Budget 2013 – impacts for those on low incomes
LITRG reviews today’s Budget for points affecting low-income households, including interactions between income tax, tax credits and other state benefits.
The 2013 Budget was delivered against a gloomier economic background than any Chancellor would have liked at this stage in a Parliament. The measures affecting individuals on low to middle incomes might have been intended to ease the burden imposed by very low growth, increasing prices of essential commodities such as fuel, and cuts to public spending.
If tax measures are to give a real boost to the earnings of ordinary workers, they need to be co-ordinated with other parts of the public finances, particularly where people on low incomes both pay taxes and are in receipt of welfare payments.
So have the announcements, taken as a whole, succeeded in improving the household finances of those on low to modest incomes? We have sifted through the documentation to pick out the points most relevant to low-income households.
Personal allowances 2014/15 onwards
We already knew that the personal allowance (the amount of income you can have in a tax year before you become liable to income tax) would be increased from 6 April 2013 to £9,440 for anyone born after 5 April 1948.
The Chancellor today confirmed that in the following year, from 6 April 2014, the allowance would once again be increased to match the Government’s target of £10,000.
At face value, this potentially saves people an additional £112 a year (in basic terms rather than real terms, as it does not take into account any increase in cost of living due to inflation). But where people both pay tax and receive means-tested benefits that are calculated using net income, any reduction in tax will lead to a corresponding reduction in their benefit entitlement. This is because tax reductions increase their net income, on which most benefit entitlement is based. By the time personal incomes reach £10,000 a year, fewer people are affected by the means-tested benefits interaction. But as more claimants are moved on to universal credit, the picture will change as universal credit will reach higher up the income scale than means-tested benefits currently do.
The increase in the basic allowance to £10,000 from 6 April 2014 also means that age allowances will continue for those born before 6 April 1948. These are frozen at £10,500 per annum for people currently aged 65-74 and £10,600 for those currently aged 75 and over.
The anticipated simplification of pensioner taxation by removing age allowances altogether will therefore have to wait another few years, as it is anticipated that after 2014/15, the basic allowance will increase each year by the Consumer Prices Index. Age allowances will therefore not disappear until such indexation means the basic allowance equals or overtakes their current level.
The 10% savings rate
The Budget documents confirm that the 10% savings rate remains in existence for 2013/14, increasing to £2,790 from its 2012/13 level of £2,710.
The Office of Tax Simplification had recommended in its final report on Pensioner Taxation that this savings rate should be considered for abolition, perhaps in favour of an increase to the Individual Savings Account investment limit. We would hope that this recommendation, which we favour in view of the complexity of working out one’s entitlement to the 10% rate, has not been rejected altogether and will be considered as part of a forthcoming Budget.
State Pension reform
The previously announced single-tier State Pension will be introduced from April 2016. This has been brought forward by a year from the original proposed introduction date of April 2017. As a result, the State Second Pension will close and individuals will no longer be able to contract out of the scheme and pay a lower rate of National Insurance contributions as a result.
The change means that there will be one rate of State Pension. To receive the full amount, pensioners will have to have at least 35 qualifying years of National Insurance contributions. To qualify for any of the State Pension, people will have to have earned or been credited with at least 7 to 10 years qualifying contributions (the detail is to be confirmed). Those with a number of qualifying years above the minimum but below the maximum will receive a proportion of the full amount.
The detail of the new scheme should become clearer as the Pensions Bill is debated, which we understand is to be introduced into the Parliamentary schedule this year. One complexity and deviation from the flat-rate seems to be for employees in existing ‘defined benefit’ pension schemes (i.e. employers’ schemes based usually on final salary) who previously paid a lower rate of National Insurance contributions due to ‘contracting out’ of the state second pension. It seems some protection under the new scheme will be afforded to them in the form of a higher rate of State Pension on retirement.
We are not as yet certain how this acceleration of the introduction of single tier State Pension will impact on the proposed reforms to bereavement benefits, which are also to be introduced as part of the Pensions Bill. We suspect that the single tier scheme will be first to come in, with bereavement benefit changes following on in 2017 but we will continue to monitor developments.
Statutory Residence Test
The government has confirmed that a statutory definition of tax residence will be introduced with effect from 6 April 2013. At this date, ordinary residence will be abolished for most purposes. LITRG has been involved in the consultation process and the full details will be available when the Finance Bill 2013 is published.
‘Employment allowance’ from 2014/15
An allowance of £2000 will be introduced for all businesses and charities enabling them to reduce the National Insurance contributions they pay in respect of their employees. The reduction will be claimed through the new Pay As You Earn (PAYE) Real-Time Information (RTI) process, which will be introduced in full in 2013/14 and is as yet not fully tried and tested.
Full details are to follow once the government has consulted, and legislation is to be introduced later in the year. Whilst this is a potentially welcome step, care will need to be taken in its implementation to ensure that the new RTI system can cope with this additional function. The claims process also has to be clear and accessible to all, particularly those often small employers who already may be struggling with the digital capability to comply with the RTI burden.
National Insurance Contributions: simplifying the process for the self-employed
The self-employed usually pay two different types of National Insurance contributions (NIC) - Class 2 and Class 4, which are both collected under separate systems and are paid at different times.
Currently Class 2 is charged on a weekly basis (£2.70 for the 2013/14 tax year) if a business makes profits above £5,725 (or below that level but does not claim the ‘small earnings exception’). This is usually paid monthly, or every six months by direct debit.
Class 4 NIC is calculated as a percentage (9% for 2013/14) of business profits between £7,755 and £41,450 and is paid as part of the self-assessment process with payments usually due on 31 January and 31 July.
The Government has announced that there will be a consultation on collecting Class 2 NIC at the same time as collecting income tax and Class 4 NIC. We await the detail later in the year.
Tax simplification for small businesses
From April 2013, eligible small businesses will be able to prepare their accounts and tax returns based on the ‘cash basis’ instead of using the current ‘accruals basis’. The cash basis will mean that businesses will not need to account for debtors, stock and most capital and revenue adjustments but this new system may not be suitable for all businesses.
HMRC will provide support to help businesses decide whether the cash basis or the accruals basis would be the most appropriate. The details of this support are not yet available but it seems that self-employed universal credit claimants will be encouraged to use the cash basis, although the monthly reporting for universal credit will not fully align with the cash basis requirements for HMRC. This is something about which we continue to express strong reservations.
Following consultation, there are to be some changes to the draft ‘cash basis’ legislation for income tax purposes. These include:
- businesses using the cash basis will be able to decide whether to claim capital allowances on their cars or to use the approved flat rate mileage allowance; and
- after electing to use the cash basis, a business must continue to do until it is no longer appropriate for them to continue to use it.
We are concerned that these changes do not go far enough. Further details of the changes to the draft legislation are awaited with the 2013 Finance Bill.
Collection of tax debts
We note from the HMRC website that they intend to introduce further measures later in the year as regards the collection of tax debt.
This will include increasing the amounts HMRC collect via PAYE coding for ‘higher income’ employees. We do not yet know what HMRC mean by ‘higher income’ and we hope that full consultation will be held on the draft Regulations and other debt proposals in due course.
Child Trust Fund and Junior ISAs
The Budget documents contain an outline of proposals to merge Child Trust Funds with Junior Individual Savings Accounts (ISAs). This might be a welcome streamlining of the two schemes, but we will have to await the further detail promised with the 2014 Finance Bill.
Rent-a-room relief and other previously ‘frozen’ limits
We are disappointed, but not altogether surprised, that our recommendation to increase the limit for rent-a-room relief was not taken up in the Budget. We will continue to press this point as and when we have an opportunity to do so, given its importance for those on low-incomes.
It is perhaps heartening that the Chancellor has recognised the need to increase the tax exemption limit for employers to make interest-free or reduced-interest loans to their employees from £5,000 to £10,000. For example, this reflects the increased cost of commuting for those who get ‘season ticket loans’ from their employers. It is also likely to be good news for employees who, particularly in these recessionary times, are occasionally in need of small loans from their employers to meet financial commitments up-front. It may go some way to providing a more cost-effective and far less exploitative alternative to pay day loans.
If the Government were to review other frozen limits, such as that for rent-a-room relief, in a similar light, progress might be made!
We are relieved that there were few further changes to the system announced today. A great deal of change is already being implemented – the introduction of RTI for employers to report PAYE for their employees much more frequently; changes to income tax personal allowances; a new system of childcare support; and the phased transition of in-work support from tax credits to universal credit.
This already seems quite sufficient for people to grapple with, and for Government Departments to implement – ironing out any glitches as they go along – without adding further to the burdens of taxpayers, businesses or their advisers.
Contact: Robin Williamson (please use form at http://www.litrg.org.uk/ContactUs)