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My PFS - Technical news - 01/09/2015

Personal Finance Society news update from 12 August 2015 - 25 August 2015 on taxation, retirement planning, and investments.

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Taxation and Trusts

Investment planning

Retirement planning

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 tax.

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 £150,000 each.

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 £38,000.

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 million.

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:-

  1. 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.
  2. 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.
  3. The transfer must be on death and can be made by will, under intestacy or as a result of the rule of survivorship.
  4. 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
  5. Special rules will be introduced to protect those who downsize.  How this will work in practice will be subject to consultation.
  6. 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).
  7. The £2 million threshold and the RNRB are due to increase in line with the CPI from 6 April 2021.
  8. 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.
  9. 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 death.
    • 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 death
    • Full standard NRB and transferable standard NRB also available
  10. 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 death. 
  11. 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 wife)
    • 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
  12. If both deaths occur before 6 April 2017, no RNRB is available to offset against the deceased's estate.
  13. If first death occurs before 6 April 2017, RNRB is available for transfer if the subsequent death occurs after 5 April 2017.


Judicial review of Partnership Payment Notices

(AF1, RO3)

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  [2015] 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 place.

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" considerations".

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 pay".

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 partnerships.

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 "refundable deposit".

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 the taxpayer.

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 tax checker.

Taxpayers need only contact HMRC if there is a discrepancy in the figures.

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 collected.

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 thresholds.

'Example 6'

"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 basic rate.

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 £1,000 balance.

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 calculation purposes.


A reminder of the conditions to be satisfied for FNs, APNs and PPNs to be issued

(AF1, RO3)

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 arrangement;
  • 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 withdrawn); and
  • 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) and:

  • 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 review); or
  • 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 partnership).

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.


Investment planning


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 retail outflow.

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 inflow.

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 nil-reading month.

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 annual CPI.

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 of oil).

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 hobbies sector.

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 pension contributions.

The phasing down of the annual allowance will only apply when:

  1. The threshold income for a tax year exceeds £110,000; and
  2. 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:




Taxable Income



Tax @ 32.5%/40%



NICs  0%/2%



Net Income



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 April.

Example 1

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 allowance phasing.

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.

Example 2

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


40% taxpayer


45% taxpayer

Gross profit








Employer NIC












Employee NIC




Net benefit




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:


40% taxpayer

45% taxpayer

Annual Allowance Charge


Annual Allowance Charge


Gross profit










Employer NI










AA Charge





Residual fund





Income Tax





Employee NI





Net benefit





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' relief.
  • 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 models.

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.

They can:

  • 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 taken.

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 legislation. 

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