any tax in dispute until after the First-tier
Tribunal had decided all relevant issues. Considering the
substantive issues, the case is in the course of being considered
in the First-tier Tribunal. This reminds us of the important
point that the issue of an APN or PPN is nothing to do with the tax
effectiveness or otherwise of the arrangement under dispute.
The APN/PPN merely requires the payment of tax in advance pending
the outcome of the proceedings.
In the Tribunal the judge ruled that the PPNs were "lawfully
issued" and that "the principles of natural justice have been
adhered to by the statutory scheme and by HMRC in exercise of the
discretion conferred by FA 2014".
The judge also dismissed claims that the issue of the notices
involved an unlawful interference with property rights under
Article 1 of the First Protocol and was in breach of Article 6 of
the Convention for the Protection of Human Rights because it
involved the retrospective imposition of a payment obligation the
claimants could not have predicted when they joined the
HMRC was, understandably, delighted with the outcome. It
apparently wins 80% of all avoidance cases that go to
litigation. This, together with the intensive publicity and
"naming and shaming" linked to aggressive tax avoidance carried out
by both individuals and corporates, means that the market for
aggressive schemes is rapidly disappearing.
As well as the continued bringing forward of new targeted
anti-avoidance legislation there is also the proposed further
extension of the disclosure of tax avoidance schemes (DOTAS)
hallmarks to catch a wider number of arrangements. IHT is a
new area of focus in this respect. Having a DOTAS reference
number is, of course, one of the key triggers for the issuing of an
APN so 'widening the base' (so to speak) makes absolute sense as
far as HMRC is concerned.
Apparently in 2014/15 more than 10,000 APNs were issued relating
to tax of £1.7bn. HMRC expect to issue a further
(approximately) 50,000 APNs in the current year. When an APN
(or PPN) is issued then payment has to be made within 90 days.
Of course, the normal appeals process is available in relation
to the assessment itself but, in the meantime, if you receive an
APN in relation to the transaction(s) that is the subject of the
assessment, you have to pay that tax up front as a kind of
HMRC's view in introducing the APN and PPN provisions is that
the tax in dispute, in the meantime, for schemes for which an APN
can be issued (broadly when there's an open enquiry and a DOTAS
reference number for the scheme exists, the arrangement is subject
to a General Anti-Abuse Rule counteraction notice or a follower
notice has been issued) should be 'resting' with HMRC rather than
HMRC, like many other businesses, appears to well recognise that
'cash flow is king'.
Self-assessment - Paid too much or too little tax?
(AF1, AF2, RO3)
HMRC is simplifying the process for those who have paid too much
or too little tax.
Taxpayers will be sent their P800 tax calculation between now
and October 2015 - this should be checked against the records the
taxpayers hold, for example, against their P60, P11D, bank
statements etc… It is also possible to check whether the correct
amount of tax has been paid through HMRC's
Taxpayers need only contact HMRC if there is a discrepancy in
If the computation appears to be correct no action need be
taken. In cases where too much tax has been paid, the taxpayer will
receive a cheque within 14 days of receiving the P800. If too
little tax has been paid, this will normally be collected by
adjusting the taxpayer's tax code for the following year. HMRC will
notify the taxpayer informing them of how any underpayment will be
Simplifying the process will no doubt be a welcome change for
taxpayers. However, advisers should encourage taxpayers to check
their P800 tax calculation to ensure they have paid the right
amount of tax - especially since they could be faced with penalties
if the correct amount of tax is not paid on time
HMRC has issued a dividend allowance factsheet
(AF1, AF2, RO3)
On 17 August HMRC issued a 'Dividend Allowance Factsheet'. Despite half a
dozen examples, it is not that informative. One point of
note, which is not spelt out in the Factsheet, is that the dividend
allowance isnotan allowance, but rather a specific nil rate band
for dividends (similar in some respects to the starting rate band
for savings income).
The non-allowance factor explains the slightly
puzzling comment in the Factsheet that "Dividends within your
allowance will still count towards your basic or higher rate bands
and may therefore affect the rate of tax that you pay on dividends
you receive in excess of the £5,000 allowance". The effect of this
is shown in the last of the half dozen examples in the Factsheet
which is reproduced below and based on 2016/17 tax allowances and
"I have a non-dividend income of £40,000, and
receive dividends of £9,000 outside of an ISA"
Of the £40,000 non-dividend income, £11,000 is
covered by the Personal Allowance, leaving £29,000 to be taxed at
This leaves £3,000 of income that can be earned
within the basic rate limit before the higher rate threshold is
crossed. The Dividend Allowance covers this £3,000 first, leaving
£2,000 of Allowance to use in the higher rate band. All of this
£5,000 dividend income is therefore covered by the Allowance and is
not subject to tax.
The remaining £4,000 of dividends are all taxed
at higher rate (32.5%)."
Had the dividend allowance been a genuine
allowance then the £4,000 excess of dividends would have been
subject to 7.5% (basic) on £3,000 and 32.5% (higher rate) on the
The news that the allowance is not an allowance reduces its
benefit marginally, as the example shows. It will also mean that
for life policy chargeable event gains and capital gains tax
calculations, thefulldividend income still needs to be taken into
account as both types of gain sit above dividends for tax
A reminder of the conditions to be satisfied for FNs, APNs and
PPNs to be issued
The recent judicial review - see earlier - challenging the issue
of Partnership Payment Notices in relation to some film schemes
prompted us to remind you of the basic conditions to be satisfied
for Follower Notices (FNs), Accelerated Payment Notices (APN) and
Partnership Payment Notices (PPNs) to be issued.
Follower Notices can be sent by HMRC to any taxpayer that has
entered into a "tax arrangement" which a Court has previously
decided does not achieve the tax advantage sought in a judicial
ruling which is final.
The notice requires the taxpayer to take "corrective action"
within a specific timeframe or potentially face a penalty.
Corrective action involves the taxpayer either amending their
return or claim to account for the failed tax advantage or, if a
tax appeal is ongoing, entering into a written agreement with HMRC
under which the taxpayer agrees to pay the tax and not to continue
with the tax appeal.
A Follower Noticemay only be issued if all of the following
conditions are satisfied:
- there is an open tax enquiry into the taxpayer's return or
claim, or the taxpayer has made a tax appeal which has not yet been
determined or disposed of;
- the taxpayer has gained a tax advantage by using a tax
- HMRC is of the opinion that there is a judicial ruling which is
relevant to the taxpayer's return/claim or their tax appeal;
- no previous Follower Notice has been given in respect of the
same tax arrangements and tax advantage (which has not been
- less than 12 months has passed since the relevant judicial
ruling (or 24 months following 17 July 2014 if the judicial ruling
predates 17 July 2014) or less than 12 months has passed since HMRC
received the taxpayer's return or claim (whichever is later).
A taxpayer who receives a Follower Notice may make written
representations to HMRC within 90 days if they wish to challenge
the issue of the FN and ask HMRC to withdraw it. Since most
of the conditions for issuing the FN are procedural, a challenge
will generally be made on the basis that the judicial ruling relied
upon in the notice is not relevant.
If HMRC confirms that the FN was validly issued, there is no
right for the taxpayer to appeal to an independent body. The
taxpayer would then have the following choices:
- to take the corrective action described above within 30 days of
receiving HMRC's decision on the representations made;
- to proceed with the tax dispute and potentially incur a
penalty. The taxpayer should consider appealing the
penalty. It should be noted that even if the penalty appeal
is successful, the FN itself will remain in force; or
- the taxpayer can also seek a judicial review of the
reasonableness of HMRC's decision to issue the Follower Notice and
ask for it to be withdrawn. However, success in an action for
judicial review requires the taxpayer to show that there was no
reasonable basis upon which HMRC could have decided to issue the
FN. It will, in most circumstances, generally be easier to
appeal the penalty than the Follower Notice.
Accelerated Payment Notices require the taxpayer to pay
any tax in dispute to HMRC on account in advance of the conclusion
of their tax enquiry or tax appeal.
An Accelerated Payment Notice may be issued if tax is being
disputed (ie there is an open enquiry or appeal in process)
- a Follower Notice has been issued;
- the arrangements have been notified to HMRC under the
Disclosure of Tax Avoidance Schemes (DOTAS) rules (note that HMRC
has published the DOTAS numbers of those schemes to which it
intends to issue these notices which will be under continual
- the arrangements are the subject of a General Anti-Abuse Rule
(GAAR) counteraction notice.
A taxpayer may potentially receive one of these notices while it
is still in the process of disputing the Follower Notice in respect
of which it is issued.
The taxpayer has 90 days to make representations to HMRC if it
believes the APN is not valid. However, there is no appeal
procedure once HMRC has confirmed the validity of the notice.
This leaves a judicial review into HMRC's decision to issue the APN
as the only potential remedy and, since the threshold for judicial
review is high, such a challenge is likely to be rare.
Making representations will delay the imposition of the payment
as HMRC needs to consider the representations before confirming or
revoking its decision. Once the taxpayer has received HMRC's
final decision they have a further 30 days to pay the disputed tax
on account to HMRC.
Once the issue of an APN has been confirmed by HMRC, the
taxpayer has no option but to pay the disputed tax to HMRC on
account by the date specified above. If the taxpayer does not
make the payment by the due date it will incur a penalty of 5 per
cent of the disputed amount and, if the sum remains unpaid at 5 and
11 months following the due date, additional penalties of the same
amount will arise on each of those occasions.
It is the APN that has had greatest prominence in the press
through their issue to many well-known public figures in relation
to their involvement in tax reducing and avoiding schemes,
including those purporting to generate tax losses or tax savings
through film schemes.
Partnership Payment Noticesare issued to partnerships and are
basically similar to APNs issued to individuals.
The Follower Notice rules are modified specifically for
partnerships to reflect that:
- partnerships typically have a representative member that will
act on behalf of the partnership as a whole;
- the tax arrangements in dispute may be both at the partnership
level (for example, whether the partnership is carrying on a trade)
and the individual partner level (for example, whether interest is
deductible on a loan to acquire a partnership interest) and FNs and
APNs can be issued accordingly; and
- many of the tax avoidance schemes for which FNs and APNs are
likely to be sent will involve partnerships.
Where corrective action is not taken by the partnership as a
whole, any Follower penalty which arises will be the responsibility
of each partner in the partnership by reference to their
appropriate share (broadly, their share of profits/losses of the
The legislation does not make this a joint and several liability
but, since corrective action in relation to a partnership dispute
can only be taken by the representative member, an individual
partner may find themselves liable for their share of a Follower
penalty even though they may have wanted to take the corrective
action but the majority of partners have decided not to.
The terms of many partnership agreements are therefore likely to
come under close scrutiny.
The June IA Statistics
(RO2, AF4, CF2, FA7)
The latest Investment Association (IA) statistics show net
retail inflow in June 2015 was down almost a third on a year ago,
with fixed income funds seeing a second successive month of net
By the time the IA publishes its monthly statistics, it can be
easy to forget their context. So it was with June's
numbers, published at the end of July. As a reminder, June was
the month when Athens lurched towards Grexit and China started to
melt down after the decision not to include Chinese A-shares in the
MSCI Emerging Markets index. That background is reflected in some
of the month's highlights:
- Net retail sales for the month were £1.534bn, 30% less than in
June 2014. The drop hides an increase of £1.387bn ingrossretail
sales (to £13.937bn), more than countered by a £2.041bn rise in
retail repurchases (to £12.403bn).
- Equity was the most popular asset class in terms of net retail
sales, with a net inflow of £874m, up £72m from May. Mixed Asset
was the second best-seller with net retail sales of £404m, the
highest since July 2014.
- The most popular sector in terms of net retail sales was
Targeted Absolute Return, no doubt a reflection on the jittery
market conditions. The sector has been very popular for most of
2015, with total net retail sales in the second quarter of
£1.291bn. Second, third and fourth most popular sectors were UK
Equity Income, Mixed Asset (40%-85% shares) and Property. Perhaps
surprisingly, fifth place was taken by Europe ex UK.
- 13 of the IA's 36 sectors had net retail outflows. The Asia
Pacific ex Japan sector suffered the most, seeing £226m disappear,
closely followed by £203m from the protected sector - nearly 10% of
that sector. All the non-gilt bond sectors saw outflows, with the
fixed income asset class as a whole losing £198m.
- The UK All Companies sector, which had been worst in terms of
net retail sales since January, saw £38m of net retail sales, the
first positive number since October 2014.
- The total value of tracker funds fell in line with the markets
and, at £104.348bn, now represents 12.1% of overall IA funds, up
from 10.4% of a year ago.
- Institutional net outflow amounted to £508m, the fourth month
of net outflow this year and a reversal from May's £904m
The Targeted Absolute Return sector now has £49.7bn of assets,
making it the fifth largest sector. Despite the name, the
sector has produced a wide range of returns over the past year
according to Trustnet: +24.2% at best and -10.1% at worst,
with an average of 4.1%. Over the last three volatile months, half
of the sector's funds have turned in a loss.
The July inflation numbers
(RO2, AF4, CF2, FA7)
Annual inflation on the CPI measure reappeared in July, with the
rate rising from June's zero to just 0.1%. The July inflation numbers from the Office for National Statistics
(ONS) were above market expectations, which had been for another
The CPI showed prices falling 0.2% over the month, whereas they
fell by 0.3% between June and July 2014. The CPI/RPI gap narrowed
marginally this month, with the RPI staying at 1.0% on an annual
basis. Over the month, the RPI fell by 0.1%.
The change in the CPI's annual rate was driven
by one major and three minor upward factors and three main downward
factors, according to the ONS:
Clothing and footwear: Overall
prices fell by 3.4% between June and July this year compared with a
larger fall of 5.7% between the same two months a year ago. This
seems to be down to shifts in the timing of sale prices. The 2015
June-July drop was "in line with recent years" according to the
ONS, whereas in 2014 it was unusually high. The move in this
category was the most significant upward factor, adding 0.19% to
Transport services: Overall prices rose
by 6.6% between June and July this year, compared with a smaller
rise of 4.6% a year ago. The upward contribution came from most
transport fares - notably air fares (despite the fall in the cost
Recreation and culture: Overall prices
rose by 0.2% between June and July this year, compared with a fall
of 0.2% between the same two months a year ago. The main upward
contribution came from price movements in the games, toys and
Miscellaneous goods and services:
Overall prices remained little changed between June and July this
year, compared with a fall of 0.5% between the same two months a
year ago. The upward contribution came from a range of services -
notably bank overdraft charges, where a number of banks removed or
reduced some of their charges last year.
Food and non-alcoholic beverages:
Overall prices fell by 0.7% between June and July this year,
compared with a smaller fall of 0.2% between the same two months a
year ago. The downward contribution came from price movements in
most sectors - notably in the milk, cheese and eggs sector - hence
the assorted farmers' protests.
Fuels and lubricants: Average petrol
prices rose by 0.1p and diesel prices fell by 2.5p between June and
July this year, compared with a rise of 1.0p on petrol and no
change on diesel between the same two months in 2014.
Restaurants and hotels: Overall prices
rose by 0.1% between June and July this year, compared with a
larger rise of 0.4% a year ago. The downward contribution came from
price movements across the whole sector.
Core CPI inflation (CPI excluding energy, food,
alcohol and tobacco) was an annual 1.2%, up 0.4% over the month to
a five month high. Four of the twelve components of the CPI are now
in negative annual territory, one fewer than last month.
As the rise in the core inflation rate underlines, fuel and food
deflation continues to keep the headline CPI figure in check. This
poses problems for the Bank of England as it contemplates a rise in
base rates. A hike when CPI is almost invisible will be a hard
sell, but while the Bank's official target is set in terms of CPI,
it is likely that the Monetary Policy Committee is paying more
attention to the less distorted core figure.
A similar situation exists across the Atlantic, where the
Federal Reserve may increase interest rates next month: the US CPI
for June was 0.1%, but core inflation was 1.8%. The USA sees more
benefits from the oil price drop in its CPI numbers than the UK
because there is much less road fuel tax in the USA to dampen the
fall in pump prices.
Coping with the income thresholds
(RO4, AF3, CF4, JO5, FA2, RO8)
The phased annual allowance reduction provisions in the summer Finance Bill 2015 are only triggered
once two thresholds that have both been crossed. Subject to the
trip wires of the anti-avoidance provisions, there is still some
scope for planning.
There are two income thresholds that need to be triggered before
phasing out of the annual allowance can take effect in 2016/17
(assuming the current pension tax regime survives that long):
- Threshold Incomewhich is basicallyallincome (investment as well
as earned) less any of a long list of reliefs (see s24 ITA 2007)
and less the grossed up amount of any pension contribution subject
to relief at source.
- Adjusted incomewhich is effectively threshold income plus all
The phasing down of the annual allowance will only apply
- The threshold income for a tax year exceeds £110,000; and
- The adjusted income exceeds £150,000.
The reduction is £1 for each £2 by which adjusted income exceeds
£150,000, subject to a maximum reduction of £30,000 at adjusted
income of £210,000 or more.
The most important point to note is that if the individual keeps
their threshold income at or below £110,000, then the phasing will
not bite. This explains why there are provisions in the Finance
Bill dealing with salary sacrifice set up after 8 July 2015 and the
anti-avoidance measures. In planning terms:
- The threshold income is defined using gross income which means
that there is a clear incentive to draw income as dividends rather
than salary from 2016/17, as from that year there will be no
grossing up of dividends. For example, assuming the new 32.5%
dividend tax rate (ie £5,000 dividend allowance used) for a higher
rate taxpayer, then to achieve the same net income, £1,164 of
salary would be required to match a £1,000 dividend:
Tax @ 32.5%/40%
The dividend would also be cheaper in terms of gross profits
(£1,250 against £1,324 once employer NICs are considered).
- Independent tax planning could help the situation, even if both
parties seemingly pay the same marginal tax rate. A taxpayer caught
by tapering is actually suffering at least 60% tax at the margin
(40% + 40% x ½ for lost annual allowance). In any event,
independent tax is a subject worthy of review with the arrival of
the dividend allowance and personal savings allowance next
Tim has a share portfolio which generates £6,000 of dividend
income in 2015/16. He estimates that in 2016/17 his threshold
income, including the dividends (with no grossing up) will be
£114,000, which would mean he would be caught by the annual
If he moves shares with dividend income of, say, £4,500 into his
wife's name before the end of 2015/16, he should keep his 2016/17
threshold income below the level at which the phasing is triggered.
The anti-avoidance provisions do not bite, because they work on an
individual basis and there would be no redressing increase
inTim'sincome in a subsequent tax year.
- It is worth considering whether just taking a permanent income
cut for those with adjusted income not too far above the £110,000
threshold is worthwhile. In those circumstances the individual may
well also be subject to the phasing out of the personal allowance
(which runs up to £122,000 of 'adjustedtotalincome' in 2016/17 -
see s24A (8) ITA 2007). At the margin an individual caught by both
the annual allowance phasing and the personal allowance phasing is
facing an effective tax rate of 82% on earnings, once employee 2%
NIC is taken into account margin (40% + 40% x ½ for lost annual
allowance + 40% x ½ for lost personal allowance + 2% Class 1 NICs).
So giving up, say, £5,000 of gross earnings could cost a net £900.
The anti-avoidance provisions would not bite, because Condition C
requires a redressing increase.
- The reduction generally only applies to the tax year in which
both thresholds are breached. That means close attention needs to
be paid to the pattern of carry forward. If the planned total
contribution for the tax year does not exceed the reduced annual
allowance for that tax year plus the amount carried forward from
three tax years previous, then trying to reduce the impact of the
phasing is of no real benefit.
In 2016/17 Graeme has £28,000 of unused annual allowance carried
forward from 2013/14 (when the annual allowance was £50,000). His
threshold income for the year will be £140,000 and he had
previously planned a £40,000 pension contribution from his company.
However, his annual allowance for 2016/17 will be:
£40,000 - ((£140,000 + £40,000 - £150,000) / 2) = £25,000
Graeme can still benefit from a contribution of £40,000 by
virtue of his carry forward from 2013/14 and he will be no worse
off than if he had managed to avoid the phasing completely, as the
£28,000 of carry forward would be lost after 2016/17.
- Ultimately planning around either threshold will be complicated
by the fact that final income figures will generally not be known
until after the end of the tax year concerned. It will therefore be
wise to build in some margin for error in any exercise.
It is worth putting the phasing provisions in context. HMRC
estimate that "Around 300,000 pension savers are expected to have
net incomes of at least £110,000 and could be affected by this
measure". The actual revenue raised is projected to be only £425m
in 2017/18, although it increases to £1,280m by 2020/21 (assuming
the annual allowance is still relevant by then). As with the
reduction in the lifetime allowance, it is the cumulative effect
that will help the Exchequer's coffers and that income will not be
the tax charge so much as the smaller claims for relief.
Caught by the cap and/or taper
(RO4, AF3, CF4, JO5, FA2, RO8)
A Freedom of Information request by Suffolk Life
has revealed that in 2013/14 HMRC collected £94.2m in lifetime
allowance charges, down marginally from £98.0m in the previous
year. Alas, there is no corresponding information for the annual
allowance charge. However, it is probably a smaller figure as input
is easier to control than pension fund growth/output. With the
lifetime allowance destined to drop again to £1m next April along
with tapering of the annual allowance, the Exchequer could be
looking forward to more inflow from pension allowance tax charges.
But are they taxes worth paying?
Lifetime allowance charge
The lifetime allowance charge is 55% if excess funds are drawn
as a lump sum and 25% if they are used within the pension to
provide income (or triggered by the age 75 BCEs). For a higher or
additional rate taxpayer, the lump sum lifetime allowance charge is
worse than receiving pay, even assuming the optimum circumstances
that the original pension contribution is made by the employer and
does not attract an annual allowance charge:
Lifetime Allowance Charge
However, the difference for the additional rate taxpayer is
marginal and has to be offset against the other pension advantages
of tax-sheltered roll up and favourable tax treatment of death
benefits. As far aspersonalcontributions are concerned, the
lifetime allowance charge is a killer because the benefit of
employer NIC is lost.
Annual allowance charge
If you attempt similar mathematics for the annual allowance,
things become rather more complicated. Assume again the optimal
employer contribution to which the annual allowance charge applies
in full and is deducted immediately under scheme pays rules. The
residual amount is then taken as a UFPLS, ie 75% taxable:
Annual Allowance Charge
Annual Allowance Charge
Paying the annual allowance charge is thus generally to be
avoided - more so than the lifetime allowance charge because of the
effective double taxation.
If both the annual allowance charge and the lifetime allowance
charges are triggered the situation is even worse - the net benefit
falls to £2,700 (£6,000 x 45%) for a higher rate taxpayer and
£2,475 (£5,500 x 45%) for an additional rate taxpayer.
So what are the options for anyone caught by either (or both) of
these charges? There are many possibilities, including:
- In theory additional rate taxpayers benefiting from employer
contributions and subject only to the lifetime allowance charge
could just grin and bear it, as the numbers above show. In practice
this is something of a non-starter, as the additional rate taxpayer
will almost certainly be caught by the annual allowance taper and
is more likely than anyone else to have claimed or is intending
claiming some form of lifetime allowance protection, thereby ruling
out any future contributions.
- Business owners can choose to retain their profits, net of
corporation tax (which will be 19% in 2017). This simple solution
comes with its own drawbacks in terms of prejudicing full
entitlement to IHT business property relief and entrepreneurs'
- If profits are to be drawn by business owners, then dividends
will still be the most attractive option, even in 2016/17.
- Employees may need to renegotiate remuneration packages, opting
for more pay/benefits and less (or no) pension contributions.
- Investment options for dividend or salary start with the usual
suspects - ISAs, collective funds, VCTs and EISs. Note however that
at present the venture capital promoters are still getting to grips
with what the Finance Bill changes will mean to their business
Next year's tapering rules and lifetime allowance cut will swell
the growing numbers of people effectively taxed out of making
further pension provision.
Overpayment and underpayment of tax on pension income
(RO4, AF3, CF4, JO5, FA2, RO8)
With the introduction of pension Flexibilities, there is now a
greater likelihood that advisers will have clients who have either
overpaid or underpaid income tax as a result of taking ad hoc
payments from their pension plans.
Many of these clients will not have had much, if any, dealings
with HMRC and probably never with an accountant. They will
doubtless come to their financial adviser as a first port of call
once they realise there may be a problem.
HMRC has published advice on what to do if an individual has
underpaid or overpaid income tax. There is also a short YouTube
video which may be useful to share with clients or employees.
If an individual has overpaid or underpaid tax during the tax
year, HMRC will notify them between now and October 2015 via a P800 tax calculation.
What the individual needs to do
If they get a P800 tax calculation, they should check the
details are correct.
- compare the figures used with their own records, such as a P60,
P11d, bank statements or letters from the DWP.
- use the HMRC tax
checker to check how much tax they should have paid
If the calculation is correct, no further action need be
If they've underpaid tax
If they haven't paid enough tax, HMRC will usually change the
tax code for the next year to collect the money owed. This happens
automatically so they won't need to do anything.
Sometimes HMRC can't collect the money owed through a tax code,
for example, if they no longer have an income source against which
PAYE operates. In this case, HMRC will write to the individual
explaining how to pay the money owed.
If they've overpaid tax
If they have paid too much tax, HMRC will automatically send a
cheque within 14 days of receipt of the P800. The individual won't
need to do anything further.
QROPS transfers banned from public section pension schemes
(RO4, AF3, CF4, JO5, FA2, RO8)
The Unfunded Public Service Defined Benefits
Schemes (Transfers) Regulations 2015 (1614) have now been
published. A loophole had been discovered which allowed unfunded
public sector pension members to transfer their pension funds to an
overseas pensions and access their pensions flexibly.
The loophole has now been closed with this piece of