Wednesday, 22 July 2015

MERGING INCOME TAX AND NATIONAL INSURANCE


The Government has asked the Office of Tax Simplification to investigate 'closer alignment' of income tax and National Insurance. It could result in a single new tax which would probably apply only to earnings.

The task will be difficult and there will be winners and losers. Here is a brief summary of the main differences between the two taxes.
  • NI is due only on earnings; income tax is due on all income including pensions, rental income, savings interest, and dividends.
  • NI is calculated on weekly earnings; income tax is calculated on annual income
  • NI is not charged under age 16 or above state pension age; income tax is due at all ages
  • NI starts on earnings of £155 a week (£8060 per year); income tax begins above £10,600 per year but that threshold vanishes as income rises from £100,000 to £121,200 a year.
  • NI for employees is 12% up to £815 per week (£42,385 a year); income tax for all is 20% up to £42,385 a year.
  • NI for self employed is £2.80 a week (if profits exceed £5965) plus 9% of profits between £8060 to £42,385 a year. income tax for self-employed is at same rates and bands as for everyone.
  • NI falls to 2% on earnings/profits (employees and self-employed) above £815 per week (£42,385 a year); income tax rises to 40% above £42,385 and 45% above £150,000
  • NI of 13.8% is also paid by employers on the earnings of their employees above £155 a week; income tax is only paid by individuals.
  • NI does not apply to savings interest and dividends; Income tax now has separate rules and thresholds for savings interest and dividends.
  • NI is not charged on some payments made to employees; income tax is charged on all payments made to employees including benefits in kind. 
These differences mean that the calculation and collection of NI and income tax are very different. Employers have to collect both separately though at the same time through PAYE. Income other than earnings is taxed in different 

National Insurance is paid into the National Insurance Fund - basically a Treasury accounting exercise - and the proceeds are used only to pay state pension, a few other benefits and work related payments and a percentage is paid to the NHS.

Income tax all goes to the Treasury and is used as the Government chooses. 

Paying National Insurance contributions gives individuals entitlement to state pension and a few other benefits such as the non-contributory Jobseeker's Allowance and Employment and Support Allowance. 

In the last twelve months income tax brought in £142.1 billion (32.0% of receipts), NI brought in £111.5bn (21.4% of receipts).


22 July 2015
vs. 1.00

Tuesday, 30 June 2015

FIND GOOD FINANCIAL ADVICE

How do I find a good financial adviser? It's a question I am often asked. And there is no easy answer. 

My first question is do you need financial advice? Unless you have a big lump-sum (tens of thousands of pounds or more) or a lot of surplus income to invest (many hundreds of pounds a month) you probably don't need financial advice and probably will not want to pay the fees good advisers charge. See free financial advice below for other services that can help you.  

But if you do want regulated financial advice - and many people thinking of exercising their new pension freedoms are desperate for advice - then here is my guide. 

You must pass financial advisers through three filters.

Filter One
Only ever use an Independent Financial Adviser. This filter has been weakened and confused by the changes the FCA and, before it, the FSA have made. Under the simple polarisation regime introduced in 1988 there were two sorts of financial advice. Independent and Tied. Or Good and Bad. Tied advisers in banks were not advisers in any true sense of the word as they could not by law recommend the best product from another bank even if they knew about it. And the evidence of mis-selling has borne out their inadequacy.

Then in June 2005, the FSA added a middle ground of ‘multi-tied’ advisers. Some claimed they were as good as independent. After all, they said, how could independents really know all there was to know about thousands of products? In reality, they said, IFAs also had a panel of those they knew and trusted. It was all nonsense of course. Multi-tied advisers were compromised by their status which allowed collusion with product providers on commission and special deals, distorting the market in favour of everyone except the consumer.

Then after years of discussion the Retail Distribution Review reintroduced polarisation from 31 December 2012 into independent and restricted. It also, following my advice over many years, ended the conflict of interest between advisers and their customers by scrapping commission payments. Financial firm or products were now banned from paying commission to the adviser who recommended them. 

But ‘restricted’ was itself further polarised into two groups. 
  • As you would expect, one group comprised firms which did not look across the whole market. They remained tied or multi-tied to individual providers. And some did deals to get providers to pay to be on their list of favoured suppliers. Money that looked, smelt, and sounded very like sales driven commission.
  • The other group was less expected. They were firms that specialised in just one or a few areas. For example, a firm that specialised in annuities, knew everything about annuities from the whole of the annuity market, but did not advise on investments or pensions could not call itself 'independent'. It was called ‘restricted’. 
This confusion between useless firms that simply sell products from a few providers and genuine specialists who know all there is to know about one type of product is not really in the consumer's interest. Not least because those two groups do not have separate names. They are officially all just 'restricted' - though that is a term hardly any of them uses. 

So by quite reasonably filtering out the restricteds who are tied or multi-tied you also lose the whole-of-market specialists as well. They may be good IFAs. But I still reject them. Don’t blame me. Tell the FCA to change its daft rules.

Filter Two 
Only ever use an IFA who is a chartered or certified financial planner. This brings you down to the best qualified 4500 - one in five or so – of independent advisers who are beyond what is called QCF Level 6. So they have put a lot of effort into being the good guys and the chances of a bad guy (or gal) remaining in there is tiny.

Again, lots of good advisers will be rejected by Filter Two. Sorry. Get the qualifications.

Filter Three 
Only use a financial planner who you can pay in pounds. Never choose one who wants to charge you a percentage of your money. You earned, made, or inherited it. Only HMRC is entitled to a percentage of it. 

Percentage fees are a hangover from the days of commission. If you cannot afford the fee in pounds you probably do not need financial advice. 

You should also pay upfront from your non-invested resources rather than out of your invested money. One drawback of that approach is that a fee taken out of your pension fund comes from money which has already had income tax relief. So ultimately that fee costs you less than if you paid it out of your taxed income. It is all part of the massive taxpayer subsidies for the financial services industry (relief from VAT costs £4.5 billion a year). They should be stopped of course. But until they are, if you must, pay in tax-subsidised pounds from your pension fund. But ideally - and with all other investments - pay in pounds out of your non-invested resources. That way you see the money you are paying and can ask yourself – is it worth it? And never pay a percentage of your fund. Ever.


These three filters will take you a long way towards finding good, safe, but often expensive, financial advice. I apologise to the good, safe, and perhaps cheaper advisers it filters out. They can get themselves included by becoming independent or getting financial planning qualifications. 

Web research
Find your initial list of financial advisers using one of two websites 
  • www.unbiased.co.uk and filtering out the non-IFAs, and those who are not chartered or certified financial planners. 
  • www.vouchedfor.co.uk which only lists IFAs and you can then filter out the non-planners. 
Neither service lists all financial advisers. They have to pay to be on the lists and not all think it is worth it. There are other lists but they are generally not as comprehensive.

Free financial advice 
If you want financial advice outside the regulated professionals, then try the free and Government approved Money Advice Service whose website is very good on a whole range of money issues, some of which many financial advisers will know little or nothing about. Or you may want to consider paying £1 a month for the Which? Money Helpline.

If you have pension questions then the Pensions Advisory Service offers an excellent website and a helpful helpline on 0300 123 1047. The service is free and approved by the Government.

Specific advice about the new pension freedoms can be found at the Government's Pension Wise website. Or you can call 0300 330 1001 to book an appointment for one-to-one telephone advice, or a face-to-face interview at a nearby Citizen's Advice office.  

Footnote
Only the term 'independent financial advice' is regulated. Anyone can call themselves a 'financial adviser', an 'investment manager', or a 'property specialist'. And they do. Those terms are meaningless. If an adviser does not use the word 'independent' or does not say 'yes' when you ask if they are independent, then they are not. Avoid them. And always ask for a FCA number and check it out on the Financial Services Register.

Paul Lewis
1 July 2015
Vs. 1.10

This piece is based on an article I wrote for Money Marketing which bizarrely has someone else's by-line on it! 

RINGING THE CHANGES

From Wednesday 1 July 2015 you are not charged for making a call to any number beginning 0800 or 0808. Despite the fact that these numbers are called Freephone, before the change a call to 0800 or 0808 could be very expensive indeed if made from a mobile phone or some landlines. 

From 1 July 2015 new Ofcom rules mean that all calls from any provider to 0800 or 0808 will cost the caller nothing. That is not to say they will be free to the receiver. The firm offering the number will still pay for the call. To avoid that cost many firms are expected to replace 0800 with 03 numbers. They are charged the same as 01 and 02 numbers and are included in many monthly inclusive ‘bundles’ so effectively cost the caller nothing anyway. 

Other firms will move 0800 numbers to 084 or 087 numbers. The charges for those are also being changed from 1 July so that the cost to the caller will be made clearer - though not necessarily cheaper. 

In future, the charge will be in two parts

  • Your phone provider will make what is called an ‘access charge’. That will be a per minute charge for all numbers that begin 084, 087, 09 or 118 which will be stated on every bill. 
  • The number you are calling will also make a per minute ‘service charge’ for the call. That will be stated in every advert or written communication about the service. If it is not then report them to the Advertising Standards Authority. 

Phone providers have now announced their access charges which vary from 5p to 44p a minute. For landlines TalkTalk charges 5p a minute, BT 9.58p, VirginMedia 10.25p, and EE 11p. Charges from mobiles are much higher. TalkTalk mobile charges 20p a minute. Vodafone 23p until 10 August when it will rise to 45p, O2 25p, Virgin 36p, and EE 44p a minute.

The service charges will vary but are capped at 7p a minute for 084 numbers and at 13p a minute for 087 numbers. 118 calls are not capped but will be much more expensive. And 09 numbers can charge up to £3.60 per minute and a single call can cost at least £6. 09 offers ‘specialist services’ including horoscopes, advice, and sex lines.

Some financial firms which are still offering 084 and 087 numbers must tell you from 1 July what the service charge will be in any published material that refers to them. You may find that substituting a '3' for the '8' will get your though at normal call rates.

Complexity
Ofcom tells me that it expects some mobile providers to muddy the transparent waters of the new simpler prices. Or, as they might put it, engage in imaginative competitive deals. The providers making the higher access charges are expected to offer customers the choice of paying an extra fee to access 084 or 087 numbers with no service charge. EE has already announced an 084 and 087 add-on. By paying an extra £3 a month you get up to 300 minutes of calls to 084 and 087 numbers at no extra charge. 

BT is joining in the complexification by continuing to include 0845 and 0870 numbers it its inclusive bundles so they will be free for the hours the bundle covers. But beware – other 084 and 087 numbers are not included in that deal. 

The freephone changes do not apply to 0500 numbers which may still be expensive to call. They will be phased out in 2017.

More details on all the changes at UK Calling Info  

Paul Lewis
1 July 2015
vs. 1.1

Friday, 19 June 2015

WAGE RISES TO BOOST TRIPLE LOCK

Average earnings rose by 2.7% compared with a year ago. The figure – provisional and for the three months February to April 2015 – was published this week. I'm sure many of you are shouting 'mine didn't' or 'pay frozen for three years' or 'barely 1% in my case'. But that is not the topic. The rise in the official measure of average pay above 2.5% has big implications for the triple lock.

The triple lock, you will recall, raises the basic state pension each April by prices, earnings, or 2.5% whichever is the highest. Prices are now (since 2012) measured by the Consumer Prices Index (CPI) and earnings are measured using the average earnings figure published each month which this month reached 2.7%. 

The CPI used is the one for September – which is published mid-October. 

The average earnings figure uses the measure for the whole economy, seasonally adjusted, taken from May to July, and compared with the same three months a year earlier. It is the figure for total pay (which includes bonuses) and waits for the revised estimate which is published a month after the provisional figure. That final figure is officially the statistic KAC3 for May to July (revised). It is also published mid-October. 

If the figure published four months from now is above 2.5% then it will be inserted in the triple lock calculations instead of the 2.5% floor. So the fact that statistic KAC3 February to April (provisional) is 2.7% is highly significant. Not least because if we look back at the revised figures over the last twelve months and project them forward in a straight line, then KAC3 revised for May to July is projected to be 3.5%. If that turns out to be the true figure it will be good news for pensioners and bad news for the Chancellor.

The Office for Budget responsibility had estimated that the rise in average pay for 2015/16 would be 2.3% and CPI would be 0.2%. That meant the triple lock to fix the state pension next April would use 2.5% leading to a basic pension of £118.85 a week. But if the earnings rise is 3.5% then that would be the figure used instead of 2.5%. If so the basic state pension would rise from its present £115.95 not to £118.85 but by another £1.15 a week to £120.00. The extra cost of that extra rise for 13 million pensioners will be around £700 million in 2016/17. And each year after that the costs will grow as that amount is itself uprated. Over the parliament it could add £4 billion to the cost of the state pension.

The extra cost does not stop there. It also affects the starting level of the single tier state pension due from April which would have to be £1.15 higher than the £154.10 which a 2.5% rise implies. And that figure of £155.25 would then set the benchmark for the future because the triple lock – under present plans – applies to all new pensions from April 2016 paid up to that single tier amount.


In my April blog Triple Lock to Continue I estimated that the extra cost of using the triple lock rather than CPI to uprate the state pension was at least £12 billion and could be up to £17 billion over the current parliament (see http://paullewismoney.blogspot.co.uk/2015/04/triple-lock-to-continue.html). If wage growth is higher than the official predictions – and this month’s data indicates it might be – then the extra cost of the triple lock will be even higher.

This blogpost is an based on my Money Box newsletter 19 June 2015. Subscribe here 

19 June 2015
Vs. 1.00

Friday, 12 June 2015

WHERE HAVE ALL THE BANK FINES GONE?

Almost every week a bank or firm – even an individual – is fined millions of pounds for cheating someone or other. In the last few weeks Barclays was fined £284m over rigging foreign exchange markets and Lloyds £117m over failing to pay the right redress to customers it had already conned by mis-selling them  PPI. 

So who gets this fine money?

It’s a question I am often asked. And the short answer is George Osborne or, as he is officially known – the Consolidated Fund!

In the past, fines by the regulator were small – a few thousands of pounds – and the money was used to offset some of the costs of regulation. But from April 2012 that changed. Seeing the large number of substantial fines coming through for banks that had cheated the markets by rigging LIBOR interest rates the Government decided that it would follow the US Treasury and keep the money itself – after the costs of enforcement (around £45 million a year) had been deducted by the regulator – the Financial Conduct Authority.

Initially the Government sweetened the pill of snaffling this money by dedicating the fines to good causes. The first announcement in October 2012 allocated £35 million of the LIBOR fines to ‘support Britain’s armed forces community’. A year later, in his 2013 Autumn Statement, George Osborne announced he would “make a further £100 million of LIBOR fines available to our brilliant military charities and extend support to those who care for the work of our police, fire and ambulance services.”

The money has partly been used to pay for rehabilitation of injured soldiers. The fines for cheating on the Forex markets are earmarked for the NHS. And before the election the Conservatives promised to use a £227 million fine imposed on Deutsche Bank to fund 50,000 apprenticeships. All things which you may think the Government would be paying for anyway.

Now the Government has told Money Marketing – which tried to track the money down – that the fines are collected centrally and “the Treasury then allocates it to relevant departments.” So it seems it will in future mainly be used to fund general Government spending.

The amounts that are now being raised are eye-watering. In 2014 alone fines totalled £1.4 billion, mainly from the big banks over foreign exchange and LIBOR fixing. And so far this year another £814 million has been clocked up for similar transgressions.


These are tempting sums for any Chancellor, especially one who is committed to begin the process of reducing the £1.5 trillion national debt before the end of this Parliament.

This piece was first published in the Money Box newsletter 11 June 2015. Subscribe here 




Sunday, 24 May 2015

WHO WILL PAY FOR CARERS' PENSIONS?

A hundred thousand severely disabled people are being told they must set up a pension scheme for their carer. And no-one knows how the cost of doing so will be met. 

The people affected take what are called direct payments from their local authority to arrange their own care. The system was introduced in 2012 in England, Scotland, and Wales as a way of giving disabled people more independence and control over their care needs and how they were met. 

The local authority gives them the money - a direct payment - to pay for a carer or carers depending what they need. That payment is enough to include all the costs of employment - including national insurance, sick pay, holiday pay and so on. 

In general it has been seen as a great success - better for the disabled person and cheaper for the local authority. But it does mean that the disabled person becomes an employer. And from 1 June 2015 even the smallest employers will begin to be brought into the auto-enrolment of workplace pensions. They will have to provide a pension for their employee and pay into it. 

Who is auto-enrolled?
The people affected will have a carer who is 

  • their employee, 
  • aged 22 to state pension age (65 for a man and around 62.5 for a woman), and 
  • paid more than £10,000 a year - which is £192.30 a week or £833.33 a month. 

Someone on minimum wage of £6.50 an hour would reach those levels at 30 hours a week. And carers paid more than that - as many are - will be well above them. All figures are for gross pay.

People who are outside those ages or earn less than £10,000 will not have to be automatically enrolled. But may request to join a pension and if they do one will have to be provided. In some cases the employer will have to pay contributions too.

Employees can opt out of the auto-enrolment pension. But the employer must then re-auto-enrol them every three years. 

What will it cost?
The cost at first is likely to be modest. The contributions into the pension are 1% from employee and 1% from employer of the gross pay above £5824 (up to a maximum of £42,385).  So a carer working 35 hours a week on £9 an hour will earn £16,380 a year. The cost of 1% of the band of earnings which will be £8.80 a month which the disabled person will have to pay into a pension scheme. The carer will also get less. Another £8.80 will be taken off their gross income and paid in. However, they will get tax relief on that amount so the net cost will be £7.33 off their net pay.

But from October 2017 the contributions double to 2% each and then from October 2018 they rise to 3% from the employer and 5% from the employee. So the costs will by then be more significant, costing the disabled person £26.26 a month and the employee £36.67 on gross pay of £1365 a month.

Commercial employers can get tax relief on the payments they make - they count as a cost of employment and reduce the corporation tax they pay. But this tax relief is not of course available for an employer who is not a company and makes no profit. 

When will it happen?
Small employers with fewer than 30 employees will have to start auto-enrolment on what is called their staging date. That is the first of the month from 1 June 2015 to 1 April 2017. The date depends on the employer's PAYE reference number. A year before that date the employer will be written to by the Pensions Regulator, and again at six months and one month. Failure to comply with the new auto-enrolment duties can result in a fine of up to £400. Some disabled people have found the fairly small print letters and the tone of them intimidating.

The Pensions Regulator estimates that 100,000 disabled people will have to enrol their carer. That implies about 5000 a month will enter the system over the final 21 months of staging. 

The Pensions Regulator has more information online. But a recent survey by the Office for National Statistics found that 27% of disabled adults had never used the internet. 

Who will pay?
There seems little doubt that the local authority making the direct payment should meet the extra costs of auto-enrolment pensions. They are obliged to meet all the costs of employing the carer. Guidance issued by the Department for health says 

"The local authority should have regard to whether there will be costs such as recruitment costs, Employers’ National Insurance Contributions, and any other costs by reason of the way in which the adult’s needs will be met with the direct payment" (Care and Support Statutory Guidance Issued under the Care Act 2014 para 12.27

and footnote 170 on that page adds 

"Employers (including direct payment holders) will be required to comply with the duty to automatically enrol eligible workers into a qualifying workplace pension scheme and to meet the minimum contributions required by law."

But the local authorities seem completely unprepared. Will they review and revise the direct payments? How quickly will they do that? And how will they estimate the extra costs?

No-one seems to know. The Association of Directors of Adult Social Services told me it did not know but would start collecting some data in the future. And the Local Government Association told Money Box it did not know.

The Department for Work and Pensions - which is responsible for direct payments - told me 

"The local authority should consider these employment costs, including automatic enrolment pension contributions, when making the direct payment award."

But the Department would not say if that meant the local authority had to meet the costs nor how they would do so.

It will be hard for a local authority to work out the cost of auto-enrolment. The staging date system means that disabled people will be brought into the scheme depending on their PAYE reference number which bears no relation to the area where they live. And the cost of contributions will depend on the exact amounts carers are paid. There seems to be no mechanism for the disabled person to convey this information back to the local authority. And it is not clear how or when the care package that includes these costs can be revised.

More information
You can listen to the Money Box item on auto-enrolment and disabled people on Money Box 23 May 2015 

24 May 2015
Vs. 1.01


Wednesday, 13 May 2015

INCOME TAX CUTS AHEAD

The 2015 Conservative Manifesto promises that the personal tax allowance will rise from its current £10,600 to £12,500 by 2020/21. And the higher rate tax threshold will increase from £42,385 to £50,000 over the same period. That is a rise equivalent to 3.4% a year every year, way above the forecast levels of CPI inflation which rises from 0.2% in 2015 to 2% in 2019 (Economic and Fiscal Outlook, Office for Budget Responsibility, March 2015 Table 1.1).

If the two levels are raised from their 2015/16 level to the promised amounts in even steps of 3.4% they will rise as shown in the table below.

 Current                   rising in equal steps  Manifesto
   2015/16   2016/17   2017/18   2018/19   2019/20    2020/21
Personal tax allowance £10,600 £10,955 £11,325 £11,700 £12,095 £12,500







Higher rate threshold £42,385 £43,810 £45,280 £46,800 £48,375 £50,000







NB allowances and threshold rounded to nearest £5. For the value of these cuts to taxpayers see Tax Cuts for the Better Off. Broadly they are worth £380 by 2020 to basic rate taxpayers and £1903 to higher rate taxpayers.

These rises are higher for the next two years than those already promised in the March 2015 Budget which put the allowance and the threshold up to £10,800 and £42,700 in 2016/17 and then to £11,000 and £43,300 in 2017/18. So expect a 'I'm being much more generous now I'm freed of the Lib Dem lead weight' in Budget II 2015. The Chancellor may even use it as an excuse to re-affirm that the idea of raising personal allowances was always his and not Danny Alexander's.

Of course the allowance and threshold do not have to change in equal steps. And it is possible that the generosity will be saved until closer to the next election. But the personal allowance is constrained by another promise - it is now linked to the National Minimum Wage.

The Conservative Manifesto promises that will be more than £8 by the end of the decade. So it must be at least £8.01 by no later than October 2020. It also promises that anyone working 30 hours a week on the minimum wage will pay no income tax - in other words will earn no more than the personal tax allowance. So the personal tax allowance and the minimum wage must rise in step.

At the moment someone on National Minimum Wage will earn £10,296 in 2015/16 so the policy is already fulfilled. Under the rises in the table above that would remain true for the whole of this Parliament until 2020/21. If the minimum wage rises in equal steps it would rise by 3.6% a year to reach £8.01 by October 2020 - via £6.94, £7.20, £7.46, and £7.73. Every tax year 30 hours a week on that pay - which changes in October - would be comfortably below a personal tax allowance which rose in steps of 3.4%.

But it does mean that the Chancellor must watch the Low Pay Commission decisions on what the level of minimum wage will be each October. And that may influence his decision on the personal tax allowance which is linked to his decision on the higher rate threshold.

So he may not be a lame duck Chancellor, but he is certainly boxed in by election promises.

13 May 2015
Version 1.01