What's new bulletin March 2022

TAXATION AND TRUSTS

Spring Statement 2022

(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3,RO4, RO5, RO7, RO8)

Technical Connection provides a brief summary of the Chancellor's announcements in the Spring Statement 2022.

The Chancellor’s Spring Statement is not meant to be a major fiscal event. However, against a background of soaring inflation, the Ukraine invasion, steep increases in the cost of living and lower than forecast borrowing (though with higher than desirable interest rates), many were hoping that the Chancellor would make a number of announcements that would immediately help those in the UK struggling the most.

Setting his speech against the need for domestic economic stability in a volatile geopolitical landscape, he laid out the facts:

• Higher global energy, metals and food prices pose risks to the outlook for inflation, consumer spending and production. The Ukraine invasion, and the resulting effect on global markets, will inevitably have an adverse effect on the UK economy and the cost of living in the relative short term.

• Consumer Prices Index (CPI) inflation has risen to a 30-year high in recent months. The Office for Budget Responsibility (OBR) forecasts inflation to remain elevated through 2022 and 2023, peaking at 8.7% in Q4 2022. On an annual basis, inflation is forecast to be 7.4% in 2022, before decreasing to 4.0% in 2023 and 1.5% in 2024. Inflation is then forecast to be 1.9% in 2025 and 2.0% in 2026.

• The economic recovery over the past year has exceeded expectations, with GDP growth of 7.5% in 2021. The UK economy recovered to its pre-pandemic level around the end of 2021 with real GDP having regained its February 2020 level by November 2021. Across the final quarter of 2021, GDP was on average 0.4% below its pre-pandemic size.

• Taking into account the pandemic economic recovery to date, continued global supply chain pressures and the initial invasion of Ukraine though, the OBR expects UK real GDP to grow by 3.8% in 2022. GDP is then forecast to grow by 1.8% in 2023, 2.1% in 2024, 1.8% in 2025 and 1.7% in 2026.

With these factors in mind, the Chancellor was at pains to state that any support the Government could give now, must be fiscally responsible. There was also a strong underlying narrative that as a country we were only able to commit to the support of Ukraine and contribute the imposing of sanctions on Russia because of a strong economy, and this would continue to be the case. He was also keen to remind us of the initiatives that he had already announced, but went on to announce some further immediate measures, as well as setting out the fundamental elements of his Tax Plan for the reminder of the Parliamentary term:

• From today, a temporary cut will be introduced to duty on petrol and diesel of 5p per litre that will last until March 2023.

• From 6 April 2022, the Employment Allowance will increase to £5,000 (from £4,000).

• From 6 July 2022, the annual National Insurance Primary Threshold and Lower Profits Limit will increase from £9,880 to £12,570. This aligns the Primary Threshold and Lower Profits Limit with the income tax personal allowance.

• From 6 April 2022, Class 2 National Insurance liabilities will be reduced to nil on profits between the Small Profits Threshold and Lower Profits Limit. This will ensure that no one earning between the Small Profits Threshold and Lower Profits Limit will pay any Class 2 National Insurance, while allowing individuals to be able to continue to build up National Insurance credits.

• Expand the scope of VAT relief available for energy saving materials and ensure that households having energy saving materials installed pay 0% VAT.

• From April 2024, the basic rate of income tax is planned to reduce from 20% to 19%.

In addition, reviews will be carried out of:

• The Apprenticeship levy, to ensure training is supported effectively.

• R&D tax credits.

• Tax on business investment (e.g. capital allowances).

Comment

In relation to the impact of these changes on financial planning strategy, the following spring to mind:

• The increase to the National Insurance threshold:
• For SME owners to take at least £12,570 in salary before considering dividends; paying a working spouse/partner up to the £12,570 threshold. Beyond the threshold though, the salary/dividend comparison remains as it was otherwise. (Although, it will need to be considered again ahead of the basic rate of income tax dropping to 19%).
• Proposed future reduction to the basic rate of income tax:
• Defer a basic rate taxable chargeable event gain from an investment bond, or other basic rate taxable income, until after the rate drops – subject to commercial economic factors of course.
• Basic rate taxpayers to:
• invest in pensions before the income tax rate drops to 19% (getting 1% more front end tax relief);
• defer taking income from a pension (if possible) until after the income tax rate drops to 19%.

• The UK life company rate for policyholders’ funds is linked to the basic rate of tax so (provided the lifeco rate were not “de-coupled” from the basic rate) would also fall to 19%. This would be relevant for the non-dividend income and capital gains of UK life funds and, thus, UK investment bonds.
• And for investors in international investment bonds – there would a lower rate of basic rate tax on encashment post the reduction.

Copies of the relevant Spring Statement documents are here:

• Spring Statement 2022
• Spring Statement Tax Plan
• Spring Statement 2022: Policy Costings
• Impact on households: distributional analysis to accompany Spring Statement 2022
• Spring Statement 2022 Data Sources
• Table 3.1: Policy decisions at Spring Statement 2022
• Debt management report 2022 to 2023
• Temporary Cut to Fuel Duty
• Government support for the cost of living: factsheet
• Spring Statement 2022: Business support factsheet
• Spring Statement 2022: Personal Tax Factsheet

Student loans: the impacts of the post-2023 system changes

(AF1, RO3)

The Institute for Fiscal Studies has been crunching the numbers on the proposed new student loan rules for England

Two sets of changes for student loans in England have recently been announced, the first of which applies to students who started their courses on or after 1 September 2012. The second set, which emerged less than four weeks later will be for those starting their courses in the academic year 2023/24 or later. Some more information has now emerged as the Department for Education has issued an 81-page consultation document. This looks something of a misnomer as the list of consultation questions do not cover either of the revised student loan financing schemes. As we remarked before, the Treasury’s sticky fingers are all over this reform.

The Institute for Fiscal Studies (IFS) has now crunched the numbers on the post-2023 system and reached some interesting conclusions:

• Under the current system only about a quarter of the loans for current students are expected to be repaid in full. For the new regime, the combination of:
• a lower payment threshold (£25,000, frozen until 2027/28 and then RPI-linked rather than, as now – at least in theory – earnings linked);
• a reduced maximum interest rate of RPI; and, crucially
• a 40-year repayment term (against the current 30 years);

will mean that around 70% of students will clear their entire loan. As the IFS says, ‘For most, it is now appropriate to think of their student loans as more akin to more familiar consumer or mortgage loans… because a majority can now expect to pay off the loan at some point, rather than have it written off’.

• The lowest earners will be little affected by the reform, as they repay little or nothing anyway. The biggest losers will be the next tier with below average earnings (3rd and 4th decile of borrowers’ earnings). The IFS estimates that they will see around an extra 2% of lifetime earnings lost in loan repayments.

• At the opposite end of the earnings spectrum, the highest decile of earners will save 2.5% of lifetime earnings because both the lower interest rate and lower earnings threshold will mean they repay their loans more rapidly.

• The IFS believes women will end up paying an average of £11,600 more because they ‘tend to spend more time out of work than men and on average earn less than men even when in work.’ Men, who are more likely to repay their student debt, will on average save £3,800.

• The IFS calculates that the way in which student loans are dealt with in the national accounts will have the effect of cutting the budget deficit by around £6.3bn in 2023, although there will be subsequent hits to the deficit as new loans will accumulate less interest. As the IFS wryly observe, ‘This will please the Treasury.’ It also looks timely given the electoral cycle.

Comment

In normal times, an RPI-linked loan would simplify the decision as to whether to clear a student loan as quickly as possible. These are not normal times – RPI is currently 7.8% – and RPI itself becomes CPIH in 2030. However, given the frequency with which the system has been tweaked in recent years, it seems unlikely we will reach 2030 without at least one more reform.

INVESTMENT PLANNING

SAYE - ending of the COVID-19 easement

(AF4, FA7, LP2, RO2)

The COVID-19 easement to pause contributions to SAYE for an unlimited period will no longer apply for new savings contracts entered into from 6 April 2022. However, anyone who is eligible will still be able to access the easement, if their savings contract was in place before 6 April 2022.

Savings-related schemes are comparatively simple. Basically, options are granted to the members of the scheme and the members then save up in a building society, bank or other authorised Save as You Earn (SAYE) account (subject to maximum amounts).

The member would typically agree, when they enter into the SAYE contract, when the bonus date should be and, this could be either three years, five years or seven years. The general rule is that an option may not be exercised before the bonus date or more than six months after that date.

Employees who participate in company SAYE share schemes can delay payments of monthly contributions into their linked savings account, for any reason, on up to 12 occasions in total, without causing the savings contract to be cancelled.

On 10 June 2020, HMRC introduced a further easement to allow employees, who were furloughed or on unpaid leave due to COVID-19, to pause saving for an unlimited period. For more information please see HMRC’s Employment Related Securities Bulletin 35 and Employer Related Securities Bulletin 36.

The COVID-19 easement for SAYE is set out in the current SAYE prospectus and is not contained in legislation. HMRC has legal authority to change the SAYE prospectus without consulting Parliament.

The current prospectus commenced 10 June 2020. To end the easement, HMRC will issue a new prospectus which will apply to savings contracts entered into from 6 April 2022.

Individuals who entered into savings contracts under the terms of the current prospectus will be able to access the COVID-19 easement for the duration of their savings contract.

Individuals who entered into a contract under the prospectus which applies before 10 June 2020 will also be able to access the COVID-19 easement for the duration of their contract. Although that prospectus does not contain provision for a COVID-19 easement, HMRC provided a concession which allowed such individuals, if they met the conditions, to access the easement. This will continue.

Any individual will also be able to access the easement which permits postponement of saving for a cumulative total of 12 months for any reason. Where an individual postponed saving due to COVID-19 and subsequently wishes to postpone saving for another reason, the easement which permits postponement for a cumulative total of 12 months will be available, provided this has not already been used up.

Individuals who enter into savings contracts under the new prospectus, from 6 April 2022, will not benefit from any COVID-19 easements but will be able to use the easement which permits postponement of savings for a cumulative total of 12 months for any reason.

Any postponement of savings will put back the three or five year maturity date of the employee’s savings plan by the total number of months missed, including any additional months missed because of the impact of COVID-19.

Example 1

A participant entered into a five year savings contract in January 2018 and had postponed payments by 11 months up to February 2020.

They were furloughed in March 2020 for 12 months because of COVID-19 and paused their contributions during this period.

They returned to work in March 2021 and were able to resume payments. They have not had cause to pause their payments since.

If from 6 April 2022 they need to pause their payments for reasons not connected with COVID-19, they can only pause them for a maximum of 1 month without the savings contract being cancelled (because they had already used 11 months up to February 2020).

Although it is unlikely, if the participant needs to pause contributions further because of COVID-19, this would be permitted as a result of the concession HMRC provided which allows such participants, if they meet the conditions, to use the COVID-19 easement.

The original contract was due to end in December 2022.

The payment-pause of 11 months up to February 2020 would put back the maturity date of the employee’s savings plan to November 2023.The further 12 month pause, which was related to COVID 19, would further put back the maturity date of the employee’s savings plan to November 2024.

Example 2

A participant entered into a three year savings contract on 1 July 2020.

They were furloughed for six months in October 2020 because of COVID-19 and paused his contributions during this period.

They returned to work in May 2021 and have not had cause to pause payments since.

In May 2022, for reasons not connected to COVID-19, the participant needs to pause their contributions for six months.

As they have previously delayed payments because of COVID-19 and no other reason, they can pause payments for up to 12 months without the savings contract being cancelled.

If, in November 2022, the participant needs to delay payments again for reasons connected with COVID-19, then this would be allowed as they entered into their savings contract before 6 April 2022.

The participant would also still have six months pause remaining to use from the usual 12 months permitted.

The original contract was due to end on 30 June 2023.

The six months pause in October 2020 put back the maturity date of the employee’s savings plan to December 2023.

The six months pause in May 2022 further put back the maturity date of the employee’s savings plan to June 2024.

Example 3

A participant enters into a new three year savings contract on 1 May 2022.

From July 2022, they are unable to contribute to their savings plan for two months due to reasons connected with COVID-19.

They are unable to use the COVID-19 easement as this ended on 5 April 2022, but they can pause payments using the savings holiday of up to 12 months allowing them to pause saving for any reason.

This will mean that they have a further ten months available to use should they need to delay contributions to their savings plan again.

The original contract was due to end on 30 April 2025.

The paused payments in July and August 2022 puts back the maturity date of the employee’s savings plan to 30 June 2025.

Stock market performance: bad news = good news?

(AF4, FA7, LP2, RO2)

Last week markets had a dose of bad news, but nonetheless mostly rallied.

Last week:

• The Ukrainian conflict continued with peace talks increasingly looking more like another aspect of Russia’s war-on-all-fronts than an immediate route to peace.
• Both the US and UK central banks increased interest rates, with the Federal Reserve decidedly hawkish on future rises.
• Supply chains were given another layer of disruption, as China announced a five-day factory lockdown in Shenzhen, its tech production centre.

So, what happened? As the graph shows, the UK, US, Eurozone and Japanese markets all ended up across the five days, with gains either side of 6%. China missed out on the rally in the first part of the week but the Shanghai Composite added over 6% to its Tuesday closing level. Except for China, the indices we have been plotting since 24 February are now close to or above their level on the day before the Russian troops entered Ukraine. The Footsie is even (just) in positive territory for 2022. A better vindication of the ‘don’t panic’ advice would be hard to imagine, even if the reaction does seem strange.

To be fair, there were some extenuating circumstances. The interest rate increases were well baked into the market, as was the likely six more notches up in 2022 that the Fed’s dot plot suggested. In contrast, the Bank of England was more dovish than many had expected. In China, the rally from Wednesday was driven by a supportive statement from President Xi’s leading economic adviser.

Yield curves had already anticipated the rate rises, so they changed little over the week. The US yield flattened marginally: there is now less than 0.01% difference between the five-year and ten-year rates. 

Comment

The focus will shift more to the UK this week, given the Spring Statement and strangely late February inflation numbers, both arriving on Wednesday. Many will be watching what revisions the Office for Budget Responsibility makes to the forecast it issued alongside the Budget on 27 October. That feels a long five months ago...

Warning on illegal crypto ATMs operating in the UK

(AF4, FA7, LP2, RO2)

A recent news story issued by the Financial Conduct Authority (FCA) states that Crypto ATMs offering cryptoasset exchange services in the UK must be registered with the FCA and comply with UK Money Laundering Regulations (MLR).

The FCA warns that none of the cryptoasset firms which are registered have been approved to offer crypto ATM services. This means that any of them operating in the UK are doing so illegally and consumers should not be using them.

There was a recent ruling against a firm that was offering crypto ATM services where the judge concluded that there was ‘lack of evidence’ as to how the firm would operate in a compliant manner.

The FCA has previously warned consumers that such investments are unregulated and high-risk so are unlikely to have adequate protection.

PENSIONS

Responses to the DWP consultation on pensions dashboards

(AF3, FA2, JO5, RO4, RO8)

Several organisations have published details of their responses to the DWP’s recent consultation on Pension Dashboards:

• The Pensions and Lifetime Savings Association (PLSA) has published its response to the consultation on the draft Pensions Dashboards Regulations 2022. In the response, the PLSA said that pensions dashboards must meet threshold tests for coverage, accurate data matches and user understanding to ensure savers are not met with incomplete or confusing information when accessing pensions dashboards for the first time.

Nigel Peaple, PLSA Director of Policy and Advocacy, said in their Press Release that: “The PLSA commends the Pensions Dashboards Programme, the Government, regulators and industry on the hard work they have completed on this highly complex project to date. The draft regulations represent a big step forward for making pensions dashboards a reality. However, with a number of important outstanding issues still to be resolved, the existing timeline for launching public dashboards still looks highly ambitious... [E]xtensive user testing will be needed to reach agreed quality thresholds so that savers are not immediately disappointed by a lack of information, or worse, suffer detriment as a result of making the wrong decisions due to dashboards not being designed correctly”.

• The Association of Professional Pension Trustees (APPT) has also published its response to the consultation. In response to a question asking for any comments on the Regulations that are not covered in the consultation, the APPT queried: “It is not clear that increases to pensions in payment will be made clear by the dashboard. A pension increasing at 5% may be twice as valuable as the same pension on a non-increasing basis. Is it your intention that this will be made clear to dashboard users?... Consideration needs to be given to members who have a right to take early retirement benefits from a non-money purchase scheme without being subject to an actuarial reduction. How will this be displayed?”
• The Association of Consulting Actuaries (ACA) has published its response to the DWP consultation on the draft Pensions Dashboards Regulations 2022. The response, whilst supportive of the policy intent, calls for a further consultation on the regulations due to gaps and lack of clarity found in the initial draft. The response says: “We are disappointed that there is no signposting in the consultation document about potential changes to the disclosure regulations as a result of the information that will become available on the dashboard. We think it important that, once the dashboard information has been settled, consideration is given as to how the disclosure regulations should change, particularly in the area of benefit statements, in order to ensure consistency in the information provided under the two routes and possibly the satisfaction of certain disclosure requirements through the dashboard.

ONS highlights both the numbers and reasons for over 490,000 over 50s leaving the Labour market as a result of covid

(AF3, FA2, JO5, RO4, RO8)

The Office for National Statistics (ONS) has released two data sets:

• Movements out of work for those aged over 50 years since the start of the coronavirus pandemic
• Reasons for workers aged over 50 years leaving employment since the start of the coronavirus pandemic

According to the ONS data sets:

• 493,000 individuals aged 50 and over have left the labour market, topped working or actively looking for work, as a result of COVID.
• Prior to the pandemic the proportion of over 50s who were economically inactive had declined steadily, see the graph.

• Those aged 60 years and over were more likely to be funding their retirement or time out of work from a private pension (66%) than those in their 50s (29%).
• Retirement is the most frequently given reason for leaving work during the pandemic (47%), with those age 60 or over more likely to report this (58%) than those in their 50s (28%).

The question, for those leaving the labour market early, is will their savings last sufficiently long to allow them to fully enjoy their later retirement? Average life expectancy at age 50 is around 84 for a man and 87 for a woman; meaning the chances of running out of money in retirement are high. The corresponding figures for 60-year-olds is the same; it is only the 1:4 and 1:10 ages showing a difference.

For those who can afford to, delaying accessing their pension will also give their retirement fund more time to grow and thus increasing the level of sustainable, not just from the additional growth but from the shorter time it needs to last.

For individuals leaving the workforce, it is important for them to check their State Pension entitlement they have thus far accrued. They may well need to make Voluntary NICs, either Class 2 or Class 3 to ensure they are entitled to the full State Pension at age 67.

The Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022

(AF3, FA2, JO5, RO4, RO8)

The Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022 (SI 2022/255) have been laid before parliament and come into force on 1 August 2022. These formally pave the way for Collective Defined Contribution (CDC)/Collective Money Purchase (CMP) schemes to apply to The Pensions Regulator for authorisation from 1 August 2022.

Currently, employers and employees only have the choice of using defined benefit (DB) schemes or defined contribution (DC) schemes. The new scheme type involves investment of all contributions with opportunity for higher returns than other defined contribution schemes. The collective nature of the schemes means that investment risks are shared between the membership and employers, whilst pensioners will receive an income which is designed to achieve a balance between the scheme’s assets and the provision of benefits. CMP schemes will also require actuarial valuations every year.

The government believes this will be more sustainable for both employers and employees and has the potential to offer better outcomes for pension scheme members. The Department for Work and Pensions have outlined application requirements and authorisation criteria to ensure only well-run schemes are allowed to operate. These include ensuring that persons involved in key capacities relating to these schemes are fit and proper and that the scheme has sufficient financial resources to meet the costs of setting up and running the scheme, with additional resources to take necessary steps if things go wrong. Further legislation is expected to be laid in front of parliament this month, relating to modifications and consequential/miscellaneous amendments.

DWP publishes speech delivered at PLSA conference on managing climate risk

(AF3, FA2, JO5, RO4, RO8)

The DWP has published the text of a speech given by Work and Pensions Secretary Thérèse Coffey at the PLSA’s ESG (environmental, social and governance) Conference 2022 on managing climate risk. In her speech, she highlighted the importance of trustees and said: “Trustees can be strong investment influencers — as asset owners, as the appointers of investment managers, by sharing their views and wishes when it comes to votes on company and shareholder resolutions, and their engagement with [companies]. I see strong and active stewardship as a really important component of what it means to put climate change right at the heart of a scheme’s governance and risk management.”

Ms Coffey concluded: “We are committed to continuing to work with pension schemes and their trustees to ensure the risks from climate change are properly managed, to protect people’s pension savings, to maximise investment opportunities to fuel our transition to our greener economy, to turn promises on climate change into action, and to fully harness the power of pensions to deliver for people and the planet.”

DHSC publishes report on changes to member contributions in the NHS pension scheme

(AF3, FA2, JO5, RO4, RO8)

The Department of Health and Social Care (DHSC) has published a report which sets out the reasons for changing the amount that members contribute to the NHS Pension Scheme. It takes into account the desirability of not making any changes at this point in time. The rates are:

Current tiers	Pensionable earnings	Current rate (FTE)	Rate from 01/10/22	Provisional rate from 01/10/23	Proposed tier
Tier 1	Up to £13,231	5.0%	5.1%	5.2%	Tier 1
Tier 1	£13,232 to £15,431	5.0%	5.7%	6.5%	Tier 2
Tier 2	£15,432 to £21,478	5.6%	6.1%	6.5%	Tier 2
Tier 3	£21,479 to £22,548	7.1%	6.8%	6.5%	Tier 2
Tier 3	£22,549 to £26,823	7.1%	7.7%	8.3%	Tier 3
Tier 4	£26,824 to £27,779	9.3%	8.8%	8.3%	Tier 3
Tier 4	£27,780 to £42,120	9.3%	9.8%	9.8%	Tier 4
Tier 4	£42,121 to £47,845	9.3%	10.0%	10.7%	Tier 5
Tier 5	£47,846 to £54,763	12.5%	11.6%	10.7%	Tier 5
Tier 5	£54,764 to £70,630	12.5%	12.5%	12.5%	Tier 6
Tier 6	£70,631 to £111,376	13.5%	13.5%	12.5%	Tier 6
Tier 7	£111,377 and above	14.5%	13.5%	12.5%	Tier 6
	Expected yield	9.8%	9.8%	9.8%