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LITRG have examined all of the Autumn Statement announcements, to see how they will affect those on low to modest incomes. This article explores some of the key areas.

Introduction

The Chancellor introduced his Autumn Statement and Spending Review 2015 by saying that it delivers on the Government’s commitment to “put security first”, both national security and economic security for working people. The watchword was “build”, as he talked of the need to “build” Britain’s finances, defences and society. Some of the measures can certainly be viewed as providing economic security. There were also many measures that will not favour low-income workers, in particular announcements in respect of tax credits and Universal credit.

Tax Credits

There was some welcome news, as the Government will not go ahead with the changes to the tax credit taper rate and thresholds from April 2016, which had been announced in the Summer Budget. However, other tax credit changes will still go ahead.

In the Summer Budget, the Chancellor had announced that the working tax credit threshold would be reduced from £6,420 down to 3,850 from April 2016 and the child tax credit threshold reduced from £16,105 to £12,125. Above these levels, tax credits start to reduce by the set taper rate. This rate is currently 41% but was due to rise to 48% from April 2016. Both changes have now been reversed so that the taper and thresholds will remain at their 2015/16 levels from April 2016.

However, other previously announced changes to tax credits will still go ahead. These include:

• From April 2016, tax credit claimants who are repaying overpayments and have household income of £20,000 or more will have their recovery rate increased from 25% to 50% of their award.
• The income disregard for rises in income will decrease from £5,000 to £2,500.
• All elements of tax credits (except the disability elements) will be frozen at their 2015/16 levels from April 2016. Since the disability elements are uprated by the Consumer Price Index (CPI), these will also be frozen at their 2015/16 levels.
• From April 2017, anyone who has a third child on or after 6 April 2017 will not receive the child element of child tax credit for that child.
• From April 2017, the family element will be removed. Only those who have a child on the claim born before 6 April 2017 will continue to qualify for the family element.

There is also welcome news, as the Government has recognised there are particular difficulties in the tax credits system where it is not clear whether someone should make a joint or single claim; in light of this they intend to consult on ways to make the requirement clearer and more objective.

Tax Allowances and National Insurance thresholds 2016/17

The blind person’s allowance and married couple’s allowance are frozen at their 2015/16 levels of £2,290 and £8,355 respectively. This is because their level is connected to the Consumer Price Index (CPI) – the official measure of inflation of consumer prices. The CPI is currently effectively 0%, hence the freeze in these allowances.

Similarly, the National Insurance thresholds for 2016/17 will remain at their 2015/16 levels, since the thresholds are also uprated by the CPI.

Savings income

The Chancellor did not make any striking announcements in respect of tax and tax reliefs for savings income. It is now known, however, that the starting rate for savings will remain at 0% and the band to which it applies will stay at its current level of £5,000 for 2016/17.

Similarly, the annual subscription limits for ISAs will remain frozen at their current levels for 2016/17. This means the maximum you can subscribe to an ISA in 2016/17 will be £15,240. The subscription limit for the Junior ISA and the Child Trust Fund stays static at £4,080.

The Government will, however, pass laws to allow the ISA savings of a deceased individual to continue to benefit from tax-free status during the administration of their estate. The legislation is likely to be included in next year’s Finance Bill.

Stamp Duty Land Tax

From 1 April 2016, higher rates of Stamp Duty Land Tax will apply to purchases of additional residential property, where these are buy-to-let properties or second homes. The Government has proposed an additional 3% on the rates, which would apply to properties with a price of over £40,000. The details of this proposal will be consulted on.

Access to Work funding

The Government has announced additional funding to help people with disabilities and health conditions find and remain in work, as part of their initiative to support people into work. This includes an increase in spending on Access to Work funding to help a further 25,000 disabled people each year remain in work. The Access to Work programme provides help to individuals, who have a disability or health condition that adversely affects their ability to work, via grants for a variety of needs, such as purchasing specialist IT equipment and/or assistance from support workers.

The Government also announced it will publish a White Paper in the New Year that will set out reforms to improve support for people with health conditions and disabilities, including exploring the roles of employers, to further reduce the disability employment gap and promote integration across health and employment.

Council Tax

The Chancellor announced that local authorities will have the ability to increase council tax by up to 2% to raise extra funds to spend on adult social care. This measure will not apply in Scotland, since council tax is devolved.

It is no secret that cuts to local authority grants have led to contract bids from care providers that are too cheap to pay their care workers properly. Anything that helps plug the funding gap and leads to an improvement of the positions of the carers therefore – on the face of it – looks like something positive.

However, it is not clear what will happen if a council decides that it does not want to raise council tax in this way, nor how it will be ensured that the money raised is used for front line services and not used for other purposes. In addition, due to the regressive nature of council tax at the higher end of the market, someone living in a multi-million pound mansion may only be paying triple the amount of someone living in a Band A property. This move therefore takes no account of the inhabitant's ability to pay and will potentially only add to the financial pressure faced by many low-income families.

Changes to Student Support

Following the recent consultations on student loans, it was to be expected that there would be some announcements as part of the Autumn Statement. The number of student loans available is increasing, with some students now eligible for several loans. New loans and changes to existing loans include:

Postgraduate Taught Master loans – following a recent consultation, the Government will change the age limit on these loans to 60 years (the proposed age limit was 30 years). The repayment amount will now be 6% above the repayment threshold of £21,000 (it had been proposed that this would be 9%). These loans will start from 2016/17.

Second degree loans – tuition loans will be available for all STEM (Science, Technology, Engineering and Mathematics) subjects from 2017/18.

Plan 2 student loans – following a recent consultation the repayment threshold will be frozen for five years at £21,000.

Maintenance loans for part-time students – these will be introduced from 2018/19 and the Government will consult further on the details.

Health students’ loans – these will be available from September 2017 for students studying nursing, midwifery and allied health subjects. These loans will replace the current grant system and the Government will consult further on the details.

Further education tuition loans – these will be extended to include those aged 19-23 studying for a Level 3 or 4 qualification or those aged 19 and over studying for a Level 5 or 6 qualification.

Maintenance loans for students at National Colleges – the Government intends to consult on these loans in due course.

Support for childcare

The Chancellor announced changes to two schemes that have not yet been introduced – the planned increased provision of free childcare and “tax-free childcare”, a scheme to help parents meet childcare costs.

Provision of free childcare

Legislation providing working parents with an additional entitlement to free childcare is currently going through Parliament. The proposal is that from September 2017 families where both parents are working will be entitled to 30 hours a week of free childcare care over 38 weeks of the year for three- and four-year-old children. This applies to England only – separate provision is made for Scotland, Wales and Northern Ireland. The current rules provide for up to 15 hours of free childcare for three- and four-year-olds and disadvantaged two-year-olds.

Tax-free childcare

Tax-free childcare is a new system of support for working families who are saving to meet childcare costs for a child under 12 (or under 17 if disabled). HMRC will top up payments made into a childcare account to be used to meet the cost of qualifying childcare. The scheme was set to begin this year but was delayed following a legal challenge, and is now expected to be implemented in early 2017.

The top-up payment will be £20 for every £80 paid in, subject to an annual limit of £2,000 per child. This is equivalent to tax relief at 20% on costs of £10,000. The annual limit for top-up payments for disabled children will be £4,000. The rules as drafted provide that support is not available if either parent expects to have a taxable income of more than £150,000.

What has changed?

The Government has announced that an upper income limit for each parent of £100,000, and a minimum weekly income level per parent equivalent to 16 hours at the National Living Wage, will apply to both schemes. The minimum weekly income requirement may make it more difficult for the self-employed to qualify under the scheme, if their business has a difficult year, for example. It may also make it more difficult for young families to qualify, since they are not entitled to receive the National Living Wage. The push to increase the earnings threshold to encourage parents to work 16 hours and more is understandable, but LITRG is concerned that it could prove counter-productive for those seeking to edge their way back into work on lower hours to start with.

An hours requirement might be more sensible for the self-employed. Clarification is needed with regard to people under 25, who will not be eligible for the National Living Wage.

Devolution

Wales

The government showed a commitment to the devolution of taxes in Wales by removing the requirement to hold a referendum on the devolution of rates of income tax. If income tax is devolved, this would follow Landfill Disposal tax and Land Transaction tax (stamp duty land tax) which are being devolved from April 2018.

Scotland

There were no tax announcements that directly and specifically affect Scotland.

It is perhaps worth being aware, however, that the changes to Stamp Duty Land Tax will not affect residential properties in Scotland, since they are subject to the devolved tax, Land and Buildings Transaction Tax.

In addition, there is a proposal that from April 2019, taxpayers who dispose of a residential property on which capital gains tax is payable, must make the payment within 30 days of the sale. This may cause problems in Scotland, where the legal system differs from that in the rest of the UK. In Scotland, once missives are concluded, the sale has taken place, but often payment and entry take place at some later time, possibly more than 30 days after the legal date of sale. It should be noted that capital gains tax is not normally payable on the sale of a taxpayer’s main residence, so this issue will not affect all sales of residential property.

Employers and Businesses

Auto-enrolment pension contributions increases delayed

The Chancellor announced changes to the dates for planned auto-enrolment contributions rate increases. The rates at which employers and employees have to contribute are set to increase over a few years, with the increases originally scheduled to take place on 1 October 2017 and 1 October 2018.

The announcement delays the increases until the following April in each case, thus giving a 6 month extension to the current rates. This also aligns the auto-enrolment contribution rate increase dates with the tax year.

The new dates for the increases in the contribution rates are as follows:

This extra time will help those employers struggling to deal with the auto enrolment process, particularly those in the care and support sector.

Apprenticeship levy

An apprenticeship levy, set at a rate of 0.5% of an employer’s pay bill, will be introduced in April 2017. Employers will pay this through PAYE. Each employer will receive an allowance of £15,000 to offset against their levy payment, which means, theoretically, that the levy will only be paid on any pay bill in excess of £3 million. Thus, only large employers should have to pay the levy; however, in practice, many more employers – particularly small or micro employers – may find themselves contributing if the £15,000 ‘offset’ is not easy to understand or claim.

Travel and subsistence

The Government confirmed that it will legislate to restrict tax relief for home to work travel and subsistence expenses for workers engaged through an employment intermediary, such as an umbrella company, from 6 April 2016. This is despite vociferous objections from the temporary worker industry after it recently transpired that the Government is making moves to introduce a new tax relief for home to work travel for councillors.

Although little is to be gained by drawing such comparisons, a delay to the changes would be preferable, as this would allow the ramifications to be properly considered. Low income workers, faced with oppressive levels of work-related travel costs that themselves will not change, will no doubt be drawn to other schemes in an effort to stay afloat financially – with potentially worse consequences for them.

LITRG suggested, in a recent consultation response, that an alternative means of assisting low-paid employees with such costs might be by including an amount for travel when calculating an individual’s entitlement to Universal Credit.

Self-employed workers and Universal Credit

The roll-out of universal credit (UC) is set to continue as previously announced, which inevitably means more people will have access to claim the new payment. Whilst the number of people who are self-employed and claiming UC now is still very low, there will be increasingly more self-employed workers, or people who choose to move into self-employment through their claimant commitment to take up work.

LITRG has written before about unfairnesses in the way income from self-employment is calculated for UC, particularly for those with fluctuating incomes and those who experience periods of low or negative takings in their UC assessment period. This is because where actual earnings are below the equivalent of the national minimum wage (NMW) multiplied by (in most cases) 35 hours a week, UC will take an assumed level of earnings that is equivalent to the NMW by means of the ‘minimum income floor’ (MIF) principle, and the UC payment for that assessment period will be adjusted as if the claimant has received those earnings.

Despite representations about the difficulties this principle will present for workers already struggling with low takings in an assessment period, the announcement that the MIF will be uprated in line with the new national living wage (NLW), instead of the NMW, comes as a further blow to self-employed ‘strivers’.

The NLW is to be set initially at £7.20 from April 2016 and is expected to rise annually to over £9.00 by 2020. Employees who are at least 25 years of age will be entitled to receive the NLW; the NLW will not be payable to the self-employed, however, some of whom may nevertheless find themselves paying their own employees the NLW.

The minimum income floor is the amount of profit that self-employed claimants of UC are expected to earn each month. It is currently assessed on the basis of a 35-hour working week at the NMW. If they do not earn as much as that, their UC is calculated as though they did. As NLW is phased in, self-employed claimants will be expected to increase their profitability to match.

Example

Jack is a single claimant who has a handyman business. His earnings form self-employment for one assessment period are £500. Jack works full-time hours and has no limitations on his ability to work.

His MIF would have been calculated as:

£6.70 x 35 = £234.50 x 52/12 = £1016.16, less notional tax and NIC (£61.24) = £954.92

Jack actually earned £500 in the assessment period but because that is lower than his MIF he would be treated as earning £954.92.

However, assuming Jack is over 25, the new living wage rate will be applied in determining his MIF so that:

£7.20 x 35 = £252.00 x 52/12 = £1092, less notional tax and NIC (£85.50) = £1006.50

This means in the assessment period that Jack actually earns £500, his MIF will be £1006.50: he will be treated as if he had earned that figure and will correspondingly receive even less UC than before this change.

Truancy fines and child benefit

The Chancellor has announced that unpaid truancy fines which are not paid directly will be taken from payment of child benefit, or through the courts if the family is not in receipt of child benefit.

Whilst this may appear straightforward, it will be important to get the detail right. In addition, there are concerns that this policy may do more harm than good, depending on the circumstances. Child benefit is a universal benefit providing support towards the costs of bringing up children. Where those children live in poverty or deprivation of some kind, withholding vital financial support from the household can so easily be counter-productive. There may also be circumstances in which the truancy is not the fault of the person who is receiving the child benefit.

Digital measures

Further to an announcement in the Autumn Statement, most self-employed people, including landlords, will be required to update their tax information at least quarterly using their digital tax account. The Government is also consulting on bringing forward the payment dates for various taxes.

In his Budget statement earlier this year, the Chancellor announced that individuals and small businesses would be able to access digital tax accounts that would be used to make tax payments simpler. He has now confirmed that these accounts will be available by the tax year 2016/17, presumably meaning they will be available from 6 April 2016.

These accounts will contain all the tax information that HMRC already have about taxpayers. For example, HMRC already receive monthly details from employers of pay and tax deductions; banks provide them with details of interest amounts earned; and the Department for Work and Pensions provides HMRC with information on various taxable state benefits including the state retirement pension. Digital tax accounts are intended to provide a real-time view of tax affairs and tax owing.

The announcement earlier this year anticipated that individuals would be able to review their digital tax account and use it to make any tax payments necessary. The announcements in the Autumn Statement widen considerably the functionality of these accounts, seemingly placing greater responsibility, and thus burden, on individuals, businesses, the self-employed and landlords to actively manage and track their tax affairs digitally, using the digital tax account and apps to provide updates/returns to HMRC at least quarterly and potentially accelerating their tax payments.

Digital tax accounts may simplify matters for some low income taxpayers, but there is a major concern that a very significant proportion of the population, often the most vulnerable, remain digitally excluded.

Consultation is expected on options to simplify the payment of taxes, such as the alignment of payment dates and bringing them closer to the point when profits arise, so that taxpayers make a single or regular payment that covers all their tax affairs. It is to be hoped that there will also be consultation in relation to the additional reporting burdens for the self-employed since the need to make quarterly returns would potentially be an unwelcome burden on smaller businesses and any kind of quarterly reporting for partnerships that is intended to give an accurate picture of the final liabilities would be almost impossible. These HMRC proposals are hugely worrying.

Conclusion

LITRG has welcomed a number of the tax and tax credits measures announced in the Autumn Statement to the extent that they benefit people on low incomes. The same cannot be said of the decision to continue with some of the reductions in tax credits and the changes to support for childcare, which will cut a swathe through the incomes of workers and non-workers alike, for which the living wage will generally not compensate and which will damage work incentives.

LITRG would welcome a more holistic approach to the tax and welfare systems and one that recognises the interactions between the two. Where it has concerns about announcements, it will raise them in due course when the Government consults on them.