What's new bulletin October 2022

HMRC’s updated guidance can be found here.

Gift Aid payments reduce income when calculating Adjusted Net Income used for the purposes of calculating entitlement to certain allowances and benefits, such as the personal allowance and Child Benefit.

They also extend a taxpayer’s basic rate tax band, reducing the income tax paid by a higher rate taxpayer by 20% and an additional rate taxpayer by 25%, just like member contributions to a personal pension.

However, note that Gift Aid payments do not reduce Threshold Income or Adjusted Income for the purposes of calculating the Tapered Annual Allowance. And although, in most cases, the gross Gift Aid payment will also increase a donor’s basic rate tax band, there is specific legislation which means this will not reduce the tax on a top-sliced chargeable event gain on an investment bond.

Gift Aid payments made in one tax year can, provided certain conditions are met, be carried back to the previous tax year.

This means making Gift Aid payments and, more importantly proper record keeping so the details can be included in an individual’s tax return, is important as it can potentially help in:

• Mitigating the tapering of the personal allowance where Adjusted Net Income exceeds £100,000, and
• Mitigating the High Income Child Benefit Charge (HICBC) where Adjusted Net Income exceeds £50,000.

Making Gift Aid payments

Some people will make regular monthly or annual Gift Aid donations to registered charities to support causes aligning with their own values and generally individual clients will remember these. However, there are some that are perhaps less obvious and where a conscious effort needs to be made for proper record keeping:

• Entry into many historic sites can be made under Gift Aid. When buying tickets individuals are often asked “are you a UK taxpayer?” The reason for that question is to allow the organisation to reclaim the basic rate income tax.
• When there are appeals by the Disaster Appeals Committee (DEC) after some natural disaster many individuals make donations and, again, are asked if they want to Gift Aid the payment. This will also apply to events like Children in Need and Comic Relief.
• Often, when friends and relatives do sponsored events with online fund raising, these can be Gift-Aided.
• Lastly, it is not just charities that Gift Aid payments can be made to, but also community amateur sports clubs (CASCs).

Payments have to be made from the donor’s own funds and they must have paid income tax and/or capital gains tax during that tax year.

Donating through Gift Aid enables charities and CASCs to claim an extra 25p for every £1 gifted. This means that the net effect increases the value of donations by 25%.

It is vital for the donor to make a Gift Aid declaration for the charity to claim. This is usually done by filling in a form - available from the respective charity - or if a donation is made online, e.g. through ‘Just Giving,’ then the donor is asked to tick a box to verify they are a UK taxpayer to make the claim.

When clients are likely to have a problem with either the personal allowance taper, or the HICBC, it is worth making sure they understand and record all their Gift Aid payments. It is also worth remembering that, for couples, the payments should be made whichever will realise the greatest tax benefit of the payments.

Note that the donor must be charged with either income tax or capital gains tax, or both, for the year of donation at least equal to the tax treated as deducted from their donation. If more than one Gift Aid donation has been made in the tax year, they must be added together to work out the tax the donor must be charged with. If the donor is not charged with sufficient tax to cover the income tax deducted from their Gift Aid donations, then they will owe the amount of the difference in tax to HMRC.

Carry back

Gift Aid payments can be carried back from the current tax-year to the previous tax-year so long as the election is made (this is done in an individual’s self-assessment tax return) by the earlier of the date the return is lodged with HMRC, or 31 January in the current tax year.

Comment

From a tax planning perspective, making gifts to charities has many advantages. Not only is there is scope to reduce income tax on donations via gift aid, any gifts are exempt from inheritance tax, and, for those who wish to leave larger amounts to charities via their will, there is the added benefit of a lower rate of inheritance tax being charged on death – 36% instead of 40%. 

Proposed reform to allow IHT-exempt transfers between siblings (AF1, RO3)

A private members bill, starting in the House of Lords, has been introduced to amend the Inheritance Tax Act 1984 to make transfers between siblings exempt from inheritance tax (IHT) in certain situations.

The Inheritance Tax Act 1984 (Amendment) (Siblings) Bill (‘the Bill’), which was re-introduced to the House of Lords in July this year, proposes to amend the Inheritance Tax Act 1984 by adding a clause 18A titled “Transfers between siblings”. The new clause aims to make transfers between siblings exempt from IHT in cases where the transferee sibling has resided in the same household as the transferor for a continuous period of seven years ending with the date of the transfer and has reached the age of 30 before that date. For the purposes of the Bill, a sibling is defined to include half-brothers or half-sisters of the transferor but not step-brothers and sisters who are related only by the marriage of their respective parents.

The proposed change in law was no doubt prompted by the European Court of Human Rights case of Burden and another v UK [2008], where never-married sisters - Joyce and Sybil Burden, aged 88 and 81 respectively - argued that the existing UK IHT provisions were discriminatory in denying them the equivalent of the spouse exemption on death. The sisters lost their case meaning that, unless and until the law is changed, there are likely to be many similar cases where the survivor of cohabiting siblings will be forced to sell the property to be able to pay the IHT.

Comment

While, in many other European countries that still impose taxes on death, some form of relief from tax is provided to siblings (either in the form of a limited exemption, a lower effective rate of tax or both), in the UK, only civil partners and married couples can currently claim exemption from IHT on any gifts between them. The proposed amendments will, if they become law, help to relieve the IHT burden on siblings who have lived together for many years, have never married and are the main beneficiaries in each other’s wills.

INVESTMENT PLANNING 

September inflation numbers

(AF4, FA7, LP2, RO2) 

The UK CPI inflation rate for the all-important month of September 2022 was 10.1%, up from 9.9% in August

The CPI annual rate for September is always an important figure as (in theory) it sets the indexation basis for many benefits and those tax allowances and tax and national insurance (NIC) bands that are not frozen.

The rate has crept back through the psychological double digit barrier, to 10.1%. That is 0.1% above market expectations, according to Reuters and a 40-year high. A year ago, the September CPI reading was 3.1%, which was the rate then applied to State Pension increases, overriding the Triple Lock (earnings growth, distorted by pandemic effects was much higher). September 2022’s monthly CPI rise of 0.5%, the same as in August, compares with a 0.3% increase in September 2021.                

The CPI/RPI gap widened to 2.5%, with the RPI annual rate up 0.3% at 12.6%. That remains the highest level for RPI since March 1981. Over the month, the RPI index was up 0.7%.

The Office for National Statistics (ONS)’s favoured CPIH index rose by 0.2% to an annual 8.8%. Remember, Tuesday’s news coverage of the 2.4% shrinkage of real wages reported by the ONS used CPIH data for May-August, not the higher CPI.

The ONS notes that the increase in CPIH inflation was mainly due to the following factors:

Upward drivers

Food and non-alcoholic beverages There was an overall increase of 1.1% between August and September 2022, against 0.2% drop last year. This took the division's annual inflation rate to 14.5% in September 2022, up from 13.1% in August. The ONS notes that:

• the annual rate of inflation for this category has risen for the last 14 consecutive months, from negative 0.6% in July 2021; and
• The current rate is estimated to be the highest since April 1980.

Restaurants and Hotels There was an overall increase of 0.5% between August and September 2022, against a fall of 0.3% last year. This took the division's annual inflation rate to 9.7% in September 2022. The ONS says this came entirely from accommodation services, which was the result of differing seasonal patterns between 2022 and 2021. The price of hotel overnight stays had fallen in August 2022, but rose by 3.6% between August and September 2022. In 2021, prices peaked in August before falling by 8.4% into September.

Furniture and Household Goods The annual rate of inflation for furniture and household goods rose to 10.8% in September 2022, from 10.2% in August. Prices overall rose by 1.5% on the month in 2022, compared with a smaller rise of 0.9% in September 2021. The largest change came from household appliances, fitting and repairs, where prices for washing machines, electric fans, and vacuum cleaners all rose this year, but had either fallen or had been largely unchanged between August and September 2021.

Housing water, electricity, gas and other fuels This category’s costs increased by 0.3% on the month in 2022, compared with a smaller increase of 0.2% in September 2021. The net result was a 0.1% increase in the annual rate to 9.3% in September 2022. The increases came from owner occupiers’ housing costs, private rents, and electricity, gas and other fuels, where prices rose by more compared with a year ago.

Downward drivers

Transport There was an overall decrease of 1.7% in this between August and September 2022, compared with a decrease of 0.2% in the same period last year. The fall was almost entirely due to the drop in the price of motor fuels, which for September showed an annual increase of 26.5%, against 32.1% in August. Annual inflation in this category is now 10.9%, well down from its June 15.2% peak.

Eight of the twelve broad CPI divisions saw annual inflation increase, while four (Transport, Communication, Recreation & Culture and Education) fell. Housing, water, electricity, gas and other fuels was predictably the category with the highest annual inflation rate at 20.2% (0.2% up from last month). Next highest was food and non-alcoholic beverages at 14.5%. Only three minor divisions (Health, Communication and Education), accounting in total for just 7.9% of the CPI basket, posted an annual inflation rate below 5%.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) rose by 0.2% to 6.5%. Goods inflation in the UK rose 0.3% to 13.2%, while services inflation added 0.2% to 6.1%.

Producer Price Inflation was 15.9% on an annual basis, down from 16.4% in August on the output (factory gate) measure. Input price inflation was 20.0%, down from 20.9% in August. Crude oil and petroleum products provided the largest downward contributions to the change in the annual rates of input and output inflation, respectively. On a monthly basis, input prices increased by 0.4% and output prices increased by 0.2% in September 2022.

Comment

The September CPI figure of 10.1% will put more pressure on the Government to adhere to the Triple Lock, just as it adds to the new Chancellor’s incentive to ignore it for a second year. Rising core inflation will also give the Bank of England one more reason to ratchet up rates by at least 0.75% when it makes its next Base Rate announcement on 3 November. Three days before – just in time for the Medium-Term Fiscal Strategy announcement – the ONS will reveal how it intends to treat the (now six month) Energy Price Guarantee in inflation calculations. 

Press release - Teenagers could be missing out on a stash of cash

(FA5) 

HMRC recently issued a press release stating that thousands of teenagers could be missing out on unclaimed amounts in their Child Trust Fund (CTF) account.

As a reminder, a CTF is a long-term savings account which was set up for every child born between 1 September 2002 and 2 January 2011. To encourage saving, the Government provided an initial deposit of at least £250.

The CTF account matures when the child turns 18 years old with the first accounts maturing in September 2020. The last CTF accounts will mature in September 2029. On maturity the account can either be cashed in or transferred into an adult ISA.

Those who are aged 18 or over and have yet to access their CTF account, could have savings waiting for them worth an average of £2,100.

If the child or their parent/guardian know who the provider is they can contact them directly, alternatively they can use HMRC’s online form to locate their CFT account. 

PENSIONS 

DWP consultation on removing performance fees from the charge cap

(AF3, FA2, JO5, RO4) 

The DWP has published a consultation on broadening the investment opportunities of DC pension schemes. The consultation includes the Government’s response to chapter 2 of its 'Facilitating Investment in Illiquid Assets' consultation and seeks views on draft regulations and guidance on the exemption of performance-based fees from the regulatory charge cap proposals. 

The DWP sets out that schemes will be able to exempt performance-based fees from the charge cap where they feel it is in their members’ best interests. 

Exemptions from the charge cap 

The DWP proposes that schemes will be able to use an exemption to exclude “specified performance-based fees” from charge cap calculations from 6 April 2023. It believes it has tightly defined this phrase so that it relates to a fee paid when returns from investment exceed a specific rate (a hurdle rate – which may be fixed or variable) or a specific amount. The rate, or amount, and the period of time over which it is calculated must be agreed upon between the trustees and the investment manager before investing. The statutory guidance makes it clear that trustees need to take specific advice before investing and ensure that the fee structure mechanism provides “appropriate safeguards for members”. The definition does not preclude any asset classes..

As for other fees, the level of charges in each default arrangement (or, in the case of qualifying CMP schemes, the scheme as a whole) will need disclosing as a percentage of the average value of assets through the Annual Governance (Chair’s) Statement and draft statutory guidance has been published to help schemes explain how deductions operate – particularly with regard to their timing. Existing provisions relating to smoothing mechanisms are to be repealed. 

Disclosure and explanation policies 

The DWP has modified the planned requirements in relation to how schemes should state their policy on illiquid investment and how they disclose their asset allocations. Perhaps most significantly, they have removed the threshold of £100m, so that all relevant schemes will have to amend their default Statement of Investment Principles (SIP) and disclose the asset allocations and explain why they have or have not chosen to invest in illiquid assets. 

The new asset allocation disclosures will need to be included in the Chair’s Statement for the first scheme year which ends after 1 October 2023, while the new illiquid investment policy disclosures will be required to be added to the first default SIP of relevant occupational pension schemes published after 1 October 2023. These requirements are being made through amendments to the regulations dealing with Investment and Disclosure. Draft statutory guidance sets out when trustees have to publish and contains specific definitions of asset classes to be used as well as sample tables showing how the detail may be presented. 

The DWP has moved away from requiring schemes to discuss their approach to illiquid asset policy in the general SIP (except for CMP schemes), it will instead require it only in respect of the default arrangement. DWP plans to proceed with a definition of “illiquid assets” that it describes as both wider and more transparent: “assets which cannot easily or quickly be sold or exchanged for cash and, where assets are invested in a collective investment scheme, includes any such assets held by the collective investment scheme”. It believes this will be more easily understood by members. 

The consultation closes at 11:59pm on 8 November 2022. 

Triple Lock Retained

(AF3, FA2, RO4, JO5)

In response to a question from Ian Blackford during Prime Minister’s question time on Wednesday 18 October, Liz Truss confirmed that she was “completely committed to the Triple Lock” applying to the State Pension from next April. The statement came after many ministers, including the Chancellor, Jeremy Hunt, had avoided any promise on the level of increases, with much speculation that the rise would be limited to the growth in earnings (5.5% to July).

Triple Lock and State Pensions

The “Triple Lock” for increases to the basic and new state pension is the greater of:

• Consumer Price Index (CPI) inflation;
• Earnings growth; and
• 5%.

It won’t come as any surprise that the winner this year is the CPI and the fact that the Government has pledged to honour the promise to stick with the Triple Lock for at least this parliament should be welcomed.

Cynics may note that it is long time until next April 2023 and the Prime Minister has a track record of changing her policies. However, assuming that there is no U-turn on this occasion the new rates will be based on 10.1% CPI inflation to September 2022. The new State Pension will increase from April 2023 from £185.15 by 10.1% to £203.85. The basic State Pension, which came into payment for those reaching State Pension Age before 6 April 2016, will increase from £141.85 to £156.20:

	2022/23 £ per week	2023/24 £ per week
New State Pension	185.15	203.85
Old State Pension	141.85	156.20

This will be a significant increase for those who are relying on the State Pension as their main source of income. Last year’s increase was only 3.1%, because the Triple Lock was rolled back to only a Double Lock discounting earnings growth.

One of the significant issues with the increase is that it only comes into payment in April 2023, over five months after the calculation dates. This can work either in the individual’s favour or against them depending on what happens in the next few months. In any case, pensioners have been dealing with increasing costs for many months now and so, even if inflation drops dramatically, it isn’t likely to mean that those impacted are any better off in the long run. The only solace is that, because of the Triple Lock, over recent years we have seen at or above inflation increases meaning that the starting point for this year’s rise could have been significantly lower.

Note that the statement only related to the Triple Lock, which applies to the new and old State Pensions. In theory other State Pension benefits will also rise in line with the CPI. In practice we may have to wait until 31 October for confirmation.

Other State Benefits

Other benefits would usually be increased by CPI. This includes working-age benefits, benefits to help with additional needs arising from disability, carers’ benefits, pensioner premiums in income-related benefits, Statutory Payments, and Additional State Pension. This hasn’t yet been confirmed and as with the Triple Lock, these increases are not written into legislation so we will have to await any announcements.

Those on benefits are likely to be the greatest hit by inflation and many are already struggling, so full inflation increases will be key to keep people afloat in these hard times. We again have the discrepancy in the timing with inflation hitting now, but the implementation not coming until April when many might find themselves in greater debt just to keep up with the basics.

Other pensions

Many defined benefit pension schemes, including those in the public sector, use the September CPI to uprate benefits. Again, this will not come into payment until April for those in receipt of benefits.

However, there are bigger issues for those who are still accruing benefits in defined benefit schemes. These are often again increased in April, but using the preceding September’s inflation figures to determine the amount. However, legislation uses the previous September’s figure when calculating the annual allowance used. So, we will see a mismatch of 7% (the difference between 3.1% in September 2021 and 10.1% in September 2022). Although a rather technical point, this means that the amount of annual allowance used is exaggerated compared to schemes that use the same CPI figures as the legislation does. So, we are likely to see very large annual allowances and therefore an increased number of people suffering an annual allowance charge this year. There are things that can be used to mitigate these charges, such as carry forward and getting good quality financial advice in this area is key to ensuring that only the actual tax due is paid.

There have been promises to review some of these issues for public sector schemes, specifically the NHS Pension Scheme but we still await confirmation of any changes and timing of these changes.

FCA: Retirement income market data 2021/22

(AF3, FA2, RO4, JO5)

The FCA has published retirement income market analysis which provides the latest data covering the year from April 2021 to March 2022. According to the findings:

• The number of pension pots accessed for the first time surged 18% in 2021/22.
• The total value of money withdrawn from pensions also rose by 22%, from just over £37 billion to over £45 billion.
• Over 205,000 people entered drawdown in 2021/22, a 24% increase compared with the previous year (2020/21: 165,988).
• Annuity sales also rose 13% from 60,383 in 2020/21 to 68,514 in 2021/22.
• Some 40% of regular withdrawals in drawdown were at an annual rate of 8% or more, down from 43% in 2020/21.
• Savers accessing their pensions during cost-of-living crisis urged to think carefully about the sustainability of their withdrawal plan. 

WPC: Protecting pension savers – five years on from the pension freedoms: Saving for later life
(AF3, FA2, RO4, JO5)

The Work and Pensions Committee (WPC) has published its report entitled: “Protecting pension savers — five years on from the pension freedoms: Saving for later life”. The report finds that over 60% of people are at risk of missing out on an adequate standard of living in retirement, despite the introduction of auto-enrolment. The WPC has warned that minimum contributions to pensions are too low and that many self-employed and gig economy workers are being excluded completely from pension saving.

WPC Chair Stephen Timms said: “The Government must urgently consider how to boost saving, including examining the case for increasing minimum contributions, before it is too late. Attention also needs to be given to the forgotten groups excluded from auto-enrolment, such as the self-employed and some gig economy workers. These people are at real risk of being left behind in retirement unless the Government steps in to ensure they have access to auto-enrolment or similar schemes. With many struggling through a cost-of-living crisis now is not the time to ask people to find extra money for their pensions, but this does not mean that the new team of DWP ministers can sit on their hands and ignore the dark clouds gathering on the horizon for a future generation of pensioners. Without action to prepare the ground now, many people will feel the reality of this coming catastrophe in their later years.”

The ABI has welcomed the response and Assistant Director and Head of Long-term Savings Policy Rob Yuille commented, in their Press Release, saying that: “As recognised in the Committee’s report, the Government needs to ensure that automatic enrolment continues to work for savers. In part, this means increasing minimum contributions to help people save enough for a financially secure retirement. However, a plan must be set out to achieve this gradually over the next decade. Additionally, we agree that solutions must be brought forward to bring lower earners and the self-employed into automatic savings. We look forward to continuing to work with Government and the Committee to address these challenges.”

The Pensions and Lifetime Savings Association (PLSA) said in their Press Release that it “fully supports” the WPC's recommendations contained in the report. PLSA Director of Policy and Advocacy Nigel Peaple said: “We agree with the Committee’s stark assessment that without Government action too many people will fail to achieve an acceptable standard of living in retirement. This is something that is true for people on average earnings, as well as for under-pensioned groups, such as people — often women — who take time out of work to care for others, and specific elements of the workforce such as the self-employed, gig-economy workers and people with part-time jobs.”

Partner at Hymans Robertson Chris Noon commented in their Press Release specifically on the recommendations for solving the gender pensions gap and said: “We are very pleased to see that the Work and Pensions Select Committee has recognised the importance of reducing the inequality of the widening gender pensions gap. It is good to see them making the recommendation that the Government considers the case for moves such as a carer’s credit to their auto-enrolment pension. It is rightly also holding the Government to account by stating that 'if it chooses not to do so, it must explain its alternative plan to address the gender pension gap mainly caused by labour market inequalities'.”

FCA warns cost-of-living crisis increases pension scams risk
(AF3, FA2, RO4, J05)

The FCA has, in a Press Release, detailed the launch of its latest ScamSmart campaign which aims to provide consumers with the knowledge and tools to avoid pension scams. According to an FCA survey of 1,009 adults aged 40 and over with workplace and private pensions, 25% of consumers would withdraw pension savings to cover the cost of living, making them vulnerable to “misdirection” scam tactics. The research found that scammers will prey on their victims’ misunderstanding of how pension savings work to secure their hard-earned money, with 54% of respondents saying they did not feel confident in how to grow their pension savings and 38% saying they do not feel confident in understanding how pensions work.

Mark Steward, FCA Executive Director of Enforcement and Market Oversight, said: “The rising cost of living is affecting people at all savings levels, and pension scammers are taking advantage of this. Pension scammers are tricking victims with false promises of a better lifestyle in retirement, more money to support a better life in hard times. Like the magician’s trick, thousands can disappear in seconds, but this time the consequences can be devastating ones. ScamSmart contains important information to avoid being tricked by scammers.”

PLSA: Five steps to better pensions: time for a new consensus (AF3, FA2, JO5, RO4)

The Pensions Administration Standards Association (PASA) has hailed the fact that, 10-years on from automatic enrolment millions more people are now saving into a workplace pension. However, opportunities to improve the retirement savings system remain.  The research report, entitled “Five steps to better pensions: time for a new consensus” has two main findings:

• Around half of savers risk missing retirement targets set by the Pensions Commission in 2005, according to the PLSA.
• Around 1-in-5 households at risk of failing to even achieve a ‘minimum’ standard of living in retirement.

Since auto enrolment’s introduction the PLSA has been building a case for a pensions framework that can help everyone achieve an adequate income in retirement. This includes ground-breaking initiatives, research and policy work including the Pension Quality Mark, Retirement Living Standards, Retirement income adequacy: Generation by generation, Hitting the target and Guided retirement income choices. But there’s more to be done.

PLSA has been calling for Government to increase contributions and improve savings among those not included in automatic enrolment. They have also supported proposals to reduce the qualifying age for auto enrolment and ensure that savings should begin from the first pound of earnings.

The report makes five recommendations for reform:

• National objectives: The creation of clear national objectives for the UK pension system – ‘adequate, affordable and fair’ – combined with regular formal monitoring of whether it is on track to achieve these goals.
• State Pension: Reform of the state pension so everyone achieves the Minimum Retirement Living Standard, to prevent pensioner poverty.
• AE reform: Reform of AE so more people are included, such as younger people, multiple job holders and gig economy workers, and at a higher level so people on median earnings are likely to achieve the Pensions Commission’s Target Replacement Rates. These measures include saving from the first pound of earnings, and gradually increasing contributions from 8% to 12% from the mid-2020s to the early 2030s – with contributions split evenly between employers and employees).
• Under pensioned groups: Additional policy interventions to help under pensioned groups, including women, gig economy workers, self-employed people, and others.
• Industry initiatives to achieve better pensions: actions to help people engage with pensions, receive higher contributions, or get better pension outcomes.

PLSA’s calculations estimate that with the reforms a median earner would see an increase in retirement earnings from £15,000 per year to around £19,000, or about 25%. This will also help more people achieve the minimum requirements for the independently assessed Retirement Living Standards.