Another notch up in State Pension Age

An independent review has recommended bringing forward the move to a state pension age of 68.

There was a time when men received their state pension from age 65 and women from age 60. Those numbers may still be locked in your memory, but they are heading towards their own retirement.

Currently, a woman’s state pension age (SPA) is about 63, on its way to 65 by November 2018. A month later both sexes will see their (equalised) SPA gradually rise to 66 by October 2020. The following increase, to an SPA of 67, takes place between April 2026 and April 2028.

In March an independent report prepared for the government made proposals about the next step up, to a SPA of age 68. The report, by John Cridland, proposed that the change should occur between 2037 and 2039, seven years earlier than provided for in the existing legislation. If the government accepts the suggestion, then you will be affected if you have not yet reached your 47th birthday.

There were no dates mentioned for further SPA increases, although Mr Cridland did say he felt SPA should not increase more than one year in any ten-year period, assuming there are no exceptional changes to mortality. In theory that could mean a SPA of age 70 arrives by 2059, which would catch the younger half of the Millennial Generation (often called Generation Y), born between 1980 and 2000.

In early May 2017, the government will publish its own report, drawing on Mr Cridland’s work and number-crunching undertaken by the boffins in the Government Actuary’s Department. Not only is it likely to adopt something very close to the 2037−2039 window, but it may also follow another recommendation of Mr Cridland: the abolition of the triple lock increases to state pensions from 2020.

Unless you are relaxed about an ever-receding state pension, now is the time to review your private pension planning arrangements.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Time to review your salary sacrifice arrangements?

New rules for taxing many salary sacrifice arrangements come into force from 6 April.

One of the employment trends of recent years has been to make employee remuneration more flexible. Instead of pay and, if you were lucky, a company car and healthcare, ‘cafeteria remuneration’ has become common, giving employees the choice of sacrificing pay for a wide range of benefits from extra holiday to gym membership and mobile phones.

Employers and employees have both gained from these arrangements:

  • The employer saved on national insurance contributions (NICs) at a rate of 13.8% of pay, although some – or even all – of that reduced bill may have been passed on to the employee.
  • The employee also saved NICs, generally at 12% if they were basic rate taxpayers and 2% if they paid higher or additional rates.
  • Crucially, the taxable value of the benefit was less than the pay forgone. In some instances, such as the mobile phone or gym membership, the tax liability was nil.

The main loser from salary sacrifice arrangements has been HM Treasury, so it was little surprise when George Osborne signalled a review in last year’s Budget. This produced a consultative document that has now been transformed into draft legislation.

The changes, which took effect from the start of the 2017/18 tax year, remove most of the advantages of salary sacrifice, with a few important exceptions. For new schemes, income tax and employer’s NICs will be based on the greater of:

  • The salary forgone; or
  • The taxable value of the benefit received (which will be less, as otherwise the arrangement would normally not make sense).

There are some inevitable transitional measures for arrangements in force before 6 April 2017, but apart from cars, employer-provided accommodation and school fees funding, the new rules will bite in no more than 12 months’ time.

There is also a handful of specific exemptions, one of the most important of which is salary sacrifice arrangements for pension contributions. These continue to provide major benefits, as the example shows.

Still a sensible sacrifice

Frank is a higher rate taxpayer who normally contributes £5,000 a year (before tax relief) to a self-invested personal pension. Instead, he could sacrifice £4,394 of his salary to achieve the same result via an employer pension contribution and save £778 in salary (an extra £451 net, after tax and NICs), assuming his employer rebates their full NIC saving:

Personal Payment

£

Salary sacrifice

£

Salary

5,172

4,394

Employer’s NIC Saving @ 13.8%

  606

Employee’s NIC @ 2%

 -103

Tax @ 40%                –2,069

Net income

3,000

Pension Contribution net of tax reliefs

3,000

Tax relief £5,000 @ 40%

2,000

Gross Pension Contribution

5,000

5,000

 

For a personalised illustration of how salary sacrifice could boost your pension contributions, please talk to us. It could make up for the extra tax you will end up paying on other sacrifice arrangements…

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

Introducing the new NS&I bond – is that it?

The Budget confirmed the rate on the new National Savings & Investments Bond.

2.2%

That is the fixed rate on the “welcome break for hard-pressed savers” which Mr Hammond confirmed in last month’s Budget. The new NS&I three year fixed rate bond will be available from April for a period of 12 months. The maximum investment will be £3,000, although unlike its widely popular pre-election predecessor, it will be available to anyone aged 16 or over.

2.2% is a ‘market-leading’ rate, as the Chancellor promised in his Autumn Statement. At the time of writing, the best three year fixed rate on offer elsewhere was 1.9%. In the government’s accounts, the new bond is shown as a ‘spend’ item, with a total cost of £290 million. That sum reflects the fact that the Treasury could borrow money at a much lower interest rate and administrative cost from institutional investors.

It could be argued that those taxpayers who don’t invest in the new bond are subsiding those who do. However, if you do invest, you may find that the return does not keep pace with inflation over the next three years – it is already below February’s 2.3% inflation rate. Your return could be even further below inflation if you have to pay tax on the interest because you have exhausted your personal savings allowance.

With hindsight, the new bond could prove to be one government gift horse whose mouth is worth a careful examination. There could be better options.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The dividend allowance cut – what’s the damage?

One of the few surprises in the March Budget was a cut to the dividend allowance to come in 2018/19.  

The dividend allowance first saw the light of day in the post-election Budget of July 2015. It was designed primarily to discourage self-employed business owners from using incorporation as a way of avoiding national insurance contributions (NICs). Ironically one of the first effects it had was to dramatically increase the government tax take on dividends.


HM Revenue & Customs has provisionally estimated that £10.7 billion of dividend income was brought forward into 2015/16 to avoid the higher rates of tax that were to apply to dividends from 2016/17 onwards.

The Chancellor’s announcement of a cut in the dividend allowance from the current £5,000 to £2,000 from 2018/19 will not result in any such pre-emptive surge in dividend payments, but it will add to the Exchequer’s income.

While Mr Hammond justified the move on the same incorporation-deterring grounds as his predecessor, the collateral damage to ordinary investors is much greater than was Mr Osborne’s announcement. The table below shows the crossover dividend levels at which investors will pay more tax in 2018/19 than they did under the old rules in 2015/16.

Taxpayer

(Dividend Tax Rate)

More tax paid than in 2015/16 if dividends exceed

Maximum tax increase between 2016/17 and 2018/19

2016/17

2018/19

Basic (7.5%)

£5,000

£2,000

£225

Higher (32.5%)

£21,667

£8,667

£975

Additional (38.1%)

£25,250

£10,100

£1,143

As the dividend allowance cut is a year away, there is time to plan ways to reduce its impact.  To learn more about your options, talk to us now.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.

6 April reminders

Tax year beginning planning can be just as valuable as its more familiar year end counterpart.

The run-up to 5 April, with the Budget (and often Easter) intervening, can be a frenetic time for personal financial planning. All tends to go quiet once the new tax year begins, but the reality is that there are many planning points that are worth considering at the start of the tax year rather than leaving it until the end.

  • ISA contributions (£20,000 maximum in 2017/18) are best made at the start of the year rather than the end, as it means the tax benefits are enjoyed for nearly a year longer.
  • A similar argument applies to pension contributions, although if your income for the year ahead is uncertain, the case for delay is stronger.
  • The dividend allowance is £5,000 per tax year, so it is worth checking early on how much dividend income you are likely to receive and whether that prompts any investment changes. If you are married or in a civil partnership, that might mean transferring assets between the two of you.
  • Similar considerations of who holds what apply to deposit accounts and the personal savings allowance of up to £1,000 a year each.
  • The many thresholds built into the income tax system are a driver to working out what might be your total income in the tax year as soon as possible. If you know in April you are likely to be near a threshold by next March, you have that much more time to plan accordingly.

If you would like a tax year beginning review of your financial planning, please talk to us now – don’t wait until next March.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.