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What has happened over the last few weeks in personal finance? (25/02/2020)

Category: News

What the Budget might mean for taxes

Reports that the budget on 11 March will contain tax rises have raised concerns within the Conservative party. Several proposals have been aired in the media:

  • Reports have floated the possibility of a “Mansion Tax” being introduced.

  • Mooted at the same time as this is a UK-wide home revaluation to squeeze more out of the council tax.

  • Britain’s 37 million drivers could face the first fuel duty rise in a decade next month. The budget could add 2p to the cost of a litre of petrol and diesel.

  • The Treasury has drawn up plans to cut the rate of relief for higher earners from 40% to 20%. At present, people can put up to £40,000 into their pension per year and do not pay tax on that contribution.

  • Inheritance tax forces estates to pay 40% tax on assets worth more than the £325,000 threshold or £475,000 if the asset is a home left to children or grandchildren. A spouse or civil partner can inherit the tax break, doubling the threshold to up to £950,000. Many business assets, including farmland, can be excluded from the calculation of taxable wealth, lowering the charge even further for many wealthy households. No 10 is reportedly considering including those assets in the inheritance tax remit.

How to protect your tax allowances

The government has committed to an awful lot of new spending. But the money has to come from somewhere.

Over the past few weeks, we have seen various suggestions tax rises. These have ranged from some form of ‘mansion tax’ on more expensive homes to tweaks to pension tax relief.

Sajid Javid’s resignation may have affected these plans. However, commentators are divided. Some think fiscal (tax) rules will be relaxed, so there’s less pressure to balance the books. Others point to the manifesto pledge to get rid of ‘arbitrary tax advantages’ for the wealthy.

Unfortunately, we don’t have a crystal ball to know what tax changes if any will come to fruition. The best way to shelter yourself from tax changes is to take advantage of what is around now while it lasts:

  • Take advantage of ISAs
  • Consider a Lifetime ISA
  • Don’t forget Junior ISAs
  • Top up your pension
  • Consider salary sacrifice
  • Take advantage of your spousal exemptions
  • Claim the marriage allowance

Taxing times for freelancers

53% of contractors plan to walk away from projects in April when tax changes take hold. This could cost the UK economy £2.2bn in lost productivity.

HMRC’s are tightening the rules on how they tax freelancers. They want to stop “disguised employment” gaming the system. This is where a freelancer works in a permanent position. The difference would be that they do not pay the same tax as full-time staff. As a result, both they and their employer avoid income tax and national insurance. The rules governing this are known as the IR35 rules.

Currently, contractors assess their tax status. However, reforms coming in from April 6 shift this responsibility to hiring businesses.

Tax raid on final salary pensions

A tax raid on pension tax relief could punch a £1bn hole in Defined Benefit Pension Schemes. This could spell disaster for dozens of firms, experts have warned.

Sir Steve Webb, a former pensions minister, said: “Words like mayhem spring to mind when thinking of the reform. You can’t underestimate just how radical this would be.”

Commentators are clear there is a reason governments have not done this before. If they are going to alienate millions of people then they have to have a compelling reason. Anyone earning more than £50,000 a year would be stung by a 20% tax charge on their annual pension contributions. As stated earlier, it is a good idea to make use of tax breaks while they are still around. Higher rate tax relief is an example of this.

Missing out on pension credit?

Some 1.3 million households could be missing out on pension credits worth £3,000 per year. This is according to government data. The government has launched a 12-week campaign to raise awareness of pension credit. It is encouraging people who are eligible to apply to claim the benefit. This could give them, on average, an extra income of around £58 a week.

Pension credit is a tax-free benefit aimed at boosting your state pension if you are retired and on a low income. It is based on your earnings. Pension credit is made up of two parts; guarantee credit and savings credit. You will need to reach the state pension age to claim guarantee credit. Savings credit is only available to those who reached state pension age before 6 April 2016. Since last February, guaranteed credit has contained an extra amount for those who are responsible for children.

You will not have to pay tax on any pension credits you pay and you can backdate it for a maximum period of three months. It may be the case that you have been unable to get it before because of your savings. If so, it is worth having another look, as your circumstances may have changed.

Don’t miss out on tax-free childcare

Over one million families could be missing out on thousands of pounds per year in childcare help. A new report for HMRC admits take-up of the Tax-Free Childcare scheme has been lower than anticipated.

The Government’s Tax-Free Childcare scheme gives eligible families 20% off childcare costs. It is worth up to £2,000 a year per child.

HMRC has estimated that 1.3 million families can claim. Pensions firm Royal London’s analysis shows only around 1 in 10 of those eligible are doing so.

Around 172,000 families are claiming Tax-Free Childcare according to Government statistics. This leaves around 1.1 million eligible families who are not. Factors such as a lack of awareness or understanding of the scheme have affected takeup. There have also been issues with logging into the site and making payments.

Under the scheme, parents and carers can open an account where, for every 80p they deposit, the state adds 20p. In total, the state can add up to £2,000 per child per year (or up to £4,000 if your child is disabled). So, including what you deposit, you can use the scheme to pay for up to £10,000 of childcare per child each year.

You can only get a maximum top-up of £500 every three months. However, the extra 20% is added at the point you put money into your Tax-Free Childcare account, not when you spend it. So if you only pay for childcare seasonally, you can pay in throughout the year to avoid missing out on any top-ups.

Britain on course for cashlessness

Britain could be cashless within a decade. A review panel has urged the Government to bring in laws to protect consumers’ rights to pay with cash. The Access to Cash Review says the UK is at a tipping point, with fewer than one in 10 payments set to involve physical money by the end of the decade.

The new Chancellor must bring in legislation that would protect the supply of physical money and force banks to offer cash, it said. The review calls on the Government to overhaul laws to make it easier to withdraw cash, such as allowing shops to offer cashback without making a purchase, which is currently illegal.

 

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