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What has happened over the last few weeks in personal finance? (23/01/2020)

Category: News

Trusts under the spotlight

Over time, the Government moves has reduced the tax advantages of trusts. They are likely to become less popular still from March. This is when trustees need to register on a government list or risk penalties.

Since 2017, certain trusts have had to report information to an online register. This is the Trusts Registration Service (TRS). From March, the next phase of the EU fifth Anti Money-Laundering Directive increases the number of trusts that must submit reports. It will also open the register to the public.

Tax rebate for PPI claimants?

If you are one of the millions of people who had a PPI payout, you may have paid too much tax. If so, and the payout happened in the last four tax years, you are due money back.

Only the Statutory Interest element of the payment is taxable. Tax is due because this should return you to the position you would have been in if you had not had PPI. If tax is due on PPI payouts, most firms deduct it at 20 per cent, before you get the money. Any tax taken is usually shown on the payout statement.

Since April 6, 2016, most could earn £1,000 a year of savings interest, tax-free. Since then, while most savings interest has not had tax taken off, the tax has been deducted from PPI payouts. If you have overpaid tax, you should contact your accountant or HMRC.

Brexit and pensions

Anyone depending on investments to fund old age face another year of uncertainty. A decisive election result cleared our path to leave the European Union. With trade deals yet to be struck with either the EU or the US our future fortunes are still not assured. The new government now could fix pension problems.

The Government has come out with a one-year fix for the so-called ‘taper problem’. This has seen doctors turn down shifts for fear of shock pension tax bills. It has also promised urgent talks with the medical profession to solve the matter.

But it has fallen short of saying it will abolish the taper. Commentators are calling for an overhaul of the pension system for everyone. If strapped for cash, the government may dust off plans, to introduce a Pension ISA.

This would mean savers no longer receive tax relief on pension contributions. Instead, it would pay out tax-free in retirement. This assumes a future Government does not slap penalties back on later.

Another option is a new flat rate of tax relief on contributions, probably between 25% and 33%. This would see basic rate taxpayers get an extra Government boost to their pots. Higher and additional rate taxpayers would not get back their full whack of tax any longer.

Pension tax tips pre-return

These tips help taxpayers get all the pension tax relief to which they are entitled. They may also help avoid an unexpected tax bill in years to come.

Claim higher rate relief on personal pension contributions:

Many pension savers who pay higher or additional rates of income tax may not know they need to claim extra tax relief on their return. Personal contributions to personal pensions automatically attract pension basic rate tax relief. This is through the ‘relief at source’ method. The pension provider claims this tax relief on behalf of the member.

Those who pay tax at the 40% or 45% rate only get their extra tax relief if they claim it through their tax return.

For example, someone who pays £80 into a personal pension automatically gets an extra £20 in basic rate relief added to their pension. If they pay tax at 40%, they are entitled to another £20 in tax relief. They will only get this if they enter this information on their tax return.

Report contributions in excess of your annual allowance

Individuals must report on their tax return any pension contributions (from themselves or their employer) into a Defined Contribution pension and/or any growth in Defined Benefit pension rights in excess of the Annual Allowance. This is so extra tax can be paid.

Report contributions made on your behalf under ‘scheme pays’

HMRC recently admitted taxpayers were not reporting whether their occupational pension scheme had paid a pension tax charge on their behalf. A new FOI obtained by Royal London shows that in 2016/17 just over 1,000 people did not report this information. As the number of people affected by ‘scheme pays’ has grown rapidly since 2016/17, it is likely that thousands of people are now failing to report this. The FOI from HMRC says that this is a case of ‘under-reporting, not underpayment.’ However, taxpayers are expected to give complete information on their tax return.

Pensions tapered annual allowance changes?

Pension experts have dismissed a solution to raise the tapered annual allowance threshold income. They have called it a sticking plaster which would not solve the underlying problem.

Officials have discussed raising the tapered annual allowance threshold income from the current from £110,000 to £150,000. This is the level where pension contributions count as earnings and lower tax-free allowances start to kick in. It was argued such a solution would solve the problem for most doctors as consultants’ median earnings are £112,000. It is estimated that 90 per cent would fall below the new limit. This solution would not be exclusive for NHS pension scheme members and would be applied to all taxpayers.

Introduced in 2016, the taper gradually reduces the annual allowance for those on high incomes. This means they are more likely to suffer an annual tax charge on contributions. It means that for every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost.

The British Medical Association has already criticised the proposed solution. Experts believe that simply raising the threshold income would not remove any of the complexity of the taper. It would also not remove the threat of doctors facing a ‘tax cliff’ when their income increases through taking on additional work.

Interest and mortgage rate uncertainty

Despite a decade of rock-bottom interest rates, the Bank of England is under pressure again to cut rates. New data showed the economy went into reverse before December’s general election. When the Monetary Policy Committee meets on January 30, the health of the British economy will be the main talking point.

GDP slumped by 0.3% in November from a month earlier, according to the Office for National Statistics. Meanwhile, inflation has declined steadily since 2018 and now sits at just 1.3%. The pound has slipped on the gloomy numbers, reaching 0.7% against the dollar to below $1.30 for the first time this year.

In May last year predictions of interest rate rises were correct. The Bank of England increased rates to 0.75% but stopped there. With investors now forecasting a rate cut, what do experts expect now?

The consensus is the latest low inflation figures have increased the chance of a rate cut, but the base case is still for no change. This refutes the view of traders who now expect a 63% chance of a rate cut. It will depend on where the economy goes over the next few months.

The economy weakened before the general election, but we could see a turnaround in business optimism and spending. If this happens then the Bank of England will do nothing for a while, most believe.

Higher rates are likely in the future due to a tightening labour market, minimum wage increases, and higher government spending. All of which could contribute to higher inflation.

Good news for child trust funds

Young people with a Child Trust Fund (CTFs) could see their savings rolled into new tax-free savings accounts at maturity.

The first CTFs are due to mature in September this year. Under current arrangements, they will be automatically cashed in. CTFs could instead roll over into another account that continues to shelter the cash from the taxman.

Child Trust Funds were launched in 2005 to encourage parents to start saving for their children. Children born between September 1, 2002, and January 2, 2011, received between £250 or £500 to be invested on their behalf. Parents, family, and friends could continue to contribute to the account, with all gains tax-free.

CTFs were dropped in 2011 and replaced with the Junior Isa. For years, children with CTFs were left in limbo as savings providers stopped offering new products as JISAs took precedence. In 2015, the Government ruled that money held in CTFs could be transferred out to a JISA. For those who kept their money in a CTF, the money would automatically cash out once the accountholder turned 18. But many have considered this to be unfair.

Junior ISAs are automatically rolled into adult Isa accounts when a child reaches 18 and continue to enjoy their tax-free status. The Government’s latest move looks to be levelling up the playing field.

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