JSP Financial Services Limited

October 2023

NEWSLETTER 2023

TAX: CRACKDOWN ON "SIDE HUSTLES"

According to the website money.co.uk almost a third of UK workers earn a little extra cash by selling goods or services online – “side hustles” as they are called. These can include platforms such as Airbnb, Fiverr, Upwork, Uber, Deliveroo, Etsy and so on.

Unsurprisingly, HMRC are taking a keener interest in such side hustles, and from 1 January the most popular platforms such as those named above will need to record how much its users make and report this to the tax office.

Anyone who earns less than £1,000 in a tax year from such activities (combined) does not need to declare this income under the Trading Allowance.

Now is a suitable time to check your tax affairs and make sure you have no historical issues – or contact HMRC first.

SAVINGS ACCOUNTS

The decision by the Bank of England to leave the Base Rate at 5.25% may have signalled “peak interest rate” in the fight against inflation. There may be one or two small rises, but generally the consensus seems to be that we are very close to the top of the Base Rate cycle. The consensus also indicates that rates are likely to stay “high” throughout 2023 and well into 2024.

Banks and building societies have become more competitive in trying to lure savers, and easy access accounts of 5%+ are available. With regard to fixed rates, banks and building societies generally base their fixed rate account interest rates not just on bank rate but also on the expectation for future interest rates. If they believe interest rates have indeed peaked, then this may lead them to begin reducing rates, particularly longer term rates.  Therefore although 1 year fixed rates of just over 6% are available, longer term fixed rates are lower (5.8%-5.9%) and may reduce further if the banks think that rates have hit peak. You may therefore wish to consider current competitive rates available by looking at a comparison platform such as www.moneyfacts.co.uk or www.comparethemarket.com etc.

MINIMUM PENSION AGE SET TO RISE

At the moment savers can withdraw money from their pension pot from the age of 55, with 25% tax free and the balance taken in a way that suits – regular withdrawals, one-off withdrawals, buying an annuity – all taxable of course.

From 2028, this minimum age is set to rise to age 57, so anyone aged 50 or under now will have to wait longer before being able to access their plans. The future intention is for this minimum age to be 10 years before State Pension Age.

There is no phasing-in period. So, anyone born after 5 April 1973 will have this minimum age applied (unless they have a protected pension age). If you were born between 6 April 1971 and 5 April 1973, you will have a window from your 55^th birthday to 5 April 2028 to access your pension savings before the minimum age increases to 57. 

PENSION LIFETIME ALLOWANCE AND ANNUAL ALLOWANCE

I provided an update on some major pension changes in March relating to the lifetime allowance and the annual allowance.

The Lifetime Allowance, the maximum value you can hold in a pension plan before the fund becomes subject to a tax charge, is being abolished. The tax charge itself is abolished from April 2023, with the lifetime allowance completely abolished from 6 April 2024.The maximum tax free cash sum that can be taken from a plan is still 25% of the fund value, but with a maximum of 25% of the current lifetime allowance to give a maximum of £268,275 – this may be higher if you have any of the pension protections. 

The Annual Allowance, the overall maximum that can be contributed to a pension plan each tax year. is rising from April 2023 from £40,000 to £60,000. In addition, the Money Purchase Annual Allowance, the maximum that can be contributed to a pension plan after you have drawn taxable income from your existing pension plan, is to rise from £4,000 to £10,000 per tax year.

PENSION: TAX FREE PAYMENTS ON DEATH UNDER THREAT

The draft legislation implementing the changes stated in the above section brought about a significant change with regard to death benefits.

Currently on death before age 75, the pension fund remaining up to the Lifetime Allowance can be taken by beneficiaries as a lump sum tax free, or it could remain in a beneficiary drawdown plan and taken as tax free income as and when required.

The draft legislation stated that on death before age 75, a pension fund was still available tax free if paid as a lump sum. If however beneficiaries decide to retain the fund as a beneficiary drawdown plan then income drawn will be subject to income tax at the beneficiaries’ marginal rate of income tax.

The legislation is still in draft form so changes may be made, with the final legislation not expected until after the Autumn Budget.

STATE PENSION: WHAT’S PAID OUT ON DEATH?

It is commonly believed that on death of a spouse the survivor would receive a proportion of the State Pension being received by the deceased, although this is certainly not the case. Often, the amount payable will be nil following the changes to the State Pension from 6 April 2016. Any amounts payable will depend on when the deceased spouse reached State Pension Age and when the spouse died.

The Basic State Pension (Old Scheme)

If you reached State Pension Age before 6 April 2016, you should contact the Pension Service following the death of your partner to check whether there is any entitlement. You may be able to increase your Basic State Pension by using qualifying years built up by your partner if you do not already qualify for the full amount.

The Additional State Pension (Old Scheme)

A spouse may be able to inherit an Additional State Pension following the death of their partner.

If the surviving spouse is under State Pension Age, they may be able to inherit an Additional State Pension if they receive Widowed Parent’s Allowance. If this allowance ceases, then the payment of the Additional State Pension ceases also, but it may be paid again on reaching State Pension Age if they haven’t remarried. If the surviving partner receives Bereavement Allowance, they will only inherit an Additional State Pension once they reach State Pension Age, and again only if they haven’t remarried.

If the surviving spouse has reached State Pension Age, the maximum Additional State Pension that can be inherited depends on when the deceased died:-

The New State Pension

In general terms, there is no entitlement to further benefits under the new State Pension when someone dies. The exceptions would be:-

1) Where someone received more than the amount payable under the New State Pension because they had built up a higher entitlement under the Old State Pension, the extra amount being known as the Protected Amount. Their partner can inherit 50% of any protected payment if the marriage/civil partnership began before 6 April 2016 and the partner reached State Pension Age on or after 6 April 2016 and dies on or after 6 April 2016. There is no entitlement if someone remarries before they reach State Pension Age.

2) If a partner defers payment of State Pension, there is no entitlement to any deferred payment on death when the partner reached State Pension Age after 6 April 2016 (though up to 3 months of backdated State Pension payments is payable to the deceased’s estate). Someone can normally inherit a partner’s extra pension if the partner reached State Pension Age before 6 April 2016 and they were married when their partner died, didn’t remarry before reaching State Pension Age and the partner had deferred the State Pension.

PRIVATE PENSION: WHAT’S PAID OUT ON DEATH?

The following summarises the position for money purchase plans (that is, not final salary plans) and assumes benefits (if taken) are in the form of a drawdown plan. If you are already taking benefits in the form of an annuity then certain restrictions may apply and you should refer to your policy documents. You should also note that benefits are taxable if not settled within 2 years of death:-

Death Before Age 75:- 

 Death After Age 75 

These new rules and freedoms can provide useful planning opportunities, particularly if considering how to source income and your Inheritance Tax position – remember that death benefits from pension plans normally fall outside of your Estate for Inheritance Tax purposes.

Beware Of Scams

There are three things we should know: 1) Anyone can be scammed; 2) Scammers are cleverer than you and I; 3) If an investment looks too good to be true, it usually (probably inevitably) is. If you have “come across” or been offered a great investment opportunity, there is a very high likelihood that you have misunderstood the risks involved or are being scammed.

Spot Warning Signs: Cold calls, cold emails; Repeated calls, emails; Exclusive offers where you are asked not to tell anyone about the opportunity; Time pressure (while stocks last) or offers of discounts or bonuses on investment opportunities; Being told not to worry about the risks; Requests for personal details, PIN/password.

Clone companies/websites: fraudsters using marketing material and websites to mirror genuine companies cost victims £78 million (an average of £45,000 per investor) in 2022 according to Action Fraud. Carefully check the website for subtle differences, check the FCA register, check the URL, call the company (not using the telephone number provided on the website). 

The same can apply to clone email addresses or texts: no bank or financial institution will ask you to move accounts or ask you for your bank details, and nor will HMRC on the promise of a refund of overpaid tax.

No reputable adviser will ask you to rush through any investment decision: sit back, take your time, understand what is being offered.

Use your instincts, check with family and friends.

Contact John Perry should you wish to discuss any aspect covered in this Newsletter 

July 2023

NEWSLETTER JULY 2023

Topping Up The State Pension: Deadline Extended

In a previous Newsletter I mentioned that anyone with a gap in their NI record from 2006/07 to 2015/16 tax years had until 5 April 2023 to fill in any missing NI payments, but that from 2023 you will only be able to go back 6 years. This deadline has been extended to 5 April 2025 given the difficulty many people have experienced in getting through to DWP’s Future Pension Centre or to HMRC’s payment line. The extension should not mean that you delay taking action.

Before doing anything else, check your State Pension to see whether you will receive the full amount in the future or whether there are gaps in your NI record. You can do this at www.gov.uk/check-state-pension or you can telephone DWP on 0800 731 0175 or you can fill in a Form BR19 and send it to Newcastle Pension Centre, Futures Group, The Pension Service 9, Mail Handling Site A, Wolverhampton, WV98 1LU. If there are gaps so that you may not receive the full State Pension in the future, you should telephone the Future Pension Centre on 0800 731 0175 and they will run through with you which NI years are missing and the costs required to bridge the gaps. These costs may not be the same as the current Class 3 Voluntary NI rates.

On current rates, each additional one year of State Pension is worth £5.82 a week or £302.64 a year, and the current Class 3 Voluntary NI rate is £17.45 a week or £907.40 a year. So, you will have earned back the NI payment in under three years. Over a 20 year retirement this could provide a total of £6,052 (plus annual increases) for a one-off cost of £907. But remember that you may reach the full 35 year record in future years without the need to pay a lump sum, so go to the Government’s “check your state pension” website to help decide whether it’s worth topping up now.

Child Benefit Tax Charge: Should You Still Register? 

Child Benefit is an important benefit, providing £1,248 (based on £24 per week) for a first child, with £826.80 for each additional child (based on £15.90 per week). However, for couples if one parent earns more than £50,000 a year then a tax charge applies of 1% of the benefit for every £100 above the £50,000 level, and this amount needs to be repaid to HMRC. If the income of one parent exceeds £60,000 pa then the whole of the child benefit received is taken back through a Child Benefit Tax Charge.

The temptation therefore is not to claim in these circumstances but this can be a mistake. By failing to register for child benefit (even if you then opt not to receive payments), the stay-at-home parent may forego certain benefits such as entitlement to national insurance credits and therefore qualification for future State pension.  If these circumstances apply to you – register. Visit www.gov.uk/child-benefit  or call the Child Benefit Office on 0300 200 3100.

Although the government recently announced that it plans to fix the problem by making “retrospective” changes to NI records, why wait and see?

SAVINGS RATES ARE ON THE RISE

Comment on interest rate rises over the past year has focused very much on the effects of mortgage payments, but on the other hand after 15 years of near zero returns on savings accounts interest rates have finally been on the rise. Easy access accounts are available with interest rates of up to 4.3%, certain notice accounts are at 5%, with fixed rate bonds in excess of 6% for 1 and 2 year fixed rates. Further rises may be on the cards following the latest Bank of England rate rise.

It may be worthwhile checking out the best rates on a comparison website such as www.moneyfacts.co.uk or others such as www.comparethemarket.com or www.moneysupermarket.com 

NATIONAL SAVINGS ACCOUNTS (NS&I)

Although perhaps not as attractive in terms of rates, National Savings are 100% secure, even above the £85,000 limit.

Guaranteed Growth Bonds (1 year fixed) currently pay 4%, and Guaranteed Income Bonds (1 year fixed) pay 3.9%. Standard Income Bonds are available at 3.40% as is the Direct Saver Account, whilst the 3 year fixed Green Savings Bond offers 4.2%. And it may be worthwhile looking at premium bonds for some cash holding. Of course, there is no interest on premium bonds (nsandi quote an annual prize fund interest rate of 4% pa to reflect the chances of winning) but you never know - the big prize? .….

INCOME TAX ON INTEREST SAVINGS

The low interest rates over the last few years has meant that few people have had to pay income tax on the interest, given that the savings allowance is £1,000 for basic rate tax payers or £500 for higher rate tax payers (Note: if your taxable income from other sources (including dividends) does not exceed £5,000 then your interest is taxed at 0% up to £5,000).

As banks and building societies do not deduct any tax from interest (paid gross) then you may need to notify HMRC about your untaxed but taxable interest. If you normally complete a tax return then you will include interest in the relevant section, if not then you may wish to inform HMRC of the taxable interest (by 5 October after the end of the tax year). HMRC will usually change your PAYE Tax Code to collect the income tax payable, but if they cannot they may send you a bill at the end of the tax year or ask you to fill in a tax return.

Although HMRC are informed of the interest you earn each year and so may use that data, if you wish to be sure you can write to HMRC at Pay as You Earn and Self-Assessment, HM Revenue & Customs, BX9 1AS showing your name, NI Number, bank/building society name, sort code, last 4 digits of your account and the amount of interest received.

MAJOR CHANGES TO PENSION PLANNING

Various announcements were made in the March Budget that have a positive impact on pension planning for some:

The Lifetime Allowance, the maximum value you can hold in a pension plan before the fund becomes subject to a tax charge is being abolished. The tax charge itself is abolished from April 2023, with the lifetime allowance completely abolished from 6 April 2024. This is of course good news for anyone who has built up substantial pension savings, although the Labour Party has already announced that it would re-instate the tax charge should it be elected.

The maximum tax free cash sum that can be taken from a plan is still 25% of the fund value, but with a maximum of 25% of the current lifetime allowance to give a maximum of £268,275 – this may be higher if you have any of the pension protections. Over time, the value of this maximum amount will therefore be reduced in real terms.

The Annual Allowance, the overall maximum that can be contributed to a pension plan each tax year, has increased from April 2023 from £40,000 to £60,000, giving more leeway for pension savings. 

The Money Purchase Annual Allowance, the maximum that can be contributed to a money purchase pension plan after you have drawn taxable income from it is to rise from £4,000 to £10,000 per tax year.

SAVINGS FOR CHILDREN

A child is treated in the same way as an adult for tax purposes, and so is subject to income tax and capital gains tax on their income and gains but also enjoys the same personal allowances as an adult. Care needs to be exercised when a parent makes an investment with their own money for the benefit of their own minor child -   when income is produced, the whole of such income could be assessed to income tax on the donor parent once income exceeds £100. 

As for any investment, due consideration needs to be given to matters such as the Time Line (clearly the longer the time between now and the time funds are required, the better in terms of planning), Accessibility (for example a Junior ISA belongs to the child and cannot be accessed until age 18. If you may require access to the funds before your child is 18, then one of the other routes may be more sensible) and How To Invest? (as a generality, the longer the term the more risk that can be considered to try to provide real growth on the savings. For short time periods cash or National Savings may be the only options to avoid risk, but for longer terms investments in stocks and shares funds are more likely to provide real returns albeit with increased risk and volatility).

Options to invest in the child’s name could include:

Bank or building society accounts: The age at which a child can open a bank account/building society account varies from institution to institution. Where larger sums are involved, accounts would usually be opened either as designated accounts (a form or bare trust) or trustee accounts.

ISAs: 16 and 17 year olds are able to invest up to £20,000 in a Cash ISA per tax year currently. The “£100 rule” will, however, apply when a parent gifts money to a child to enable that child to take out an ISA. 

Junior ISAs (JISAs): These are available for any child under 18 years of age, who is UK resident and does not hold a Child Trust Fund Account, in addition to a Cash ISA for 16 and 17 year olds.  JISAs permit up to £9,000 per child per tax year (in a cash account and/ or stocks and shares) by any one or more persons (e.g. parents or grandparents) for tax free accumulation of income and capital until age 18 when the JISA will convert to an ordinary (adult) ISA. At age 18 the child has unconstrained access to the funds invested.

Pension Plans: Anybody can contribute to a registered pension plan for a child.  A net annual contribution of up to £2,880 would generate tax relief credit of £720 making a total investment into the plan of £3,600, the maximum that can be paid to a registered pension on behalf of a relevant UK individual who has no relevant UK earnings. The obvious disadvantage is that no funds will be available until the child is aged 55 (57 from 2028). This could also be an advantage of course.

Child Trust Fund (CTF): No new CTF accounts have been available since 3 January 2011, but CTF accounts set up before that date can continue and top-ups can be made (although Government contributions are no longer paid). Family and friends of the child (anybody in fact), and the child (when older), can between them make annual contributions of up to £9,000. All income and capital gains arise free of tax.

National Savings Premium Bonds:  Up to £50,000 per child, minimum £25, the account is under the control of a parent/guardian until the child is 16. Anyone can subscribe, prizes are tax free and the “£100 rule” does not apply.

An Investment Account can invest in the same funds as an ISA (useful if you are using your ISA allowance for other purposes) but growth within the funds is subject to Capital Gains taxation and income tax is payable on interest or dividends from the funds, but these are likely to be small for savings plans. These cannot be in the child’s name but you can if you wish “designate” the account in your child’s name (effectively a bare trust) although again the funds then become the property of your child from age 18 if this is the case.

One of the problems with investments for children is that the parent or grandparent is wary of allowing the child full access to the funds at age 16-18. It may be therefore that a preferred route is to arrange investments in your own name but earmarked for the child until you feel the time is right. There are basically three ways in which investments can be arranged in this way:

(a) You notionally earmark the investment for a child’s benefit.

(b) You create a trust for the benefit of a child.

(c) You designate an investment for the benefit of a child – although the legal and tax effects of this will depend on your domicile (the rules in Scotland are different from the rest of the UK).

INHERITANCE TAX: A GROWING PROBLEM

Inheritance Tax receipts by HMRC are rising rapidly. In the 2011/12 tax year, HMRC collected £2.9 billion in Inheritance Tax, but £7 billion in 2022/23 year, affecting the estates of more and more people. 

Yet there are many ways of reducing or eliminating this tax.

Everyone is entitled to an estate of £325,000 without paying Inheritance Tax, and for married couples, if the first spouse to die does not use all of their nil rate band, the unused amount can be transferred to a surviving spouse. There is an additional nil rate band available of up to £175,000 where the main residence passes on death to direct descendants such as children and grandchildren. The Residence Nil Rate Band is also transferable between spouses/civil partners, but is reduced where an estate exceeds £2 million value. This additional nil rate band can mean that from April 2020 an individual can have a total estate of up to £500,000 before IHT is payable on death.

So if on death the first to die leaves everything to the spouse and has not made other gifts within 7 years of death, then the surviving spouse will have a combined nil rate band of £1,000,000. A problem is that these bands are frozen until at least 2028.

Inheritance Tax on estates above the nil rate band is charged at 40%. 

There are very many ways to reduce the effects of Inheritance Tax:- 

• Gifts of an unlimited amount between UK-domiciled spouses are exempt.
• You can give up to £3,000 per tax year without any liability to Inheritance Tax.
• Gifts of any amount are exempt if they are made on a regular basis, are made out of income and do not affect your standard of living. Accurate records would be required here.
• Gifts on marriage of up to £5,000 from a parent, £2,500 from a grandparent and £1,000 by other relative are exempt.
• Business Property Relief of 100% can apply to business property owned for two years or more (eg a shareholding in a non-quoted trading company). 50% relief is available on assets owned by a controlling director that are used in the company’s trading business.
• Outright gifts of any amount made during your lifetime would fall outside of your estate for Inheritance Tax purposes after 7 years. Care is needed as gifts of property for example can be subject to immediate Capital Gains Tax at the time the gift is made. Gifts of cash are not subject to Capital Gains Tax. Such gifts need to be made “without reservation”. That is when you make the gift, if you retain a benefit (such as enjoy the income generated by such a gift) then the gift will be deemed to remain as part of your estate. The problem with such gifts is often one of control – the donor would like to have some control over who receives the benefit and when. This can often be overcome by the use of trusts.
• Gifts into most trusts (up to the amount of the nil rate band) will fall outside of your estate after 7 years and the growth in value on the gifts falls outside of the estate immediately. It is important that gifts into such trusts be limited to £325,000 otherwise it could give rise to an immediate Inheritance Tax charge at 20%. For some trusts, an income can usually be retained by the donor in respect of the amounts paid into such trusts without affecting the usual gift with reservation rules
• Where a potential Inheritance Tax liability is left unreduced after the above, you can provide for that liability through a life assurance policy held in trust.

Contact John Perry should you wish to discuss any aspect covered in this Newsletter 

December 2022

                         NEWSLETTER 2022

                                             A Very Happy Christmas To All

                                         2023 will be a much better year!

STOCK MARKETS SET FOR A REBOUND?

2022 is drawing to a close and I think we can agree that it has been a truly awful year as far as investments are concerned. This follows the 2020 “Covid year” which brought its legacy of a breakdown in supply chains in many goods and services, exacerbated by continued lockdowns in China.

The war in Ukraine, which many thought would be short-lived, has proved to be much longer-lasting. The same comment can be applied to inflation (accompanied by interest rate rises) which many had hoped would be temporary but which has become much more embedded given the energy crisis in particular.

Although doom and gloom seems to be everywhere in the media, in fact so far earnings of leading companies are holding up well, the energy crisis in America may have peaked and inflation there may have softened. China is trying to boost its economy (although the best boost may be to cease lockdowns). The energy crisis is a major concern of course, and a danger for all economies is the servicing of the debt pile following the huge spending on covid relief and now energy subsidisation.

As consumers tighten their belts, we know that the coming months are going to be difficult for many.

From an investment viewpoint however, stock markets will have built in the above and much of further anticipated bad news. Component costs are falling rapidly as supplies improve, gas prices have fallen but will remain volatile, shipping costs are down over 20% this year and supply bottlenecks are finally easing. All of these point to a strong recovery for economies once inflation is dealt with.

And we should remember that economies and stock markets are different, certainly in the short and medium terms. Markets have largely built in inflation, interest rate rise predictions and recession probabilities, and indeed have shown some stability and growth over the last few weeks. When they happen, upswings in markets can come quickly and we have to be invested to take advantage, although we may not quite be at that point just yet.

KEEPING YOUR TAX TO THE MINIMUM AND MAXIMISING BENEFITS

Tax rules are complex enough, but there are some simple basic rules that should be borne in mind.

SAVINGS RATES ARE ON THE RISE

Interest rates have finally been on the rise, but as usual not all banks and building societies are passing on the increase. Shopping around is therefore important, particularly if your savings are stuck in an account offering miserly rates.

As of 23 November, easy access accounts are available with interest rates of up to 2.8%, with 1 year fixed rate bonds of up to 4.35% and 2 year fixed rate bonds of up to 4.75%.

It may be worthwhile checking out the best rates on a comparison website such as www.moneyfacts.co.uk, but given that the Bank of England is meeting again on 15 December you may wish to hold on until that rate decision.

And it may be worthwhile looking at premium bonds for some cash holding. Of course, there is no interest on premium bonds (nsandi quote an annual prize fund interest rate of 2.2% pa to reflect the chances of winning) but you never know - the big prize? .….

MEETING CHILDCARE COSTS

Rising childcare costs are a problem for parents who work, but it is worthwhile re-iterating the help that is available:-

The 30 hours free childcare scheme is available to 3-4 year olds for up to 38 weeks per year where the child is cared for by an approved childcare provider (nurseries, pre-school, registered child minders) as long as both parents are working, earning above the national minimum wage but below £100,000 a year. In some circumstances, the 38 week period can be increased to 52 weeks if fewer than 30 hours a week are used.

The tax free childcare voucher scheme is available where parents are working for children under 12 who are cared for by any Ofsted-registered provider including nurseries, nannies/childminders or after-school clubs. For every £8 that you put into the tax-free childcare account, the government adds £2 to a maximum of £2,000 per child (so if you put in £8,000, the government adds £2,000 a year).

This is certainly not free child care, but taking advantage of what’s available is a step.

STATE PENSION AGE SET TO RISE?

The Autumn Statement confirmed that State Pensions will rise by 10.1% from April, and this has focused attention of the cost burden of state benefits.

The Government has already put in place plans to increase the state pension age so that:-

It will be rising from 66 to 67 between 2026 and 2028.

It will rise again to 68 between 2044 and 2046.

Jeremy Hunt announced in the Autumn Statement that the State Pension Age is under review again and that a consultation paper is expected to be provided early in 2023, the expectation being that the age 68 change may be brought forward with a new age of 69 or 70 being mooted as the standard State Pension Age.

The rocketing costs of state pension provision, the longer life expectancy, and the need to balance the ratio of people in work and those on state pension are all factors.

STATE PENSION – HOW THE OLD AND NEW SCHEMES INTERACT

the changes in State Pension provision from April 2016 have brought some confusion for people reaching State Pension Age. In particular, a question often asked is “I have paid NIC for 35 years, so why am I not receiving the full state pension of £185.15 a week?”

There are in fact two State Pension rates:-

New State Pension (new scheme from April 2016):                                   £185.15 a week (2022/23 year)

Old Basic State Pension (old scheme before April 2016):                       £141.85 a week (2022/23 year)

The new State Pension of £185.15 a week applies only where NIC has been paid each year since April 2016, this full amount being available to those with at least 35 years of NI contributions or credits since 2016.

For anyone who has already built up State Pension entitlement before 6 April 2016, a “starting amount” is calculated which is the higher of:-

1) Entitlement under the new Scheme above (so 1/35 of £185.15 per week for each year of NIC with a maximum of 35 years counting) minus a deduction for any periods of being contracted-out.

2)  Entitlement under the old Scheme – 1/30 of £141.85 per week for each year of NIC with a maximum of 30 years, plus any entitlement under the State Second Pension or SERPS, less a deduction for any periods contracted-out.

If the starting amount is above £185.15 per week, the excess is protected and treated as a “protected payment”. This protected amount will however increase in the future only by the Consumer Prices Index (CPI) and not by the highest of price inflation, earnings inflation and 2.5% which applies normally. If the starting amount is less than £185.15 per week, you can earn extra State Pension for NICs paid after 6 April 2016.

As an example, if someone reaches State Pension Age today and has a “starting amount” of £120 a week at 5 April 2016, and has continued to make NI contributions since that date (6 years), the State Pension entitlement will be £120 plus 6/35ths of £185.15 (£31.74) to give a total of £151.74 a week. Therefore, depending upon the starting amount at 6 April 2016, the State Pension entitlement can be higher or lower than the New State Pension.

CRYPTO CATASTROPHE

Well, it was always going to happen. The spectacular collapse of one of cryptocurrency’s biggest exchanges, FTX, in November has hit hundreds of thousands of traders, with possibly 80,000 UK traders suffering despite FTX not being regulated in the UK and not authorised to offer services under the Financial Conduct Authority’s crypto asset rules.

The collapse of FTX has been blamed on poor management and the lack of effective regulation, and is having a spill-over effect on other businesses in the crypto-currency sector such as Genesis and Gemini, whilst the price of Bitcoin has fallen from $67,707 in November 2021 to $16,374 at 23 November 2022.

My view has always been that investing in crypto is gambling, not an investment. Very few people actually understand crypto (I don’t) and I don’t know what it’s for – it’s virtual not real, is not a currency as not universally accepted, offers no protection, and is open to criminal activity. “Invest” only if you fully understand where your money is and what you are actually “investing” in.

Contact John Perry should you wish to discuss any aspect covered in this Newsletter 

July 2022

NEWSLETTER JULY 2022

The Cost Of Living Support Package 

To help households with the high energy costs, the Government has announced a £15 billion package to be funded by a windfall tax on oil and gas producers. The main points are:-

• All UK households with an electricity meter will receive a one-off grant of £400, automatically applied to bills from October. This does not need to be repaid and it replaces the previous plan for a £200 subsidy which would have had to be repaid over 5 years.
• 8 million+ households on means-tested benefits (including universal credit, tax credits, pension credits) will receive a one-off £650 “cost of living payment”, being paid in two stages – the first in July and the second in the Autumn. These tax-free payments will be made directly by the DWP and will not affect existing benefits.
• 8 million+ pensioner households that receive the winter fuel allowance will receive an additional £300 one-off “pensioner cost of living payment” this winter, again paid directly to them. This is tax-free and will not affect any other benefits being received.
• A separate £150 “disability cost of living payment” will be made in September to those who receive the disability living allowance, personal independence payment and attendance allowance.
• The £150 council tax rebate should by now have been received by those eligible, namely all properties in council tax bands A-D. Those that do not pay by direct debit have to apply to the local council separately.

The usual protests of “too little too late” perhaps need to be tempered against a backdrop of the recent huge Covid support measures and rising Government debt costs.

Premium Bonds 

Premium Bonds currently have a minimum limit of £25 and a maximum holding of £50,000, and can also be purchased for children under the age of 16. 

Of course, there is no interest paid on premium bonds but your money is entirely safe and you are entered into a prize draw. From June, nsandi increased the chances of winning a prize – they quote an annual prize fund interest rate of 1.4% pa to reflect the chances of winning (previously 1%) and every £1 bond number now has a separate and equal chance each month of winning a prize from £25 to £1 million, the odds of winning any prize being 24,500 to 1 (previously 34,500 to 1).

A safe holding for a proportion of funds (but beware the effects of inflation), and you never know….

Topping Up The State Pension: Act By 5 April?

If your NI contribution record is not enough to achieve the full single tier State Pension (normally need 35 years), you can buy extra years by paying voluntary Class 3 NIC (an alternative applies to the self employed who earn below £6,725 pa – you can elect to pay Class 2 NIC of £163.80 a year voluntarily).

Currently, anyone with a gap in their NI record from 2006/07 to 2015/16 tax years has until 5 April 2023 to fill in any missing NI payments, but from 2023 you will only be able to go back 6 years. You would pay the Class 3 NIC rate of £15.85 a week (£824.20 a year).

On current rates, each additional one year of State Pension is worth £5.29 a week or £275.08 a year. So, you will have earned back the payment of £824.20 in under three years. Over a 20 year retirement this could provide a total of £5,500 (not including any annual increases) for a one-off cost of £824.

You can now check quite easily if you have paid or are likely to pay enough NI contributions (www.gov.uk/check-national-insurance-record) and if you are not going to reach 35 years to qualify for the maximum then you can buy added years.  But remember that you may reach the full 35 year record in future years without the need to pay a lump sum, so go to the Government’s “check your state pension” website to help decide whether it’s worth topping up now.

Child Trust Funds and Junior ISAs 

Child Trust Funds (CTFs) were created in 2005 and automatically opened for children born between 1 September 2002 and 2 January 2011 with a £250 voucher (£500 for lower income families) and with a second £250 payment for some children when they reached age 7, but this was scrapped from 2010. Parents and grandparents could then add to the CTFs. The children could gain access to their account only when they became 18, so the first CTFs became available from September 2020. Since 2015, CTFs could be converted into Junior ISAs.

According to The Investing and Saving Alliance, it is thought that between September 2020 and 31 May 2021:-

• 525,000 CTF accounts matured
• 184,000 have been cashed in
• 36,000 have been rolled over into an ISA
• 305,000 are thought to be still unclaimed!

The CTF provider should have written to the CTF holder just before the account matured, and given that the average CTF holds about £1,500 then it is worthwhile responding – even if you decide to roll it over into an ISA.

It is certainly worthwhile searching through those old papers to find details. If lost, HM Revenue & Customs have an official tracing service but you need to register to open a Government Gateway with an ID and Password, and provide a National Insurance Number. HMRC then send details in the post.

Junior ISAs have now been running for 10 years and although they started off as a bit of a “side show” for savings, they have become far more mainstream for children’s savings. They are as efficient as adult ISAs since they can grow tax free.

• Contributions can be made in each tax year to a Junior ISA, the current limit being £9,000.
• A child can have one Cash Junior ISA and one Stocks & Shares Junior ISA at any one time (unlike usual Stocks & Shares ISAs the child cannot hold multiple ISAs of the same type at the same time).
• The child takes control of the Junior ISA at age 16 but cannot access the funds until age 18.

There are drawbacks given that the child can access the funds at age 18 but Junior ISAs can give the child a tremendous head start.

Student Loans

University costs are topical at the moment:

How Big Are They? Tuition fees can be up to £9,250 per year. The average living costs for a student seem to be about £550 a month, and the average rent about £600 a month, so over a 10 month period about £11,500 a year (source: savethestudent.org). Clearly, these depend on where the university is.

The average student debt today is in excess of £45,000.

When Are They Repaid? At present, graduates start repaying their loan when they earn more than £27,295 (£19,884 for graduates before 2012) at the rate of 9% above this threshold. Interest starts at RPI plus 3% during student years, with those that earn below the threshold accruing interest on the simple RPI rate of interest, and those above the threshold on RPI plus up to 3%. The debt is wiped out after 30 years and in practice only one in four graduates repays their loan.

Under new plans, from 2023 graduates must start repaying their loans once they earn £25,000 with interest being RPI only, but the debt remains for longer – up to 40 years. This change seems small, but the Institute for Fiscal Studies believe that 60% of future students will now repay their loans in full compared to 25% currently.

Saving To Meet The Costs? For the average debt of £45,000 and assuming future inflation of 2% a year and investment growth of 5% a year, then a child born today would need £64,270 to meet costs, which would require saving of £183 a month. A child aged 5 now would need £58,200, requiring saving of £263 a month and a child aged 10 now would need £52,700 which would need saving of £438 a month.

How To Save? Parents and grandparents can arrange for the savings to be made in your child’s name (such as through a Junior ISA) or in your name (such as through an ISA or an Investment Account).

A Junior ISA provides tax free growth and proceeds, but belongs absolutely to your child who will be able to access it in any way he/she wishes from age 18. Access is not available before age 18.

An ISA in your name provides the same tax free growth and proceeds, but of course you have control with access at any time.

An Investment Account can invest in the same funds as an ISA (useful if you are using your ISA allowance for other purposes) but growth within the funds is subject to Capital Gains taxation, although you have your annual Capital Gains Tax allowance (currently £12,300) to set off against any gains. In addition, income tax is payable on interest or dividends from the funds, but these are likely to be small for savings plans. If you wish you can “designate” the account in your child’s name (effectively a bare trust) although again the funds then become the property of your child from age 18 if this is the case.

The key points that need to be considered when saving are 1) The Time Line - clearly the longer the time between now and the time funds are required, the better in terms of planning, 2) Accessibility needed - as mentioned above, a Junior ISA belongs to the child and cannot be accessed until age 18. If you may require access to the funds before your child is 18, then one of the other routes may be more sensible, and 3) How To Invest?: As a generality, the longer the term the more risk that can be considered to try to provide real growth on the savings. For short time periods cash or National Savings may be the only options to avoid risk, but for longer terms investments in stocks and shares funds are more likely to provide real returns albeit with increased risk and volatility. How you would invest the funds depends primarily upon RISK – the level of risk you wish to take with your children’s investments taking account of time and the target amount needed.

So, a detailed analysis is needed first – how much is needed, how much can you afford to save (you may not be able to save for all of the costs, rather make a contribution towards them), is accessibility needed, are you using your ISA allowance currently, how much risk are you prepared to take?

The War On Landlords Continues

Buy to let landlords are having a tough time of it over the last few years:-

• Removal of tax relief on mortgage interest payments, replaced by a basic rate tax credit only.
• Extra 3% Stamp Duty on second properties.
• New electrical checks and red tape are pushing up costs of renewing tenancy agreements.
• Forthcoming minimum Energy Performance Certificate targets are estimated to cost landlords up to £10,000 per property.
• The new Renters Reform Bill includes scrapping Section 21 “no-fault” evictions and getting rid of fixed-term tenancies, making it much more difficult to remove tenants. Landlords can still evict tenants who have breached their contract by repeatedly failing to pay rent or through antisocial behaviour, but will need to use Section 8 of the 1988 Housing Act which may require an arduous and costly legal process, with the delays involved. Landlords will be banned from discriminating against benefit claimants as tenants and will have to reimburse tenants if homes are substandard. Tenants will also have new rights to keep pets in the property and landlords can refuse only if they have good reason. The new Bill has a long way to go before becoming law so is unlikely to apply until late 2023/early 2024.
• All of the above come on top of rising mortgage rates which make profitability that much harder.

Of course, landlords should provide fit and proper properties to let but the extra costs, uncertainties and loss of control are making the proposition of buy-to-let far less attractive.

Crypto Currencies (Bitcoin etc)

At the beginning of the year, more articles were appearing in the press asking whether it was time to start including an allocation of crypto in investment portfolios.

Whenever asked about this, I have always replied that I do not know what crypto currencies are for, as they (a) are very difficult to understand, (b) are virtual not real, (c) are not a currency in my view as they are not universally accepted, (d) offer no protection (hackers stealing wallets), (e) are very volatile indeed, (f) leave themselves open to criminal activity given they trade anonymously and (g) are open to action from governments.

Many proponents of crypto “currencies” suggested they would be a good hedge against inflation given the limit on the number of coins in circulation. Well inflation is certainly here and has been accompanied by a huge fall in the value of such coins with Bitcoin falling from $67,707 in November 2021 to $21,136 at 28 June, hardly a hedge.

My view remains: gambling, not an investment, and so best left to gamblers.

Contact John Perry should you wish to discuss any aspect covered in this Newsletter 

January 2022

NEWSLETTER 2022

This newsletter concentrates on two aspects: planning for the end of the tax year and paying for long term care following the recent announcements.

PLANNING FOR THE END OF THE TAX YEAR

The end of the tax year approaches very quickly making it worthwhile to consider some approaches to ensure you are maximising the opportunities available. Some hints follow, although these are not exhaustive.

Maximise Your ISA Allowance If You Can

With a Cash ISA or a Stocks & Shares ISA, you can invest up to £20,000 a year tax free, so no personal liability to income tax or capital gains tax, dividends are not taxable when received under an ISA wrapper, interest is tax free, and there is no need to report ISA investments on your tax return.

And remember:-

The adult ISA limits are per person over age 18. Re-allocating savings between spouses means you can also use your spouse’s ISA allowance allowing up to £40,000 to be saved between you.

Junior ISAs are available for children up to age 16, the current limit being £9,000 per tax year. A child can have only one Cash Junior ISA and one Stocks & Shares Junior ISA at any one time (unlike adult ISAs the child cannot hold multiple ISAs of the same type at the same time). The child takes control of the Junior ISA at age 16 but cannot access the funds until age 18.

In fact, 16- and 17-year olds can have a Junior ISA of up to £9,000 plus an adult Cash ISA (they cannot have an adult Stocks & Shares ISA until age 18) to give a total allowance of £29,000.

People aged 18-39 can have a Lifetime ISA which entitles them to save up to £4,000 a year until they are aged 50 with a government top-up to a maximum of £1,000 a year. These are intended as savings towards a deposit on a first home or as retirement savings, and therefore there are restrictions on accessibility with penalties (including the loss of the government bonus) if not used as a deposit or if accessed before age 60.

Consider Topping Up Your Pension

For most people, pensions remain the most efficient way of building up long term savings – tax relief on your own contributions at your highest marginal rate of income tax, tax efficient build-up of your pension fund, accessibility from age 55 (57 from 2028), tax free cash sum option of up to 25% of the fund value usually.

For personal contributions, Income Tax relief is allowable on contributions you make to a pension plan. The basic rate of tax relief is provided by an addition to your contributions so that for every £80 you contribute, £100 will be invested into your pension plan (£100 x 20% = £20 relief). If you are a higher rate tax payer (that is your taxable income exceeds £50,270 pa currently) then additional tax relief of 20% of the gross contribution is available through self assessment (tax returns).

The overall maximum tax efficient contributions (between you and your Employer) that can be paid each year is usually £40,000 (the annual allowance) with personal contributions limited to 100% of your relevant earnings, although you are able to carry forward unused relief from up to 3 previous years if needed, as long as you were a member of a pension plan during those three years.

There are some restrictions for this annual allowance, particularly for high earners or if you have already flexibly accessed your pension savings through drawdown.

Pension and Protecting Your Personal Allowance

For higher earners, making pension contributions can help you save your tax-free personal allowance. If your income exceeds £100,000, you start to lose your personal allowance (currently £12,570) by £1 for every £2 of earnings that exceed £100,000. By making pension contributions you could get some of this allowance back as the income on your tax return is reduced by the amount of contributions.

Topping Up A Spouse’s Pension Contributions

For a non-working spouse without earnings, pension contributions of up to £3,600 a year can be made with basic rate tax relief applying. This can rise to 100% of earnings (less any other pension contributions paid and subject to a maximum of £40,000) for an earning spouse.

Splitting Pension Savings

The splitting of pension contributions where possible can also bring savings when you come to draw benefits. Say you build up a pension pot of £500,000 and start to draw down on it at the rate of about 5% each year (£25,140 a year). Assuming no other income, the income tax currently payable would be £2,514, so net income £22,626 pa. If however you had built up two pension pots (one each of £250,000), then each drawing about 5% at £12,570 would result in no income tax (assuming no other income).

Voluntary Class 3 NIC

If your NI contribution record is not enough to achieve the full single tier State Pension (normally need 35 years), you can buy extra years by paying voluntary Class 3 NIC (currently £15.40 per week). An alternative applies to the self employed who earn below £6,515 pa – you can elect to pay Class 2 NIC (£158.60 pa) voluntarily.

You should only consider voluntary contributions if you have or are likely to have insufficient qualifying years for a full State Pension and you can get a forecast from www.gov.uk.check-state-pension. The forecast should show your starting amount under the new state pension, how many years of NIC you have credited, and what is needed to make up any shortfall.

Limiting Inheritance Tax

If you feel you may have an Inheritance Tax liability in the future (please request our leaflet for more details) then one way you can reduce this is by giving away £3,000 per tax year so that such gifts are no longer part of your estate – this is known as the annual exemption.

Remember, this amount applies per individual so a couple can give away up to £6,000 each tax year.

If you didn’t make use of this exemption in the last tax year, then you can carry forward this to the current tax year, making the limit of £6,000 (£12,000 if you’re a couple).

Making Charitable Donations

If you are a taxpayer and you make charitable donations, it is always worth considering using Gift Aid so that charities can claim an extra 25p for every £1 you give at no cost to you. And if you’re a higher rate taxpayer, remember to put the amounts on your tax return as you can claim back the difference between the tax on your donation and what the charity got back.

Capital Gains Tax Allowance

Everyone has their own Capital Gains Tax allowance, and selling a jointly owned asset would mean that two allowances (£12,300 each currently) could be used to offset any capital gains. Therefore, ensuring assets are owned jointly before sale can help to reduce taxation.

It’s possible to transfer assets between spouses without creating an immediate tax charge – such transfers are made on a no gain/no loss basis so that any taxable gain is deferred until the second spouse disposes of the asset.

Transferring assets to a lower taxpaying spouse could also mean that gains in excess of the exemption can be taxed at a lower rate of 10% (18% for residential properties) rather than at 20% (28% for residential properties). For example, transferring a share portfolio (or part of it) to a lower taxpaying spouse could mean that much more of the gain above £12,300 is taxable at 10% rather than 20%.

For landlords with let properties, at least splitting ownership with a lower taxpaying spouse could mean (a) lower income tax on the profits and (b) use of both Capital Gains Tax exemptions on sale of the property with less Capital Gains Tax on the gain.

Property Sellers – Reduced Tax Deadline

If you sell a property (for example a buy to let or second property) and you make a gain, then you must pay the tax within 30 days of completion and submit a one-off return to HMRC.

Those who miss the deadline face penalties for late filing of returns and late payment of tax.

The Transferable Marriage Allowance

This has been available since 2015 but evidence suggests that this allowance is not always being claimed where it is due. The marriage allowance enables one spouse to transfer up to £1,250 of his/her personal allowance to the other spouse or civil partner, with a potential tax saving of £250.

You’ll be able to claim Marriage Allowance if all the following apply: you are married or in a civil partnership, the annual income of one spouse is £12,570 or less, plus up to £5,000 of tax-free savings interest, the partner’s annual income is between £12,570 and £50,270 and you were born on or after 6 April 1935.

To claim the allowance, you will need to register your interest at www.gov.uk/marriage-allowance and the claim can be backdated for 4 years.

Employing A Spouse

If you operate through a limited company or indeed on a self employed basis, employing a lower tax paying spouse in the business can reduce overall income tax through the use of the personal income tax allowance and the basic rate/higher rate tax bands, as well as ensuring the dividend allowances are fully utilised for spouse shareholders (remembering that the first £2,000 of dividend income is tax free). 

Savings And The Tax-Free Savings Allowance

From April 2016 a tax-free personal savings allowance of £1,000 was introduced on the interest earned on savings so that savers will be entitled to the first £1,000 of interest gross with no further liability as long as taxable income is below the higher rate tax threshold. For those with income between the higher rate and additional rate threshold a reduced personal savings allowance of £500 is available. Re-allocating savings between the spouses could ensure that each becomes entitled to the £1,000 savings allowance.

There are clearly many ways in which to save income tax by using the allowances and reliefs available simply by planning ahead.

PAYING FOR LONG TERM CARE

Following the Government’s announcement in the Autumn, the funding of social care in England is undergoing a major overhaul, assuming final agreement of Parliament.

The following provides a very brief summary of the intentions – always remember that the actual detail is important and this may not be available for a while.

What’s Changing?

The first thing to note is that care is not going to become “free”.  From October 2023, individuals will be entitled to a lifetime cap on their social personal care costs of £86,000 regardless of assets. Currently of course there is no cap.

Anyone with assets below £20,000 will have their care costs fully covered by the state, and those with assets between £20,000 (currently £14,250) and £100,000 (currently £23,250) will be expected to contribute to their costs on a sliding scale, with those with assets above £100,000 needing to fully contribute (but within the lifetime cap of £86,000 for personal care). Costs accrued before October 2023 will not count towards the cap – only contributions made from own savings and income after that date count.

What Is Covered?

This lifetime cap applies only to “personal care” (the physical acts of caring). It does not cover the costs of accommodation, food, cleaning etc for care home residents.

Living costs for people residing in a care home will be set at £200 a week (these costs will not count towards the £86,000 limit). Of course, if anyone wishes to enter a care home other than that directed by the local council will need to meet costs in excess of £200 a week.

Remember also that to qualify for care costs in the first place, we would still need to go through the local authority’s assessment process, which could restrict any local authority contribution.

Will Anyone Still Need To Sell Their Home To Pay For Care?

Some will certainly. The lifetime cap on costs does not cover the actual living costs, just the costs of care provided. Anyone in this position can apply to defer the sale of their home until after they die, with the local council meeting costs and reclaiming these from the proceeds of sale.

How Is It Going To Be Paid For?

A new health and social care tax is to be introduced to fund the NHS and the reforms to social care. From April 2022, NIC paid by both employers and workers will rise by 1.25%. This will become a separate tax from 2023 as a “Health and Social Care Levy”. The increase will also apply to the self employed. Those earning under £9,564 don’t have to pay NIC and will not have to pay the new levy. People working past State Pension Age currently do not pay NIC – this changes from April 2023. Dividends will face a tax increase of 1.25% - clearly to avoid the position where an owner-controlled company reduces salary in favour of dividends to try to avoid the increase.

How Can You Plan For Care?

The problem is that we don’t know (a) whether we shall need care and if so what kind, (b) how long we may need care for, and (c) the likely costs of this care. This makes planning very difficult, although the new rules at least make it easier given the cap on the personal care contribution.

Contact John Perry should you wish to discuss any aspect covered in this Newsletter