Doctors tapering off as pension tax rules bite; Record IHT tax take parallels estate planning confusion; Payslips for all; Van or company car: what’s the real thing? How long do you want to work…?
Doctors tapering off as pension tax rules bite
Measures designed to limit the cost of pensions tax relief to the Treasury are having some unwelcome consequences, as some senior doctors have found their incomes disappearing.
Some members of the medical profession have found changes to legislation mean their earnings are getting swallowed up by the tax system. According to a recent Financial Times report some NHS consultants are being landed with tax bills of up to £87,000, prompting them to reduce working hours or even take early retirement.
The doctors’ problems primarily stem from the implementation of the pension annual allowance tapering rules. These have two key trigger points:
• ‘Threshold income’ (broadly speaking total income from all sources, less personal pension contributions) exceeding £110,000; and
• ‘Adjusted income’ (broadly total income from all sources plus employer pension contributions) exceeding £150,000.
If both levels are crossed, then the standard annual allowance for pension contributions of £40,000 is reduced by £1 for each £2 by which ‘adjusted income’ exceeds £150,000, subject to a minimum annual allowance of £10,000. The all-or-nothing nature of the triggers can mean that just an extra £1 of earnings brings the taper rules into play. That additional £1 could therefore result in an additional tax bill of much more than £1.
To complicate matters further, £110,000 sits almost in the middle of the band of income between £100,000 and £125,000 at which the personal allowance is tapered away, creating an effective marginal tax rate of up to 60% (61.5% in Scotland). Added to that will usually be 2% national insurance contributions.
The Financial Times article said that many doctors had been ‘surprised’ by their pension tax bills. This implies they had not sought personal financial advice on how the pension taper rules, introduced from April 2016, would affect them.
There are ongoing discussions between the Treasury and the Department for Health and Social Care about the issue, but it seems highly unlikely the former will forgo the revenue generated by the annual allowance rules (over £560m in 2016/17). In the meantime, the episode serves as a reminder of the importance of regular financial reviews to avoid – or at least be aware of – the growing range of tax traps in the UK’s labyrinthine tax legislation.
The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice.
Record IHT take parallels estate planning confusion
While the Treasury benefitted from record inheritance tax (IHT) receipts of £5.2bn in 2018, new figures show that many people are unaware of how the IHT system works or how it could help them pass their wealth to their beneficiaries.
A survey out in April from Quilter showed that only 37% of those asked were aware of inheritance tax rules. Under half of those surveyed knew about basic IHT rules around gifting or the nil rate band. At the same time, however, 60% thought the rules likely to be important for how they could pass wealth on, highlighting the disconnect between the information available and understanding the practical implications for individuals and their families.
The Office of Tax Simplification (OTS) is due to deliver the second part of its review of IHT regulations during this spring, following an initial report in January that looked largely at administrative issues. The review is aimed at simplifying how IHT is implemented, with the second of the reviews expected to focus on specific areas of change.
With additional complications like the residence nil rate band still focusing on the nuclear family, the IHT regime appears out of step with modern families and concerns about inter-generational wealth. A House of Lords committee on intergenerational fairness has already reported across a range of issues from housing to pension credits and estate tax.
Among a raft of recommendations, they called IHT “capricious and not fit for purpose”. Going back to fundamentals, the Lords report questions why and how assets should be taxed at death or on transfer to the next generation. The report suggested options such as a capital receipts tax payable on income received by beneficiaries or exempting certain assets from IHT if earmarked for first home purchase by a family member.
Whether any of these ideas come to fruition, and whatever the awaited OTS report recommends, there are ways in which the existing IHT regime can currently benefit your own estate planning and ensure a fairer distribution of your assets through your family. The £3,000 a year annual gift allowance is good place to start. So is reviewing your will and making sure your assets will be dispersed the way you wish.
Let us know if we can help.
Payslips for all
It may have come as a surprise to realise that until this April, not all workers were entitled to a payslip.
From 6 April, all workers now have a statutory right to receive an itemised payslip, including zero hour and casual workers. Up to that date, the right only extended to employees. Employers must now be prepared to provide information on ‘time worked’ with details of the number of hours being paid on workers’ payslips. This can be given either as a single aggregated figure or separate figures for different types of work at different rates. Workers should be able to clearly see that they have been paid for the hours worked at the appropriate statutory rates where relevant.
As the new rules were coming into force, however, the Department for Business, Energy and Industrial Strategy (BEIS) released a survey revealing that many don’t entirely understand all the information on their slips – only 62% were confident about everything they saw. Gaps in understanding were higher for women than men (55% of women compared to 70% of men admitted to not understanding their complete payslips) and younger workers.
April also marked the 20th anniversary of the national minimum wage (NMW), which has risen this year to £7.70 an hour for employees between 21 and 24. At the same time the national living wage saw a record 5% increase to £8.21 an hour for employees over 25, However, the BEIS survey also revealed misunderstanding around entitlement to the NMW, with around 30% believing that only permanent employees are entitled to receive it.
With the new payslip rules now in force, it’s even more important for all workers to be aware of their entitlements and check that they are receiving them. But many people don’t check their payslips, trusting their employers to get it right and assuming deductions are correct. Payroll offices do make mistakes or may have been given erroneous information on pay and allowances. For permanent employees likely affected by April’s increase to auto-enrolment contributions, there is even more reason to make sure everything is present and correct.
Encouraging employees to question anything they don’t understand, and to ask if concerned about unknown deductions, will go a long way to consolidating trust. Ensuring engagement with wages flows into helping workers with informed financial decision-making, pensions planning and alleviating one of the major factors of workplace stress.
Van or company car: what’s the real thing?
The phrase ‘define your terms’ could have been invented for the benefit-in-kind rules around company cars. A recent case that ended up in the Upper Tribunal between Coca-Cola and HMRC illustrates the importance of understanding when a van is a van – or legally a car.
These definitions determine the relevant income tax and NICs payable where a vehicle is provided to an employee as a benefit-in-kind. The charges vary considerably between ‘cars’ and ‘vans’, with tax on company cars generally much higher than for vans.
In the legislation, the key concept is around use as a ‘goods vehicle’, so:
• A car is not classed as a goods vehicle.
• A van is a goods vehicle with a weight of 3.5 tonnes or less when loaded.
• A ‘goods vehicle’ is described as one “of a construction primarily suited for the conveyance of goods or burden of any description”.
The case centered on three models of vehicles provided by Coca-Cola to technicians who had previously been provided with cars. Over time the equipment they were required to use became heavier and they were offered different vehicles – either a ‘panel’ van or a modified vehicle. Two models of a VW Kombi had dual capability, where some elements could be added or removed for additional passengers or equipment. Which is where the problems started.
The employees who were given these vehicles had their PAYE coding notices adjusted by HMRC for car benefit and the employer, Coca-Cola, was assessed for Class 1A NICs. They appealed initially to the First Tier Tribunal on the grounds that the vehicles were not cars but vans. The models came under scrutiny under the definition of “construction” and whether they were “primarily suited” for the purpose used, which was ‘the conveyance of goods’.
The case hinged on the second element of primary suitability. Because the Kombi model could be used both for carrying passengers and for conveying goods, the Upper Tribunal ruled it did not have a primary suitability for only conveying goods and so could not be classed as a goods vehicle. It therefore had to classed as a car for benefit-in-kind purposes. The other model narrowly fell on the other side of the argument. Ultimately the VW models were deemed to be more like mini-buses, while the other vehicle on offer was a van.
The upshot of this complex case is that the external appearance of any vehicle is not the deciding factor for benefits-in-kind. Internal configuration and the purposes behind it will make a difference. Being aware of how legal definitions may be applied could ultimately save you and your employees some potentially painful lessons.
How long do you want to work…?
As people are living longer, a parallel older-age profile is emerging in the labour force.
Source: National Statistics 16/4/2019
Labour market statistics for the period December 2018 to February 2019 revealed some impressive results. In the UK, employment of those aged 16–64 was running at 76.1%, the joint highest level ever and up 0.7% on a year ago.
Drill down into National Statistics numbers and some interesting facts emerge:
• The increases are being driven by more women aged 50–64 in the workforce. At the start of the decade, 58.5% of women aged 50–64 were in employment, whereas the latest figure is 68.1%. Coincidentally in 2000, that was the male rate of employment in the 50–64 age band.
• The proportion of men aged 50–64 in work has also risen over the same period, but less dramatically – from 71.4% in 2010 to 76.8% now.
• At 65 and beyond, employment is reaching record levels for both men and women, as the graph shows. Women and men aged 65 and over have an employment rate of 7.9% and 14.2% respectively, compared to 5.5% (women) and 10.8% (men) in January 2010.
There are several reasons for the increase in employment beyond age 50:
• For women – and now men – the rise of state pension age (SPA) has undoubtedly had an impact. As recently as April 2010, the SPA for a woman was 60. By October next year, both men and women will share a SPA of 66.
• The ending of compulsory retirement ages has encouraged longer working lives.
• The gradual disappearance of final salary pension schemes, particularly in the private sector, has forced some people to revise their retirement plans.
• Economic conditions have played their part. Real (inflation-adjusted) wage growth has been virtually zero over the last 10 years, limiting the scope for retirement savings.
Working for longer can be beneficial to health, although the case is by no means clear cut: continuing work-related stress could be life shortening. The key is to be able to choose when to stop work, rather than have the decision forced upon you. To get into that position, there is no substitute for adequate retirement planning – preferably well before the age 50, yet alone 65, is reached.
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.