Monthly Archives: May 2016

More anti-avoidance measures
May 2016

The Chancellor hopes to raise another £12bn from anti-avoidance measures announced in the Budget.

A Budget would not be a Budget without the announcement of a range of new measures to counter tax avoidance and tax evasion. The latest Budget did not disappoint. Among the targets under the heading of “Avoidance, Evasion, Imbalances, and Operational Measures” were:

  • Legislation to tackle ‘historic’ disguised remuneration schemes. This will levy a new tax charge on loans paid through disguised remuneration schemes (typically employee benefit trusts – EBTs) which have not been taxed and remain outstanding on 5 April 2019.
  • The current exemption from employer’s national insurance contributions for termination payments (“golden handshakes”) will be restricted to the income tax-free amount of £30,000 from April 2018.
  • From April 2017 public sector bodies will decide whether the IR35 rules apply when hiring an individual who works through their own personal service company. At present the decision is the individual’s.

This trio is a reminder that the anti-avoidance net is spreading ever-wider, to areas which once seemed to be accepted practice. The imposition of a tax on EBT loans, long after they were made is a classic example. In many instances the loan was made with the intention that it would run for decades. Now those who spent their everlasting loans could face financial ruin.

There are still areas where you can save tax – for example, the Chancellor explicitly endorsed salary sacrifice for pension provision in his Budget – but grey areas are turning increasingly black. As ever, the key is to take advice and consider all your options before acting.

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

Is LISA the back door to pension reform?
May 2016

The announcement of the Lifetime ISA suggests that the Chancellor has not given up on his ideas for reforming the taxation of pensions.

Shortly before the Budget there was an unofficial announcement that the much leaked (but equally unofficial) plans for pension tax reform would not be making an appearance. Most commentators thought the Chancellor had not abandoned his plans, but merely put them on hold to avoid antagonising anyone ahead of June’s European referendum. The response to the original consultation on pension tax reform, published on Budget Day, was notable for including no comment on next steps.

However, Budget Day also saw the surprise announcement of a new ISA variant, the Lifetime ISA (destined to be LISA, even if the Treasury eschewed such a label). Available from April 2017 to those aged under 40, the LISA will:

  • Have a maximum contribution of £4,000 a year, which counts towards the overall ISA allowance;
  • Benefit from a government bonus equal to 25% of the amount contributed (maximum £1,000) up until age 50;
  • Permit penalty-free access from age 60, or earlier, provided the amount withdrawn is used towards the purchase of a first home in the UK with a maximum value of £450,000. Other withdrawals before age 60 will generally mean the government bonus and any growth on it is lost and will also be subject to a 5% charge. However, the Treasury is consulting on allowing penalty-free access before 60 “for other specific life events”.

The LISA looks remarkably like the Pension ISA which was an idea floated in the summer consultation paper on pension tax reform. Even the age of 60 fits quite neatly: anyone under the age of 40 in 2017 (i.e. born in 1978 or later) is probably looking at a State Pension Age of 68 or more, meaning access to private pension provision will not be available until age 58 at the earliest.

The arrival of the LISA will coincide with a significant increase in the overall ISA contribution limit to £20,000, welcome news for those who don’t qualify for a LISA. In the meantime, making pension contributions continues to look like an attractive retirement planning option – while it remains available.

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

National Savings wields the axe
May 2016

National Savings & Investments (NS&I) are cutting interest rates. Axe-tree

National Savings & Investments (NS&I) has announced that it will be cutting interest on five of its variable rate products, mostly from June. It blames the cuts in part on the fact that for 2016/17 the Treasury has set NS&I a lower net funding target than for 2015/16. There is an element of smoke and mirrors about this, as last year NS&I had the 65+ bonds on sale at rates widely seen as a pre-election carrot.

The changes will leave Income Bonds and the Direct ISA both paying just 1.00% interest, well below the latest (March) 1.6% rate of RPI inflation. The cuts will take NS&I out of the top rungs of the league tables and are a reminder of one of the more unwelcome side effects of ultra-low interest rates. NS&I are shaving 0.25% off its current rates on these two products, but that will represent a drop in income of a fifth.

Premium Bonds will suffer a smaller cut, with the annual prize fund dropping from 1.35% to 1.25%. To deal with this – which equates to a 7.4% drop in total prize payments – two changes are being made:

  • The odds of a winning monthly draw will worsen from 26,000:1 to 30,000:1.
  • The distribution of prizes will alter, with fewer big payouts. NS&I estimates that the number of prizes of £5,000 and above will drop from 204 in March 2016 to 88 in June 2016.

There has also been a minor change to the terms for reinvesting maturing index-linked savings certificates. The new rate is RPI + 0.01%.

There remain a range of opportunities to earn an income well in excess of NS&I rates, but advice is vital if your goal is maximising income. As a general rule, the higher the income on offer, the more risk needs to be considered, whether in terms of being locked in for a long period or losing capital security.

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.