New income tax statistics from HMRC appear to be good news, but the numbers are not what they seem.
Taxpayer’s marginal rate The data recently released by HMRC shows the average income tax rate for the three main categories of taxpayer. For example, in 2020/21, on average, basic rate taxpayers paid 9.5% of their income in tax and in the current tax year are expected to pay a slightly larger share, 9.9%. At first sight, higher rate and additional rate taxpayers seem to be doing better, as their average income tax rate drops. HMRC offers no real explanation for the difference, other than a statement that says, “Average rates of income tax vary over time depending on the number of overall income tax payers and the number in each marginal rate band, as well as growth in incomes and changes to income tax thresholds and allowances.” The story behind the changing numbers may be why HMRC is less than fulsome in setting out what has happened: · For basic rate taxpayers, the average rate has increased because the personal allowance has only risen by £70 (0.56%) since 2020/21, whereas average weekly earnings increased by 23% between April 2020 and April 2023. So a greater share of income is taxable in 2023/24 than in 2020/21 and the proportionate tax rate rises. · The backdrop for higher rate taxpayers is the same, so why the falling average rate? What HMRC forgot to mention is that in 2020/21, the higher rate tax band ended at £150,000, whereas in 2023/24 it stops at £125,140. Many higher rate taxpayers towards the top of the band three years ago have now migrated into the additional rate band. The overall result is the lower average rate for higher rate taxpayers. · The picture for additional rate taxpayers is almost a mirror image of the higher rate scenario. The near £25,000 lower starting point for additional rate in 2023/24 than 2020/21 means there are just about double the number of additional rate taxpayers in 2023/24 than in 2020/21. That extra, lower income population in the additional rate band drags down the average rate. All of which should make you check what tax band you fall into for 2023/24 and seek professional advice if you have questions or concerns about how the changing rates might affect you. Although the lifetime allowance was effectively abolished from April 2023 as the lifetime allowance charge was removed, it has been retained on statute for a year to allow time for the intricacies to be ironed out. Draft legislation, to take effect from 6 April 2024, has now been published.
With the lifetime allowance abolished, the problem faced by the legislators was how to tax lump sums and death benefits in its absence. They have overcome this by introducing a new lump sum and death benefit allowance, which, not surprisingly, is the same amount as the old lifetime allowance – £1,073,100. If the draft legislation is enacted, the most significant changes will be in the way death benefits are taxed when a pension saver dies before age 75. Death benefits – lump sum A beneficiary can generally receive lump sum death benefits tax free if the pension hasn’t been accessed (uncrystallised). · Previously, any excess over the lifetime allowance was taxed at the rate of 55%. · From 2024/25, the excess over the new lump sum and death benefit allowance will be taxed at the beneficiary’s marginal rate of tax. This is as intended when the changes were announced. Death benefits – Income What was not announced alongside the initial abolition news is the proposed approach to taxing uncrystallised death benefits taken as income – either by drawdown or an annuity. Previously, the pension income was exempt from tax. From 2024/25, the proposed legislation will see pension income taxed in full at the beneficiary’s marginal rate of tax. The new rules are broadly neutral if a pension saver dies after reaching age 75, but the tax treatment could be potentially worse from 6 April 2024 for those that die younger. Given the more advantageous tax treatment if uncrystallised funds are taken as a lump sum (completely exempt if less than the new lump sum and death benefit allowance), this could push more beneficiaries into taking a lump sum even where income would be more suitable for their needs. HMRC’s policy paper on the abolition of the lifetime allowance can be found here. If an English or Welsh domiciled person dies without leaving a will, the amount that a surviving spouse or civil partner can inherit as a statutory legacy under the intestacy rules has – from 26 July – been increased from £270,000 to £322,000.
This statutory legacy only comes into play if the deceased also has children – the spouse or civil partner receives £322,000 and the deceased’s personal possessions, plus 50% of the remainder of the estate. The children receive the other 50% of the remainder. An exception applies where property is jointly owned. If there are no children, the spouse or civil partner will inherit the whole estate. Example Noah died intestate leaving an estate valued at £900,000. He is survived by his spouse, Emma, and two children. Emma inherits a total of £611,000 (£322,000 plus 50% of the remainder), and the two children will share £289,000. Controversy The statutory legacy is reviewed every five years, and the next review is due in January 2025. However, the five-year review period is overridden if inflation increases by 15% or more. The trigger point should have been December 2022, but inflation then fell in January 2023 before again going over 15%. The 26 July uplift is therefore around seven months late, and some surviving spouses and civil partners will receive £52,000 less as a result of the delay. A House of Lords committee has raised the matter with the relevant authority, the Ministry of Justice, asking how such shortfalls will be dealt with. Importance of leaving a will The importance of leaving a valid will can be seen by looking at those who have no automatic right of inheritance: · Unmarried partners; · LBGT partners not in a civil partnership; · Relations by marriage; · Close friends; and · Carers. Close relatives other than children only inherit in certain circumstances. The intestacy rules differ for those domiciled in Scotland or Northern Ireland. The government has created an online tool to check who will inherit if someone dies without leaving a valid will. This can be found here. Draft legislation has been published that will, from 6 April 2024, restrict the geographical scope of agricultural relief and woodlands relief to property in the UK.
Currently, property can qualify for either agricultural relief or woodlands relief if it is situated in the European Economic Area (EEA). With the UK having left the EU, the change will bring the inheritance tax treatment of property located in the EEA in line with the treatment of property located in the rest of the world. The change will also see property located in the Isle of Man and the Channel Islands ceasing to qualify for agricultural relief from 6 April 2024, bringing the treatment in line with that for woodlands relief. Inheritance tax relief
The government is also consulting on how agricultural relief might be extended to certain types of environmental land management. The current rules are sometimes perceived as a barrier to landowners participating in environmental schemes due to concern that tax relief could be lost. Although business relief will often be available as an alternative, this relief is not available in all circumstances. HMRC’s detailed guidance on agricultural relief can be found here. One of the many criticisms aimed at the High Income Child Benefit Charge (HICBC) is that anyone caught by the charge needs to submit a self-assessment tax return even if all of their tax is collected under PAYE. However, this is set to change.
The government has announced that employed individuals will, in future, be able to pay the HICBC through their PAYE tax code without the need to register for self-assessment. The statement in July on draft Finance Bill legislation from Victoria Atkins, the Financial Secretary to the Treasury, didn’t give a date for the change, but said details would be released “in due course”. The change will be particularly welcome for those earning just over £50,000 who have to go through the self-assessment process just to report and repay a small amount of child benefit. Child benefit For 2023/24, child benefit of £24.00 a week is paid for a first child, with £15.90 a week paid for each subsequent child. Child benefit is paid regardless of income, so the HICBC is the government’s way of reducing the amount paid to higher earners. The charge The HICBC can come into play when an individual – or their partner – receives child benefit and their annual income exceeds £50,000. · The charge removes 1% of child benefit for every £100 of income over £50,000. · Once income reaches £60,000, the charge is 100% so the amount of child benefit is essentially reduced to nil. · For those with several children, the HICBC can result in a high effective marginal tax rate. For 2020/21, some 355,000 individuals were hit by the charge, with a high proportion having been subject to compliance checks by HMRC for failing to register for self-assessment. Despite the HICBC being in place since 2013 – and with HMRC running various publicity campaigns – there is still a general lack of awareness. Although HMRC has adopted a more lenient attitude towards HICBC penalties in recent years, the maximum penalty can potentially be equivalent to the amount of HICBC owed. Detailed government guidance on the HICBC can be found here. Hard on the heels of the Sunday Times Rich List, will new proposals for a wealth tax gain any traction?
In 2020, a group of economic research bodies set up the Wealth Tax Commission to examine the options for a wealth tax to cover the huge costs then being incurred to handle the Covid-19 pandemic. The Commission produced a comprehensive report at the end of the year that suggested: · A one-off wealth tax (as opposed to annual); · A rate of 5%, payable at 1% a year for five years; and · The tax to be payable on all wealth above £500,000, including pensions and main residences. The tax would have produced £260 billion in total, almost as much as income tax is projected to raise in 2023/24. While the proposals received considerable attention at the time, they were given the cold shoulder by the government and soon disappeared from view. About two and a half years later, a new wealth tax proposal has been put forward by a group of three tax-campaigning organisations. Their launch came shortly after the latest Sunday Times Rich List was published, showing that 350 individuals and families together hold combined wealth of £796.5 billion. The new wealth tax was substantially different from the Commission structure: · It would be an annual tax; · The rate would be 2%; and · It would only be payable on all wealth above £10 million. The high threshold means that the annual amount raised each year would be less than the previous proposal – the campaigners suggested up to £22 billion, although the Commission’s 2020 research suggested a figure of around £17 billion for a similar structure– there are only around 22,000 individuals with wealth of greater than £10 million, according to the Commission. Polling for one of the three organisations, undertaken by YouGov, showed 74% public support for the 2% wealth tax. Such a result is hardly surprising – most people are in favour of a tax from which they could only benefit. This latest wealth tax proposal seems destined to suffer the same fate as its predecessor. Were the government to provide a counter argument, it could point out that the freezes it has made to the personal allowance and higher rate threshold alone will raise an extra £21.9 billion in 2023/24, rising to £25.5 billion by 2027/28. This seems unlikely however… The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid. For 2021/22, the gap was at an all-time low of 4.8% (or £35.8 billion), although in monetary terms the gap increased by some £7 billion from 2020/21.
Small businesses Recently published figures from HMRC show that small businesses now account for the largest share of the tax gap, at 56% of the total or just over £20 billion. This percentage has grown steadily from 40% in 2017/18. By comparison, the share for mid-sized and large businesses has fallen from 18% to 11% over the same period. There isn’t sufficient information to understand what is happening here, but there are a couple of possibilities: · Having endured the challenges of the Covid-19 pandemic and now facing an equally tough economic climate, small businesses may be under-declaring income or, more likely given most sales are now done electronically, overclaiming on expense deductions. · At the same time, HMRC now lacks the resources to carry out extensive tax investigations. And, of course, having an extremely complex tax system doesn’t help. The whole concept of the tax gap has been subject to criticism, especially as HMRC does not explain how figures are calculated. Making Tax Digital (MTD) HMRC has been accused of using the tax gap to push their own agenda, in particular, making a case for MTD. MTD for the self-employed and landlords is now not set to start until April 2026. MTD for VAT has been introduced in stages since April 2019, with virtually all VAT-registered business now included. The tax gap for VAT, although showing some improvement since 2018/19, doesn’t exactly support the need for MTD – the VAT gap fell from 6.4% in 2018/19 to 5.4% in 2021/22. HMRC’s press release on the latest tax gap figures, along with more detailed information, can be found here. Just over 200 businesses – including some of the country’s best-known retailers – have failed to pay the minimum wage and will have to repay workers and face penalties of up to £7 million.
The minimum wage rules can be complex, and the fact that some major retailers have been caught out shows just how difficult compliance can be. Uniforms One particular area where businesses were not compliant was in regard to uniforms. The rules differ depending on whether uniforms are required as a condition or employment or if they are optional. · If employees are required to wear specific uniforms, any deduction by the employer to cover the cost reduces pay for minimum wage purposes. Similarly, if an employee has to reimburse their employer or has to purchase the uniform themself. · If uniforms are optional, pay is only reduced where the employer makes a deduction from the employee’s pay. Working time The other major problem area was paying correctly for time worked. This is not anywhere as simple as might first appear as illustrated by these examples: · Being on standby near the workplace counts as working time, but not if the worker is on standby at home nearby. · Travelling between assignments counts, but from home to the first assignment, and then from the last assignment back home does not – unless the first and last trips are by train and the employee is working on their laptop. Penalties A penalty of up to 200% of the unpaid wages can be charged, subject to a maximum penalty of £20,000 for each employee. However, the penalty will be cut in half if the unpaid wages and penalty are paid within 14 days. Non-compliant employers will also be named and shamed, even where minimum wage underpayment is not intentional. It is worth taking advice if an employer has any uncertainty over their wage position. A business can check if it is paying the correct amounts of National Living Wage and National Minimum Wage using HMRC’s calculator here. HMRC is offering taxpayers named in the leaked Pandora Papers a chance to correct their tax affairs. The October 2021 leak involved almost 12 million documents revealing hidden wealth and tax avoidance.
The papers revealed that many taxpayers had used shell companies to hold luxury items such as property and yachts. HMRC has reviewed the papers and found UK residents who they believe have untaxed offshore assets. They are now warning those taxpayers that they might face penalties of up to 200% on the tax due, and there is also the possibility of prosecution. Disclosure There are two alternatives for taxpayers who wish to disclose tax due on undeclared overseas income or gains:
Receipt of a letter Anyone who receives a letter from HMRC should review their tax position, and, if disclosure is required, take immediate steps to correct the situation. Given the complexity of overseas tax matters, professional advice is recommended. The Pandora Papers is the third major leak of financial information, and with HMRC having 12 years to investigate offshore non-compliance, it should serve as a timely reminder to taxpayers who fail to declare and pay tax on overseas income and gains and think that HMRC will never find out. HMRC’s press release on giving offshore taxpayers a chance to come clean, along with links to disclosure options, can be found here. The normal time limit for a person to fill gaps in their national insurance (NI) record is six years, but transitional arrangements allow gaps to be filled back to 2006/07. The deadline for making such contributions was recently extended to 31 July 2023, but has now been extended to 5 April 2025.
The deadline has been delayed because people have been finding it difficult to get through on pension helplines once the July deadline received a publicity boost. The transitional arrangement will now apply for the years 2006/07 to 2017/18. Voluntary NI contributions for the years 2006/07 to 2017/18 paid by 5 April 2025 will be at the 2022/23 rate of £15.85 a week, even though the rate is currently £17.45. Contribution record The first step is for a person to check their state pension forecast and NI record. This can easily be done online. · Voluntary contributions will not always increase the amount of state pension. The decision can be especially complex if contracted out of the state pension prior to 2016. · A person in very poor health or with a short life expectancy will probably not benefit from voluntary contributions. Personalised advice can be obtained by contacting the Future Pension Centre (if not yet at state pension age) or the Pension Service (if already receiving the state pension). The benefit A person needs 35 qualifying years on their NI record to qualify for the full state pension, which is currently £10,600 a year. To add a full year the cost is £824, but this will boost annual pension entitlement by some £303 – a very respectable return for someone who then enjoys at least five years of retirement. The return will be even better if partially complete years can be filled since these might only require a few missing weeks – at £15.85 per week – to be paid. A state pension forecast can be obtained here. |
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