Tax cuts for middle earners but more welfare cuts signal continuing austerity
Earlier today 3 December 2014 the Chancellor of the Exchequer, George Osborne, delivered his Autumn Statement to the House of Commons. With most of the economic indicators moving in the right direction, the deficit – while lower than forecast – nonetheless remains high, and austerity continues for a few years yet.
Those with incomes just above the tax threshold will benefit in a small way from some of the tax cuts on offer, and small businesses may benefit from the review of business rates and other measures. But as the welfare state (aside from the state retirement pension) remains a prime target for cuts, the Statement contains small comfort for those on the lowest incomes who do not earn enough to pay tax.
Care and support employers
Nevertheless, our favourite announcement of the afternoon was the extension of the employment allowance, worth £2,000, to households who employ care and support workers. This measure comes in response to a year-long campaign by LITRG.
From April 2014, most employers have been able to reduce the amount of National Insurance contributions (NIC) they pay for their employees by up to £2,000. However several categories of employer have been unable to claim the NIC Employer Allowance – including employers of domestic workers, such as those who employ someone to help with their care needs.
Extending the annual £2,000 Employment Allowance for employer NICs to care and support workers is clearly the right thing to do, particularly in light of the removal of the statutory sick pay percentage threshold scheme under which employers could recoup some of the statutory sick pay they paid to their staff.
We also welcome the announcement that disabled employers will be exempted from the impact of removing the £8,500 benefit in kind threshold and so will continue to have no reporting or payment requirements when they provide certain low-paid, probably part-time carers with non-cash remuneration – for example board and lodging. This is a sensible easement which will benefit potentially vulnerable people.
It had previously been announced 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 2015 to £10,500 (up from £10,000) for anyone born after 5 April 1948. Today the Chancellor increased it yet further to £10,600.
This potentially saves most basic rate taxpayers an additional £120 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. For example, those in receipt of Universal Credit (UC) who are basic rate taxpayers will be only £42 better off whereas non-benefit claimants will benefit by the full £120. In addition, many low earners will see no advantage from the increase in the tax free allowance at all, because they earn under the current threshold.
Thus, raising the tax allowance may not be the most efficient way of improving the financial position of people on low incomes.
The primary earnings thresholds for employees’ NIC – that is, the point at which employees start to pay NIC – will remain more or less at current levels, so that employees earning between that (£8,060 in 2015/16) and the personal allowance will continue to pay NIC on that slice of their earnings, despite paying no income tax. One way of simplifying the system while supporting the lower paid would be to align the primary earnings threshold with the uprated personal allowance – although it would be necessary to ensure that nobody whose earnings currently entitle them to contributory benefits would lose out as a result of the change.
Employee Benefits and Expenses
As anticipated, following the recommendations by the Office of Tax Simplification and the four consultations over summer 2014 by HM Revenue & Customs (HMRC) and HM Treasury, the Government has indicated that it will reform the rules for employee benefits and expenses. We cautiously welcome the announcements, although we will need to see the draft legislation to ensure we are satisfied with the detail.
The Government has announced that it will remove the £8,500 threshold with effect from April 2016. It will mitigate this for certain affected groups by introducing new exemptions for carers and ministers of religion. In response to the consultation, LITRG had acknowledged that the removal of the threshold would result in some simplification and would also remove an element of unfairness. We highlighted carers as a group that we thought could be adversely affected by the abolition. We therefore welcome the intention to introduce new exemptions for these groups.
The Government has indicated that it will provide a statutory exemption for trivial benefits in kind costing less than £50, with effect from April 2015. LITRG think that a principles based statutory exemption for trivial benefits in kind would be best to help to reduce costs and administration for employers and HMRC. We give a cautious welcome to this proposal, as it should mean that employees do not face a tax charge on items that neither they nor their employers view as benefits in kind, but we need to see the detail to be satisfied with its design.
The Government has announced that it will exempt certain reimbursed expenses, but that this exemption will not be available if used in conjunction with salary sacrifice. We raised concerns during the consultation about the differences between expenses rules for relief and reimbursements and the impact on low-paid employees whose employers choose not to pay or reimburse allowable expenses, and whose income level means they are unable to claim tax relief.
A statutory framework for voluntary payrolling will also be introduced. LITRG recognise the opportunity that voluntary payrolling presents for simplification for employers and HMRC. Nevertheless, it may be less beneficial for employees. We call on HMRC to provide clearer guidance both for employers and employees.
The Government is continuing its review of relief for travel and subsistence payments.
Taxation of pensions
The Chancellor confirmed in his Autumn Statement that new tax breaks on pension pots left on the death of the pensioner will now extend to annuities that continue after death. This is a welcome equalisation of tax treatment for those already drawing from ‘crystallised’ pension pots and those who might still use their pension pot to purchase a joint life or guaranteed annuity, notwithstanding the new pensions ‘freedoms’.
The Pensions Bill currently making its way through Parliament introduces the ability for a pensioner who is drawing on a pension pot under the new flexible regime to leave the remainder of the fund on death without a tax charge, provided they are under the age of 75 at the time of death.
As the law stands, this would result in an inequality for those who have purchased an annuity (or still intend to do so from April 2015, as this will still be an option). For those purchasing a single life annuity, the payments die with them. But many people choose to protect part of their capital by purchasing a guaranteed annuity; or they make some provision for a surviving spouse or civil partner by purchasing a joint life annuity. Currently, income tax is payable by the beneficiaries of those post-death annuity payments.
We welcome the Government’s decision to make sure that there is no tax disadvantage on death to pensioners who choose, or have chosen in the past, to purchase an annuity.
Annuities may continue to be an attractive option to some even in the new ‘free’ pensions landscape from April 2015, particularly those who want the security of a guaranteed and known income for life.
We particularly welcome that this will apply to post-death annuities already in payment, not just those taken out from April 2015. We hope that HMRC and pension companies will be able to work together to ensure that all such annuities are identified and removed from the PAYE coding system in time for April 2015 when the new rules will be implemented.
Tax credit and other welfare changes
Universal Credit work allowance
We have previously welcomed the news that the childcare element of UC will cover up to 85% of childcare costs, and that where a claimant leaves UC and returns within a 6 month period, they will undergo a simplified re-claiming process. The announcement that the work allowances within UC are to be frozen for yet another year, until April 2018, will mean that UC claimants do not see the benefit of increases in their earnings to the same extent as non-claimants. Furthermore, neither do those low-earning UC households reap the same benefits from increases in income tax personal allowances, as of course, UC is tapered according to net pay – the higher net pay, the less their UC entitlement.
Tax credit measures to restrict overpayments
From April 2015, where a tax credit claimant has a change in circumstances which reduces their entitlement, and their annual award is reduced accordingly, further payment of tax credits will be stopped in order to cut the build-up of overpayment by the end of the year. While this will help with budgeting and prevent the hang-over of overpayments, the measure could precipitate real hardship for some who find the payments they’ve been relying on suddenly dry up.
Tax Credits – eligibility conditions for self-employed claimants
The eligibility conditions for those claiming working tax credit as self-employed workers are to be tightened in line with similar restrictions that currently apply in EEA migrant cases. The claimant will need to show that their self-employed work is genuine and effective and in doing so they will also be required to register their self-employment with HMRC and provide the Unique Tax Payer number when claiming working tax credit. We understand that this is an attempt to prevent abuse of the system, and so it may. But HMRC will need to take care that these extra steps, which amount to administrative checks, should not delay payment to those in need.
Migrants’ access to benefits
Those coming to the UK from EEA will be subject to more stringent conditions before they can access UK benefits, but in the main these have been announced previously and some are already being applied. The rules mean that EEA migrants who are not working can only receive child benefit, child tax credit, housing benefit and JSA once they have been resident in the UK for three months; and that those who are working need to satisfy the minimum earnings threshold (currently £156 a week).
For those seeking work, the maximum period that new EEA migrants can claim JSA has been halved to three months, at which point claimants must undergo a Genuine Prospect of Work assessment; and from February 2015, the Genuine Prospect of Work assessment will apply to all EEA migrants who began claiming JSA before these changes were introduced. Those who do not satisfy the test will see their claim ended and their right to reside in the UK as a jobseeker withdrawn.
National Minimum Wage enforcement
The National Minimum Wage (NMW) provides important protection for low earners. We therefore welcome the announcement in the Autumn Statement that the government will increase funding for HMRC NMW enforcement activity in 2015-16 by £3 million.
This will help to ensure that workers receive at least the hourly minimum rates set and that employers and workers are better aware of their obligations and rights – vital in light of figures such as arrears being found in 47% of the cases investigated by HMRC in 2013/14.
However, what certain low paid earners, for example carers, would no doubt also appreciate is a rethink of the underlying rules that exclude travel time and unreimbursed expenses from the NMW calculation.
A welcome announcement for small businesses is the 2% cap on the annual increase in business rates from April 2015 to March 2016 and the doubling of the Small Business Rate Relief for a further year. This recognises that despite their contributions to local growth and innovation, small business owners are often on a low income and struggling to make ends meet. In addition the ‘high street discount’ increase to £1,500 from April 2015 to March 2016 will help bring life to communities and towns.
Any such measure favouring those in self-employment, starting a business or looking to expand and grow is to be welcomed as it may encourage them to offer direct employment to others.
Welcome cut in NI for those employing apprentices
As previously announced, from April 2015, no employer’s NIC will be payable for those aged under 21. In the autumn statement this relief was extended to those apprentices aged under 25.
And yet – a missed opportunity
We were disappointed to see nothing in today’s Autumn Statement to help taxpayers, especially the self-employed, to pay their taxes according to a flexible timetable.
Currently taxpayers in self- assessment, including all of the self-employed population, pay their tax liabilities in lump sums in January and July each year. Indeed, from April 2015, Class 2 National Insurance liabilities, often paid monthly at the moment, will be paid along with the January tax liability.
Bunching tax payments into lump sums like this can make it difficult for taxpayers. Besides, under UC, self-employed claimants whose earnings are low in January and July might become subject to the Minimum Income Floor and have their credit restricted, simply because of the way the tax liability falls. As a result, the claimant will receive less UC than they would have done had the tax bill been paid in smaller amounts.
There is some good news for students as the government will remove the cap on student numbers from 2015-16 onwards.
Student loans will be available for graduates who plan to continue to study on a post-graduate taught masters course. Although this is positive news, there are some drawbacks as the student must be under 30 years old, the loans, of up to £10,000, will only be available from 2016-17 onwards and will be repaid at the same time as undergraduate student loans.
Stamp Duty Land Tax
With effect from 4 December 2014, Stamp Duty Land Tax, the tax you pay when you buy a house, will change. Under the new rules you will not have to pay any tax if your property costs £125,000 or less. If your property costs more than £125,000, you will only pay tax on the price of the property that falls within each tax band.
Changes are also being made to the rates and bands. There are now five bands. You pay 0% on the first £125,000 and 2% on any portion of the purchase price between £125,000 and £250,000. For properties costing more than £250,000 there are additional rates of 5%, 10% and 12%. LITRG welcomes this change, which makes the system fairer. It also means that most people buying a property will pay less tax than they would have done under the old rules.
For people who are buying properties in Scotland, you should be aware that UK Stamp Duty Land Tax will apply to purchases before 1 April 2015. From 1 April 2015 onwards however, if you buy a property in Scotland, you will have to pay Land and Buildings Transaction Tax instead.
Devolution – Scotland
The Government will prepare draft legislative clauses in the New Year to implement the Heads of Agreement published by the Smith Commission on 27 November, as previously promised. The legislation will give the Scottish Parliament the power to set the rates and thresholds of income tax for non-savings and non-dividend income of Scottish taxpayer. In addition, it will give the Scottish Parliament responsibility for a number of benefits for disabled people and carers. This legislation will not lead to any immediate changes for taxpayers in Scotland in itself – it will then be up to the Scottish Government to apply these new powers at their disposal.
This has no impact on the tax changes that are already due to apply in Scotland, such as the replacement of Stamp Duty Land Tax and Landfill Tax by Land and Buildings Transaction Tax and Scottish Landfill Tax respectively from 1 April 2015, and the introduction of the Scottish Rate of Income Tax from 6 April 2016.