LITRG has examined all of the Autumn Statement announcements, to see how they will affect those on low to modest incomes. Some of the key points are explored below.
The Chancellor’s Autumn Statement 2016 seemed to be about to conclude without any major surprises, but Mr Hammond saved his show-stopper to the end – Autumn Statement 2016 would not only be his first Autumn Statement, it would be his last, as he is abolishing the event. However, there was a twist – the Budget will move to the Autumn (starting in autumn 2017) and while a Spring Statement made in response to the Office of Budget Responsibility’s Report might exceptionally contain tax announcements, the Autumn Budget will in future be the one fiscal event of the year.
Personal Allowance 2017/18
The personal allowance is the amount of income you can have in a tax year before you become liable to income tax. As previously announced, the personal allowance will increase to £11,500 for 2017/18. The Chancellor also confirmed that the personal allowance would rise to £12,500 by the end of the current Parliament (2020).
LITRG welcomes the increase in this allowance, as it reduces taxes for many basic rate taxpayers.
The Group cautions, however, that headline increases in the personal allowance do not generally benefit the lower paid as much as the higher paid. In addition, recipients of means-tested benefits (where net income is taken into account) such as universal credit gain still less, because their benefit is withdrawn as their net income increases.
So, a basic rate taxpayer who does not claim means-tested benefits will be £100 better off in 2017/18 as compared with 2016/17. Meanwhile, a basic rate taxpayer who is also a universal credit claimant will gain by only £37, because in 2016/17 universal credit will be withdrawn from claimants by 63p in every £1 by which the claimant’s income exceeds the work allowance.
Perhaps more importantly, increasing the personal allowance does not benefit those on the lowest incomes at all – that is those who have income of less than the current personal allowance.
Universal credit taper rate
The universal credit taper rate on earned income will decrease from 65% to 63% with effect from April 2017. This is a small step in the right direction, in that it not only increases the universal credit received by the claimant, but it also reduces the disincentive faced by those on high marginal deduction rates to make financial progress through work. The marginal deduction rate is the percentage of every extra pound earned that is taken away in tax, National Insurance contributions and withdrawal of benefit.
Tax credits – Child disability element payments
Child tax credit (CTC) is paid to people who are responsible for a child or qualifying young person. A higher rate of the child element of CTC is paid to families who are responsible for a disabled child or young person. The most common way to qualify for these higher payments is through receipt of a disability benefit such as disability living allowance or personal independence payment.
Although it is the claimant’s responsibility to tell HMRC that they receive a disability benefit for their child, HMRC have historically received information directly from the Department for Work and Pensions (DWP) about these disability benefits. This has allowed HMRC to update the tax credits award automatically with the extra child disability amounts, even where claimants have not directly notified them about the benefit.
There was a gap in the data-feed between the DWP and HMRC during 2011-14 which meant that HMRC could not automatically update awards. The result has been that around 28,000 families in 2016/17 are not receiving the higher level of CTC that they could be entitled to because of their child’s disability.
The announcement in the Autumn Statement confirms that, where the qualifying disability benefit is being paid by the DWP, HMRC will award the extra child disability elements from 6 April 2016 without claimants needing to contact them.
The ISA annual investment limit will rise to £20,000 with effect from 6 April 2017 (from a limit of £15,240). The limit for Junior ISAs and Child Trust Funds will increase to £4,128 a year.
The Chancellor announced a new savings bond to support savers. The three-year savings bond will be offered by NS&I and will be available to those aged 16 and over. It will be available for 12 months from Spring 2017. The Government expects the bond to pay interest at a rate of around 2.2%. Individuals may save up to £3,000 each in the account.
This is unlikely to be a tax-free savings product, so the interest will be taxable. However, due to the 0% savings rate and the personal savings allowance, many who invest in the bond may not have to pay tax on the interest they receive.
National Minimum Wage and National Living Wage to rise from April 2017
The National Living Wage was introduced with effect from 1 April 2016.
All the rates for the National Living Wage (NLW) and the National Minimum Wage (NMW) will rise with effect from 1 April 2017. Previously, the NMW rates used to rise annually on 1 October, so it is important that employers are aware of this change.
The NLW, for workers aged 25 and over, will increase to £7.50 per hour (from £7.20).
The NMW rates will also increase: the rate for 21-24 year olds will increase to £7.05 per hour; the rate for 18-20 year olds will increase to £5.60 per hour; the rate for 16-17 year olds will increase to £4.05 per hour; the rate for apprentices will increase to £3.50 per hour.
It was also announced that there will be an additional £4.3m investment to strengthen NMW enforcement. This will fund new HMRC teams to proactively review those employers considered most at risk of non-compliance with the NMW. The Government will also provide additional support targeted at small businesses to help them comply, and run a campaign aimed at raising awareness amongst workers and employers of their right and responsibilities.
This is to be welcomed – however, of course, there is always more that could be done.
Salary sacrifice changes
The tax and National Insurance advantages of salary sacrifice schemes are to be removed from April 2017, except for certain arrangements that the Government wants to promote such as childcare vouchers. Salary sacrifice arrangements often result in beneficial tax and National Insurance treatment under the rules applying to employer-provided benefits. The Government has expressed concern about the growth in such arrangements and recently held a consultation on the issue.
In the Autumn Statement, the Chancellor made clear he will take action to remove the advantages of salary sacrifice except for arrangements related to pensions, childcare, Cycle to Work and ultra-low emission cars. Employees will be able to continue to enjoy favourable tax and National Insurance treatment in respect of these benefits in kind at a reduced cost at the expense of the Exchequer.
This move does not attempt to deal with another salary sacrifice-related issue – the fact that those on low pay are currently stopped from benefiting from such arrangements. This is because employees with earnings at or near the National Minimum Wage (NMW) cannot participate, since their cash earnings cannot be reduced below the NMW rates. This leaves them at a disadvantage in comparison to, say, a colleague doing generally the same work but with slightly higher earnings.
Ideally the NMW Regulations would be rethought to allow those on the minimum wage to salary sacrifice.
Property and trading income allowances 2017/18
As announced in the Budget earlier this year, from 6 April 2017 there will be two new allowances for individuals with small amounts of property income or trading income. Each allowance will be £1,000.
The allowances will mean that individuals with property income and/or trading income below £1,000 will not have to declare the income to HMRC or pay any tax on it. The trading income allowance will now also apply to certain miscellaneous income from providing assets or services.
It is still not known exactly how these allowances will operate. LITRG will provide more information once it is available.
VAT Flat Rate Scheme
There was a surprise announcement in relation to the simplified Flat Rate Scheme for VAT used by many small businesses. This scheme allows businesses to work out their quarterly VAT bills by taking a percentage of their VAT inclusive income only, and ignoring VAT paid on their expenses. The percentage ranges from 4% -14.5% according to the type of business.
However, the Government is now planning to introduce a higher rate of 16.5%, which will apply to Flat Rate Scheme businesses that have negligible expenditure on day-to-day goods or materials. It appears that this will affect small businesses that mainly supply services and/or expertise (for example journalists, photographers, IT workers, accountants, labour-only tradesmen), making a significant difference to their cash flow.
This measure will involve an additional test: businesses will be required to determine whether they meet the definition of a ‘limited cost trader’. If they meet the test, then they will be required to use the new 16.5% Flat Rate, which will be the highest rate within the scheme. Such businesses will be known as ‘limited cost traders’ and an online tool is promised to help businesses decide whether they meet the test.
The measure is aimed at tackling abuse of the Flat Rate Scheme and will take effect from 1 April 2017.
Changes to National Insurance contributions for the self-employed
The Chancellor confirmed that National Insurance contributions (NIC) will change for the self-employed with some transitional protection for those on lower incomes. The self-employed do not get sick pay or automatic enrolment into a pension scheme. Payment of NIC helps to secure the state pension and other state benefits for them.
Currently all self-employed people are liable to pay Class 2 and Class 4 NIC, depending on their level of profits. Class 2 contributions go towards providing state pension, maternity allowance, bereavement benefits and contributory Employment & Support Allowance, while Class 4 contributions provide no such entitlement to state benefits.
Class 2 NI is currently payable at the rate of £2.80 per week (£2.85 per week for 2017/18) for those earning more than £5,965 in the year (£6,025 per year for 2017/18). Those who earn less than that sum are able to voluntarily pay Class 2 contributions to secure those state benefits.
From April 2018, the Government intends that entitlement to these state benefits will be accessed through paying Class 3 and Class 4 NIC – they will go ahead with the proposed abolition of Class 2 NIC from that date.
Class 3 contributions are currently £14.10 per week (£14.25 for 2017/18), very significantly more expensive than Class 2 NIC. While the 2018/19 rates have not been announced the fact that the Chancellor announced a transitional measure to support self-employed individuals with low profits implies that the cost of Class 3 NIC will be significantly higher than the cost of Class 2 NIC.
The Autumn Statement documents included a note that the tax treatment of foreign pensions will be changed so that it is more closely aligned with the UK’s domestic pension tax regime. The detail is unclear, but we know that this will include bringing foreign pensions and lump sums fully into tax for UK residents, to the same extent as domestic ones.
This could mean a significant change for some pensioners, as – at present – only 90% of the amount of foreign pension received is generally subject to UK tax. The proposed alignment in treatment between foreign and UK pensions may mean that those in receipt of a foreign pension will in future pay tax on 100% of the income received.
Pensions – Money purchase allowance
As part of the Autumn Statement, the Government has published a consultation on reducing the pensions ‘money purchase annual allowance’ from £10,000 to £4,000. Under the proposals contained in the document, people who have drawn money from their pension pot will not be able to put more than £4,000 a year back into a pension from April 2017 onwards.
This could catch out people who have taken advantage of the pension flexibility rules, which took effect in April 2015 and allow people to take their money purchase pension savings in full as a lump sum, or in stages, rather than purchasing a lifetime annuity. In contrast, the current money purchase annual allowance of £10,000 is unlikely to catch out too many people who might do this.
The measure is aimed at deterring people from manipulating the pension flexibility rules to engage in ‘tax-free cash recycling’, which might mean that people seek to get further tax relief on money they have just taken out of a pension. Some may get caught out by this measure though, if they decide to take money out of their pension (currently allowed at age 55) – for example, to pay off their mortgage or other debts. Paying off such debts could result in surplus disposable income, which they may then decide to put back into pensions.
Life insurance policies
As announced at Budget 2016 and following consultation, the Government will legislate in Finance Bill 2017 regarding the very large and unfair tax charges that arise in certain circumstances from life insurance policy part-surrenders and part-assignments. This will allow taxpayers to ask HMRC to recalculate the gain on a ‘just and reasonable’ basis. This will lead to fairer outcomes for policyholders. The changes will take effect from 6 April 2017.
LITRG welcomes this change, although the Group would have preferred a more clear-cut measure to tackle the problem. As it stands, much will depend on how HMRC implement the change, as those affected will need to be made aware of their ability to have the gain recalculated. LITRG will be pursuing with HMRC how this will work.
Digital measures – Making Tax Digital
The Government has announced today that further details of HMRC’s ambitious programme to bring the tax system into the digital age will be published in January. Responses to the six consultation documents relating to various aspects of the project have been submitted to HMRC over the last few months.
While it is important that the details of the new digital tax regime, which will eventually affect all individuals, businesses and limited companies, are publicised as soon as possible so that taxpayers can plan how they will comply with the new rules when they are introduced, HMRC must give themselves sufficient time to properly consider all the responses they have received to the consultations before finalising the details of the programme.
However, as there are so many areas where even outline proposals are not yet clear, LITRG would urge HMRC not to rush through legislation just to keep the project to its rather unrealistic deadline of an April 2018 start. It will be better to delay full implementation and continue to engage with stakeholders to make sure the programme is well designed, workable and fully tested before launch to ensure that the Making Tax Digital project will be successful in the long term.
Digital measures – tax credits
The announcement that new claims for tax credits can be made from digital devices from April 2017 is a welcome development. This will mark substantial progress in tax credits since HMRC were forced to withdraw their first attempt at on-line tax credit claims in the early days of tax credits, over ten years ago. The digital agenda is now firmly under way and, providing the new claims service is easy to use, quick and accurate, this will be a welcome development for many. It will be important that HMRC keep to their pledge to ensure that those not digitally enabled, for whatever reason, and who will inevitably continue to rely on paper-based or telephone claims, do not receive a second-rate service by comparison.
The Government has also announced that from 2017 HMRC will publish their customer service performance data more regularly and in greater detail. This will include the monthly publication of digital, telephony and postal performance data, as well as new customer complaints data. This is welcome as it will facilitate timely external scrutiny of HMRC’s performance.
LITRG welcomes a number of the announcements in the Autumn Statement, including the fact that the Government will be reverting to a single annual fiscal event, as tax change is a major cause of tax complexity. The Group gives a cautious welcome for the package of measures designed to help low earners, however. While headline increases in the personal allowance do not generally benefit the lower paid as much as the higher paid, the higher benefit awards, reductions in marginal deduction rates and increases in the living wage also announced make the package of changes as a whole more attractive to the lowest earners.