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What's new bulletin June 2022

News article

Publication date:

22 June 2022

Last updated:

18 December 2023

Author(s):

Technical Connection

Update from 3 to 16 June 2022.

TAXATION AND TRUSTS

LITRG warns of double tax risk for SEISS claimants

(AF1, RO3)

The Low Income Tax Reforms Group (LITRG) is reminding SEISS claimants that these grant payments are taxable income and need to be included on their 2021/22 self-assessment tax returns and it has warned of a potentially easy-to-make mistake that could see some taxpayers taking a double tax hit.

Self-employed clients will be completing their 2021/22 self-assessment tax returns in the months ahead (if they haven’t already done so). Many of these self-employed individuals, and partners in partnerships, will have claimed the fourth and fifth Self-Employment Income Support Scheme (SEISS) grants during the last tax year.

The first three SEISS grants should have been included on the 2020/21 tax returns. But the fourth and fifth SEISS grants need declaring on the 2021/22 tax returns.

The SEISS grants must be included in a different box to other Coronavirus business support payments on the tax return, but LITRG warns this can confuse people when filling in their form.

Some sole traders and partners are aware that these grants need to be included in the appropriate box on their tax return because they claimed at least one of the first three grants which were taxable in 2020/21. But because the fourth and fifth grants were the first SEISS grants available for new businesses, some of these claimants might not realise these grants are taxable and need to be included in a specific place on the tax return. If they are not included in the right place, then HMRC will amend the tax calculation automatically - and in certain cases the SEISS grants could be taxed twice.

The fourth and fifth SEISS grants should be included on the 2021/22 self-assessment tax return in in box 27.1 on the SA103S self-employment short supplementary pages and box 70.1 on SA103F self-employment full supplementary pages. In certain circumstances the SEISS grants may be included within a partnership’s sales income instead but that depends on the relevant Partnership Agreement. There is detailed information on the LITRG website.

The SEISS grants may be pre-populated on online returns, but this doesn’t help paper tax returns filers, those who have multiple trades or partners whose grants have been included as partnership income. Taxpayers should still check any pre-populated boxes and ensure that they have not included the SEISS grants in other boxes on their tax return by mistake.  

HMRC will automatically amend the tax calculation if the SEISS grants are not included in the correct box. If the SEISS grants were not included on the original tax return, then the revised calculation should now show the correct tax position. However, if for example, the SEISS grants were included in sales income then HMRC will not know this so the amended calculation will effectively tax the SEISS grants twice as the sales income will still include the SEISS grants and also the grants will be within the correct SEISS box.

If an error is made, then affected taxpayers should make sure they check any amended calculations to make certain that any SEISS grants are not double-counted. The LITRG website explains in more detail how HMRC amend the tax calculation for SEISS grants and what taxpayers need to check and do if the revised tax calculation is incorrect.

The LITRG is an initiative of the Chartered Institute of Taxation (CIOT), which is intended to give a voice to the unrepresented.

The 60 per cent marginal tax rate hits the headlines

(AF1, RO3)

The press has suddenly rediscovered the 60% marginal income tax rate.

"A million to pay 60pc income tax within years." The Sunday Telegraph ran that headline last weekend, which might point to the silly season having arrived early this summer (sic). However, as is the way with the press, on the following day The Times repeated the story, suggesting in its opening paragraph that the 60% rate was due to “a glitch in the personal allowance regime."

The analysis underpinning the one million figure starts from an estimate that there are 950,000 people earning between £75,000 and £100,000 and that over the next five years all of them could land in the 60% band (which runs from £100,000 to £125,140). That requires the sort of wage inflation for half a decade which would give the Bank of England’s Andrew Bailey even greater wage/price spiral nightmares than he is currently experiencing.

While the one million headline is attention-grabbing, there are several points worth noting, not all of which reached the press copy or were correctly explained:

  • The 60% rate arises because above £100,000, for each £2 of income, £1 of personal allowance is lost (until it all disappears at £125,140), meaning that effectively the £2 of marginal income attracts tax on £3. If this marginal income is earnings (UK ex-Scotland) or savings income the marginal rate is thus 60%. In Scotland, if it is earnings the marginal rate is 61.5% (Scotland’s higher rate being 41%). The marginal rate is slightly lower if the extra income is dividends (53.75% outside Scotland, 54.25% otherwise). These figures exclude national insurance contributions (NICs), which adds another 3.25% if earnings are the marginal income source.
  • The 60% marginal rate is nothing new. It dates back to Alastair Darling’s Spring 2009 Budget, when he announced the tapering of the personal allowance (then £6,475) from £100,000 and a new top tax rate of 50%, both to take effect from 2010/11. Reports suggested that the combination of the two was a compromise to avoid 50% tax biting at a lower level and potentially alienating aspirational voters at the next election.
  • That election in May 2010 saw the Conservatives gain power (in coalition with the Liberal Democrats), but the new Chancellor, George Osborne, carefully chose to leave the income tax changes of his predecessor untouched. According to HMRC data, in 2010/11 there were 319,000 taxpayers with incomes in the £100,000 - £150,000 band and 588,000 taxpayers with £100,000+ income. As Osborne froze the personal allowance, the band of income taxed at 60% was £12,950 wide.
  • Darling’s Finance Act 2009 legislation made no provision for indexation of the £100,000 taper threshold and since then no Chancellor has shown any inclination to make the politically awkward decision to help six-figure earners. If the threshold had been CPI-linked, it would now be around £128,000.
  • While the threshold was left to languish, the personal allowance was given electorate-pleasing above inflation increases. This exacerbated the impact of the 60% rate because the width of the 50% tapering band is double the personal allowance – hence its current £25,140. Ironically that means anyone with income over £150,000 now effectively pays more than 50% on income in the £100,000- £150,000 band – just what the original structure was meant to sidestep...
  • The latest HMRC income data (for 2019/20) shows 547,000 taxpayers with incomes in the £100,000 - £150,000 band and 991,000 taxpayers with £100,000+ income. Viewed another way, the proportion of taxpayers paying the higher marginal rate on at least part of their income has risen by just over two thirds. Frustratingly, the published HMRC is not granular enough to calculate how many are trapped in the band, but at a rough estimate it has more than tripled since 2010 given the near doubling of the 60% band’s width and increase in taxpayer numbers with income between £100,000 and £150,000.

Comment

The 60% tax band is another example of the problems created by successive Chancellors’ adherence to fiscal drag as a means of stealth taxation. The one compensating corollary is that while there is a 60% marginal rate of income tax, there is also a 60% rate of income tax relief on pension contributions (and gift aid).

INVESTMENT PLANNING

New UK Digital Strategy - more venture capital investment?

(AF4, FA7, LP2, RO2)

As part of the Government’s recent announcement, it has made it clear that it wants to encourage pension funds and other institutional investors to be invested in UK venture capital funds.

On 13 June, the Government launched the new UK Digital Strategy which includes bringing tech leaders together in a new Digital Skills Council to tackle the skills gap and a review of the UK’s large-scale computer processing capabilities, vital for powering technologies of the future such as Artificial Intelligence. Working directly with employers, the council will encourage investment in employer-led training to upskill workforces. It will look at the issue of digital skills from schools through to lifelong learning. The group will also look at ways the industry can inspire the next generation of talent from a wide range of backgrounds to consider a digital career.

In that press release, the Government announced that new figures had been released showing more than £12 billion in venture capital funding has been secured by UK tech startups and scaleups so far this year, which is more than the whole of 2020. And last year, a new tech unicorn - private companies valued at $1 billion - was created every eleven days, more than doubling the number of UK unicorns from 2017.

Digital skills

The Office for Students has also been announced as the provider for the up to 2,000 scholarships funded by the Government, announced back in February. The Office for Students will allocate up to £23 million to universities to fund scholarships starting in 2023. Organisations are being encouraged to “play their part” by match-funding scholarships for the AI and Data Science conversion courses with further information on the Office for Students website.

Compute review

Over the next decade, many aspects of business and research will be transformed by advanced ‘compute’ - the large-scale processing power, memory, data storage and networks that does the work everyday computers can’t do. It is an enabling technology necessary to maximise the potential from AI, Internet of Things Sensors and quantum computing. An external review has now been started into the future of compute to ensure the UK has the computing capacity it needs to power these changes. The review will inform the long-term approach to this important area.

Early stage and scale-up investment

The Patient Capital Review in 2017 identified a relative lack of institutional UK capital flowing into the UK venture capital market. The Government says that it wants to see UK pension savers "benefiting from the UK’s ingenuity and enterprise, and being given the opportunity to secure higher returns to enjoy during their retirements."

Though choosing which assets to invest in to secure the best outcomes remains a matter for pension fund trustees and other custodians of institutional capital, the Government believes that UK institutional investors are under-represented in owning UK assets. For example, over 80% of UK defined contribution pension funds’ investments are in mostly listed securities, which represent only 20% of the UK’s assets.

The Government says it will continue to do everything possible, short of mandating investment, to encourage pension funds and other institutional investors to take advantage of available routes to invest in the UK’s most productive assets such as venture capital.

In March 2022, the DWP consulted on new proposals to require pension schemes to have a stated policy on investment in illiquid assets, such as private equity and venture capital. The DWP also announced in early 2022 that it will be taking forward proposals to remove well-designed performance fees, often paid when investing in private markets, from the cap on charges that applies to workplace pensions. The Government says that it continues to work with the industry-led Productive Finance Working Group to encourage investment in long-term, illiquid assets. A focus of this group has been supporting the launch of the new Long-Term Asset Fund (LTAF) structure. This is a new fund structure that will enable pension schemes and other investors to invest in illiquid assets, such as venture capital, more easily.

The Government is also reviewing Solvency II. One objective of the review is to support insurance firms to provide long-term capital to underpin growth, including investment in infrastructure, venture capital and growth equity, and other long-term productive assets within the prudential regulatory framework.

According to the Government, many pension funds, including in the public sector, say that they do not have the scale or expertise to invest in venture capital funds. The Government says that it will therefore continue working closely with UK institutional investors to identify, understand and address remaining barriers to investment, to encourage and facilitate the development of the capabilities to invest in private markets, and to challenge industry to change mindsets and behaviour.

For more information on the announcements, please see The Digital Strategy.

The Government says that it will also set out further detail on plans for other major digital industries in the weeks and months ahead:

  • A response to the public consultation on data reforms now that we have left the EU will be published soon. Later this year, the Department for Business, Energy and Industrial Strategy will publish the UK’s first Quantum Strategy.
  • Before the end of the year, the Government will publish a Semiconductor Strategy covering its international and domestic approach to this strategically important sector and a review of the UK’s position in the resilience of the wider global supply chain.
  • A White Paper on AI Governance will also be published later this year which will set out a light-touch approach to regulating AI so rules keep pace with fast-moving technology without impacting innovation.

April 2022 ISA statistics

(FA5)

The Investment Association (IA) statistics for April 2022 show a disappointing ISA season

The Investment Association (IA) has just published its monthly statistics for April 2022, showing results for the ISA ‘season’ of March and April:

  • Net ISA sales for April were £683m, down 53% on 2021.
  • For March and April total net ISA sales were £934m, 58% less than in 2021.
  • Net ISA sales in 2021/22 amounted to £1,645m, despite six consecutive months of outflows (September 2021- February 2022) amounting to £1,030m. In 2020/21 ISA net sales were £1,684m, 2% higher.
  • ISA funds under management (FUM) at the end of 2021/22 were £190,848m, 13% of the IA’s total FUM figure and up 7% on the previous year.
  • The IA puts a brave face on the numbers, saying that the ISA season’s total ‘is just above the average inflows of the last five years (£922 million) despite the challenging start to the year for overall fund flows.’

Comment

As the graph shows, net ISA sales for 2021/22 were lower than those of 2013/14, when the maximum investment was £11,520. The current £20,000 ISA limit has been unchanged since 2017/18. The increase in dividend tax rates and freezing of personal, personal savings and dividend allowances plus income tax bands ought to be giving ISAs a boost, but both the Government and investors appear to be allowing ISAs to wither on the vine.

Providing tax certainty for cryptoasset investments

(AF4, FA7, LP2, RO2)

In April, the Government announced plans regarding its intention to expand the Investment Transactions List (ITL) used by the Investment Manager Exemption (IME) to provide tax certainty to UK investment managers and their non-UK resident investors who are seeking to include types of cryptoassets within their portfolios. It is anticipated that this will also encourage new cryptoasset investment management businesses to base themselves in the UK.

The IME provides an assurance to investment managers and investors that, where qualifying tests are met, there will be no charge to corporation tax for overseas corporate investors, or to income tax for individuals. This means that UK based investment managers can be appointed without creating a risk of UK taxation for non-resident funds.

The purpose of the ITL is to identify transactions which would generally be considered to form part of an investment business and would not generally be viewed as trading activities. The ITL currently applies for both the IME and certain UK tax regimes for funds. This means that both UK and overseas funds managed by UK investment managers obtain the same level of certainty about the types of transactions which will not be taxed as a trading activity in the UK.

The purpose of this consultation is therefore to understand:

  • the types of cryptoassets which should be included within the IME
  • whether there is a case for extending this change to other tax regimes which also use the ITL.

HMRC is seeking views from tax practitioners, investment managers, representative bodies, administrators and other interested parties.

The consultation will run until 18 July 2022 - a summary of responses and any draft legislation is expected to be published in the autumn.

Reforming the rules companies must follow to list their shares in the UK

(AF4, FA7, LP2, RO2)

The FCA is continuing its discussion on how it can make the listing regime, the rules companies must follow to be allowed to list their shares in the UK, more effective, easier to understand and more competitive. Please see Primary Markets Effectiveness Review: Feedback to the discussion of the purpose of the listing regime and further discussion.

Under one of the FCA’s suggestions, companies wishing to list in the UK would no longer have to choose between two different segments with different branding and standards.

Instead, all listed companies would need to meet one set of criteria and could then choose to opt into a further set of obligations. These would be focussed on enhancing shareholder engagement and be overseen by the FCA.   

Feedback to the FCA’s earlier discussion paper suggested many were keen to keep these additional safeguards. Companies and their shareholders would decide for themselves whether these additional obligations were right for them. 

Last year, the FCA lowered free float levels, allowing certain forms of dual class share structures and introducing digital financial reporting.  

These changes are intended to promote broader access to listing for a wider range of companies at an earlier stage in their development and help investors use data faster to improve decision-making, while maintaining high standards. 

The discussion period is open for nine weeks, closing on 28 July 2022. 

PENSIONS

TPR and FCA outline consumer journey next steps

(AF3, FA2, JO5, RO4, RO8)

The Pensions Regulator and the Financial Conduct Authority have jointly published a feedback statement for the Call for Input they issued in May 2021 on the pensions consumer journey.  The statement highlights feedback received, actions that have been taken and actions the regulators intend to take to help engage consumers so they can make informed decisions that lead to better pension saving outcomes.  The statement is also intended to share knowledge on key issues with the industry and other stakeholders to help inform initiatives that the regulators design.

As a result of the feedback, the Regulator and/or the FCA are intending to:

  • Publicise and encourage larger schemes and providers to support Midlife MOT toolkits available for employers
  • Work with MaPS to produce guidance which enables employers to support staff returning to the workforce
  • Conduct an equality review to understand how well the market works for different groups of savers
  • Review the Pensions Regulator’s communicating to members section of the DC guidance to provide more information on inclusivity, use of behavioural insights and timing of communication
  • Explore firms’ concerns around providing more support to customers about accessing their pensions and discuss options for giving consumers greater support within the current regulatory framework, while also considering further FCA interventions beyond the Stronger Nudge to support consumer decision-making

The regulators plan to publish an update to their joint strategy in the second half of 2022 which will outline the shared strategic outcomes that will continue to draw their focus in the years ahead.

PPI issues Briefing Note 130

(AF3, FA2, JO5, RO4, RO8)

The Pensions Policy Institute (PPI) has published Briefing Note 130: Set for life? — Guaranteed Incomes in Retirement. The note explores the current state of the UK guaranteed retirement income market and considers the “annuity puzzle” — why do people not purchase annuities even when they may prove to be their best option in retirement?

Mark Baker, Senior Policy Researcher at the PPI, said: “There is no doubt that guaranteed retirement income products will continue to play a role in the retirement landscape, but their significance and use will change. This represents a challenge and an opportunity for industry; as pot sizes increase and people may become more engaged with their workplace pensions, new products and options could be developed and more widely used.”

Commenting on the PPI's briefing note, Kathryn Fleming, Partner at Hymans Robertson, said: “Annuities are often seen as one of the least popular of the pension freedom options, so it is fantastic to be able to support this PPI research and [to help] raise awareness of where they can add value. An annuity can have an important role when combined appropriately with the other pension options as part of an individual’s retirement plan. This note, rightly, explores the key role annuities will play as DC pot sizes grow, education increases, and the industry considers retirement options as a sequence of decisions, instead of a “once and done” event. As an industry we are still on a journey to fully integrate the pension freedom options, ensuring that they maximise individual retirement outcomes. It is great to see the PPI point towards the “teachable moments” along this journey, between age 50 and state pension age, where the industry needs to raise its game.”

 DWP concludes on trustee oversight of investment consultants and fiduciary managers CMA remedies

(AF3, FA2, JO5, RO4, RO8)

After a delay blamed on COVID, the DWP has published its response to a consultation on trustee oversight of investment consultants and fiduciary managers launched in July 2019. It has also published a draft of the Occupational Pension Schemes (Governance and Registration) (Amendment) Regulations 2022.

The consultation, following the Competition and Markets Authority’s investigation into investment consultants and fiduciary management, set out regulations to put two of its remedies into the main body of pensions law.  The two remedies are those that apply to trustees of most occupational pension schemes.  The consultation in turn followed an Order issued by the CMA in June 2019 that has been fully operational since December 2019.

The DWP regulations are to go ahead broadly as intended  and have been laid before Parliament in draft form with the intention that they will come into force on 1 October 2022.  The Pensions Regulator, whose current trustee guidance reflects the contents of the CMA Order, is to update its guidance by this date.

As before, the regulations require trustees to:

  • Carry out a tender process for fiduciary management services, subject to certain limited exceptions - a Schedule to the regulations spells out in great detail, for various situations, the trustees’ duties in this respect
  • Set objectives for their investment consultants and review their performance against these objectives at least every 12 months

These replace the CMA’s remedies one and seven, respectively.

The regulations also enable the Pensions Regulator to oversee the requirements via submission of prescribed additional information in the scheme return.  This is backed up by a system of compliance notices (directed at the trustees or third parties), financial penalties and appeal mechanisms.

Many of the changes made by the DWP as a result of the consultation are to ensure greater consistency with the CMA Order.  The changes include clarification that the provision of high-level investment commentary provided by actuaries in actuarial valuations does not, by itself, comprise the provision of investment consultancy services.  The DWP says that it should be evident where the actuary goes beyond this and in such a case the trustees are required to set and review objectives for the provision of such investment consultancy services.

The regulations only replace part of the CMA Order, which it appears will need to be modified going forward.

The main part of the regulations is subject to a review mechanism every five years, with the first report on the results of the DWP’s review requiring to be published by 31 December 2028.

Comment

For most trustees this change from the CMA Order to DWP regulations should have little impact on what they are required to do, with the only obvious change being that the nature of the compliance reporting will alter.  However, the DWP states that there are four small policy differences between the CMA Order and the DWP regulations – as set out on page 5 of the DWP’s impact assessment published alongside the consultation response – and these may impact some trustee bodies.

Presumably, the next round of trustee reporting to the CMA due by 7 January 2023 will now be replaced by an expanded scheme return requirement.  However, an announcement to that effect has yet to be made.

FSCS confirms latest 2022/23 levy forecast of £625m and publishes report to support discussion on the future of financial services compensation in the UK

(AF3, FA2, JO5, RO4, RO8)

As a part of publishing its revised compensation levy forecasts for 2022/23, the Financial Services Compensation Scheme (FSCS) has also published a report. The balancing act of compensation highlights some of the data and insights put forward by FSCS in response to the FCA’s Compensation Framework Review discussion paper. Some of the key highlights of the include:

  • Savers and investors have been undercompensated to the tune of £1 billion over the last 6 years as a result of the cap on compensation pay-outs.
  • Almost half (£472 million) of this relates to pensions advice claims, according to the Financial Services Compensation Scheme (FSCS).
  • The FSCS is calling for the pensions compensation limit to be increased to better protect customers Most claims to the FSCS are subject to an £85,000 cap – although if a life insurer fails then annuity payments are 100% protected‘
  • Polluter pays’ model could boost compensation pay-outs and lower industry costs

PPF writes to members on delayed progress in uncapping compensation payments

(AF3, FA2, JO5, RO4, RO8)

The Pension Protection Fund (PPF) has published a copy of the letter they are sending to members, updating them on the work being done to uncap compensation payments and calculate and pay the arrears plus interest that the PPF owes. In the letter, the PPF acknowledged that progress on this issue has been slower than expected and explained the reasons for the delay.

PPF Director of Scheme Services Sue Rivas wrote: "In many cases, we don't have the historical member data we need to proceed with the calculations. This is because it was never anticipated we'd need this data when your scheme transferred to us...We have also discovered that some information provided to us previously is incorrect or appears to conflict with other information we hold. This means we have had to recheck data, and contact third parties, and members direct, to obtain this vital information."

Ms Rivas noted that, whilst some progress has been made, there is “still some way to go” and the majority of affected members will not see their compensation increased and arrears paid until the second half of this year.

TPR publishes Annual Funding Statement Analysis 2022

(AF3, FA2, JO5, RO4, RO8)

The Pensions Regulator (TPR) has published its Annual Funding Statement Analysis 2022, which is a review of DB pension schemes with valuation dates between September 2021 and September 2022 (Tranche 17 or T17 valuations). The analysis shows that most major asset classes invested in by UK pension funds achieved substantially positive returns over the three years to 31 December 2021 and the three years to 31 March 2022. The report also reveals that nominal gilt yields were significantly lower at 31 December 2021 than they were three years earlier, whereas at 31 March 2022 nominal gilt yields were higher.

TPR has highlighted that the strength of the employer covenant is a key consideration for trustees and employers when setting their funding strategies. In previous years the data has demonstrated trends in potential employer affordability. This analysis was based on historic, publicly available information on profit, shareholder funds and dividend payments. Given the significant and uneven impact of the COVID-19 crisis on scheme employers, for many schemes, recent trends in employer affordability based on historic data are likely to be of limited use in assessing employer affordability today. Consequently, trends in employer affordability have been excluded from this year’s analysis.

This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.