Pension Tax Relief
Calls to reform tax relief on pension contributions are coming from across the political spectrum.
You could be forgiven for thinking that the radical changes to pensions announced in the Budget should have put an end to calls for further reform of pension taxation. No such luck. The pension environment tends to be in constant flux and last month saw two ideas to create some more.
Steve Webb, the Pensions Minister, stepping out of his ministerial persona, proposed that tax relief on pension contributions should be at a flat rate of 30%, regardless of the contributor’s personal tax rate. At the same time he suggested the abolition of the lifetime allowance (LTA), which effectively sets the maximum tax-efficient value of your pension benefits. The LTA has just been reduced from £1.5m to £1.25m and Mr Webb’s party, the Liberal Democrats, has a further cut to £1m in its 2015 election manifesto.
The idea of a flat rate relief for pension contributions is nothing new. Last year the Pensions Policy Institute (PPI) proposed the same idea, arguing that at 30%, the overall cost would be the same to the Exchequer and that it would encourage more basic rate taxpayers to save via pensions. The PPI argued that under the current regime low earners pay around 50% of pension contributions but receive just 30% of all tax relief given.
A more radical proposal has re-emerged from the Centre for Policy Studies (CPS), a think tank closely linked to the Conservatives. In a newly published report, it suggests that tax relief on pension contributions should be replaced with a Treasury payment of 50p for £1 saved (331/3% effective relief) on pension contributions of up to £8,000 a year. It also suggests combining pensions and ISAs, with a total annual savings limit of £30,000.
None of these re-workings of tax relief may come to pass, but as the author of the CPS report, Michael Johnson, pointed out in a blog “For a cost savings-hungry Chancellor, pensions tax relief is now the lowest-hanging, juiciest fruit in Whitehall.”
Criticism for HMRC powers to seize debts from bank accounts
A Treasury plan to allow HM Revenue & Customs (HMRC) to remove cash from bank accounts without a court order has been criticized by MPs
In the Budget, the Chancellor outlined plans for new powers for HMRC to recover tax debts from anyone who owes more than £1,000 in tax or tax credits. This would allow the tax authority to withdraw the tax owed directly from debtors’ bank accounts. In early May, HMRC stated that about 17,000 people a year would be targeted under the new measures, through ‘direct recovery’ powers.
The Treasury Committee, however, says it is very concerned because tax officials have a history of making mistakes, for example by sending out the wrong tax cards. The committee said on 9 May that taxpayers could suffer “serious detriment” if officials are able, either by mistake or through an abuse of power, to take money from people who have not done anything wrong. “People should pay the right amount of tax. But HMRC does not always ask for the right amount”, said committee Chairman Andrew Tyrie. “Some taxpayers may find money taken from their accounts that later should be paid back. That would be unacceptable”.
HMRC defended the proposal and explained that it will only target those who have long-term debts and have received at least four demands for payment. It will ensure that at least £5,000 is left in total across all debtor’s accounts, including savings accounts, after the unpaid tax is seized. The debtor will be allowed a period of 14 days in which to pay while the money is frozen in their account, after which the sum will be withdrawn.
The ACCA has now backed away from their original reaction to the “draconian measures” and calls them “less fearsome than originally thought”. Clearly, this is a story to watch...
HMRC relaxes mandatory filing of vat returns online
HM Revenue & Customs (HMRC) has agreed to relax the strict rule requiring VAT returns to be filed online, the Low Incomes Tax Reform Group (LITRG) announced on 2 May.
This move follows the consultation which was launched after the appellant’s success in the First-tier Tribunal case of LH Bishop Electric Co Ltd & Others vs. HMRC Commissioners.
HMRC proposes that businesses will be permitted to use telephone filing where HMRC are satisfied that it is not reasonably practicable for them to file electronically due to their age, disability, remoteness of location, or any other reason. If for any of those reasons it is not reasonably practicable for them to file either electronically or by telephone, they will be permitted to file on paper. Any business who disputes HMRC’s decision to refuse telephone or paper filing will have the right of appeal.
Furthermore, HMRC have proposed to improve the telephone filing service by making it possible for taxpayers to ring HMRC rather than making an appointment for HMRC to ring them, by providing a dedicated line, and providing a service outside normal working hours. Until now, online returns have been mandatory unless the taxpayer is a practising member of a religious society or order whose beliefs are incompatible with the use of electronic communications, or a business in insolvency.
Anthony Thomas, Chairman of the LITRG said: “This is a good outcome to an open consultation and we are pleased that HMRC have listened to those who responded. During the consultation period, LITRG and Chartered Institute of Taxation colleagues held discussions with senior HMRC officials and we are pleased to say that the outcome of the consultation is very much in accordance with the views we expressed.
Until now, online returns have been mandatory unless the taxpayer is a practising member of a religious society or order whose beliefs are incompatible with the use of electronic communications, or a business in insolvency. In the Bishop case the Judge found that requirement breached the human rights of those who were unable to file online because they were computer illiterate due to age, or had a disability that made using a computer accurately very difficult or painful, or they lived too remotely for a reliable internet connection.
It is regrettable that it has taken more than two years of hard work, uncertainty and stress on the part of the appellants and their advisers, and tens of thousands of pounds of court costs borne by the general taxpayer to reach this point. Nevertheless, the outcome is sensible and rational and gives HMRC a sound basis for its future digital strategy”.
Pensions guidance to include life expectancy estimates
Retirees could be issued guidance on how long they are likely to live, Pensions Minister, Steve Webb, announced mid-April warning that people often underestimate how long they might live and can be left without enough savings.
The Government has pledged to provide ‘free, face to face impartial’ guidance to those about to retire as part of its shake-up of pension rules which will allow people to take their entire pension pot as cash from age 55 from 2015. Estimates of life expectancy would be based on factors such as gender, where pensioners live, and whether they smoke. Webb stated that the information would help them plan their finances more efficiently. “We don’t have a lot to go on. We might think perhaps about how long our grandparents lived, and of course, in the generation since then people are living a lot longer” he said. “Based on your gender, based on your age, perhaps asking one or two basic questions like whether you’ve smoked or not you tell somebody that they might, on average, live for another 20 years or so.”
This announcement comes as new figures from the Office of National Statistics revealed that life expectancy is rising steadily. The majority of local areas in Scotland (72%) had the lowest male and female life expectancy at birth in 2010-12. Male life expectancy at birth was highest in east Dorset (82.9 years) and lowest in Glasgow City (72.6 years). For females, life expectancy at birth was highest in Purbeck (86.6 years) and lowest in Glasgow City (78.5 years).
Cashing in on isas
HMRC have recently issued statistics showing the ISA decisions that were being made in recent years.
HMRC take their time to deliver statistics, so it was not until late April 2014 that the details of ISA subscriptions in 2012/13 emerged. They revealed:
- The total amount invested in ISAs (other than JISAs) was £443bn at 5 April 2013, split almost equally between cash ISAs and stocks and shares ISAs.
- In 2012/13, adult ISAs attracted subscriptions of £57.4bn, of which over 70% went into cash ISAs.
- The average 2012/13 subscription was £3,501 to a cash ISA and £5,629 to a stocks and shares ISA, against maxima for the year of £5,760 and £11,280.
- JISAs, which were launched in November 2011, only attracted £392m in 2012/13.
These statistics show why the Chancellor was able to make the Budget increases to ISA limits. Put simply, most of the money will go into cash deposits where, at current interest rates the tax loss is small, and few investors come near to investing the maximum (in 2011/12 less than 8% did so).
