Friday, 28 March 2014


All the information in this blogpost is given in good faith, has been checked thoroughly, and is believed to be accurate at the date of publication – 28 March 2014. Paul Lewis accepts no responsibility for any consequences financial or otherwise to individuals who act on it. By reading on you accept this condition.

Up to £1500 free
Generally I don’t approve of using tax wheezes – evoidance as I call it – but this is one loophole which is built in to the current pension rules and has just been widened considerably. If you are aged at least 60 but under 75 and can get hold of a few thousand pounds (I know, I know) you can make £500 almost overnight. And you can do that up to three times with the same money. The gain is tax-free.

Here’s how it works.

             Open a personal pension plan (PPP) and pay in £8000.
             The Treasury puts in another £2000.That represents the basic rate tax you have paid to have £8000 left.
             The total in your fund is £10,000.

From Thursday 27 March a pension pot up to £10,000 counts as a small pot and can be taken out in cash as a lump sum.

             Immediately take out your small pot as cash
             The first 25% is tax free. That is £2500.
             The remaining £7500 is taxed at your basic rate.
             That will cost 20% which is £1500
             You are left with £6000.
             Add on the £2500 tax free and you have £8500. Even though you only put in £8000.
             Profit £500.

You can cash in up to three small pots, so you could make £1500 for nothing.

The calculation

Pay into a PPP
Treasury adds
Total in PPP
Cash in as small pot
Tax free cash
Taxable balance
less 20% tax
less original outlay
Do it 3 times

HMRC has what it calls ‘anti-recycling’ rules to stop people taking tax free cash and putting it straight back into a pension to get further tax relief on it. However, those rules do not apply until you take more than £12,500 of tax-free cash so should not apply to this process as even doing it three times releases only £7500 tax-free cash.

The scheme has been possible since April 2012 when the rules for cashing in ‘small pots’ first began. But before 27 March 2014 the maximum 'small pot' was £2000 so the profit was just £100 and you could only do it twice. So it was not worth it. By raising the limits to three pots of £10,000 each the Government has made the scheme much more worth doing. You can of course do it with any amount up to paying in £8000 which gives the maximum small pot of £10,000.

If you take three maximum lump sums it will count as taxable income of £22,500 and added to the earnings you need of at least £30,000 that will push you over the threshold for higher rate tax - £41,865 in 2014/15. Depending on your other income, two lump-sums or even one might do the same. That would mean some of the lump-sum is taxed at the higher rate. In that case the calculation is complex. You may make more profit but will have to wait longer for it. See the paragraph on higher incomes below. 

Lower incomes
The scheme also works for people who have low or no earnings. It is especially profitable if their income is low enough for them to pay no tax.

Anyone below the age of 75 can open – or have opened for them – a personal pension with up to £3600 in the fund. That means a payment in of £2880 and £720 tax relief is added by the Treasury. The whole lot can now be taken out instantly by those aged at least 60 – leaving a profit of £720 for a non-taxpayer or £180 for a basic rate taxpayer. Non-taxpayers will find the basic rate tax is deducted and they must claim it back. If the lump-sum takes them over the personal tax allowance of £10,000 (£10,500 for 66-74 year-olds), in which case they will only get part of it back. 

So a kind spouse or child or grandchild can open a personal pension with £2880 for a relative aged 60 to 74 who has low or no earnings and the person over 60 can then take the profit and repay the initial investment of £2880. It can only be done once a tax year.

Higher incomes
People who pay higher (40%) or top (45%) rate income tax can make more out of the scheme. If you pay higher rate tax the arithmetic is a little more complex. For your £8000 outlay you would get back just £7000 after paying 40% tax on the taxable £7500. That is a loss so far of £1000. But you can then claim further tax relief through self-assessment which will give you another £2000 which will be deducted off your tax bill. So the final net profit is £1000. For a top rate 45% taxpayer the initial loss is £1375 but the self-assessment claim will reduce the tax bill by £2500 leaving a net profit of £1125. The procedure can be done three times. But beware pension limits – see below.

The person opening the pension fund must be aged at least 60 and under 75.

They must earn at least as much as the pot or pots they pay into in the year they pay into them. Other income such as interest, dividends, a pension in payment, or an annuity does not count as 'earnings'.The exception is a single pot of up to £3600 including basic rate tax relief which can be opened by or for someone with low or no earnings.

Beware maximum limits
The maximum amount that can be put into a pension fund in a year is £40,000. If these payments take you over that limit in your pension input period you may face a tax charge on some or all of the money. If you are a member of a final salary scheme the rise in the value of your rights over the year will count towards your £40,000 limit. If you are at or close to your lifetime pension allowance of £1.25 million in 2014/15 further payments may not attract tax relief and you may be liable for a tax charge.

The Treasury payment may take some time to be credited which could delay the process. If you are a higher or top rate taxpayer you will make a short-term loss and will have to wait until you complete your self assessment form and pay your tax to make the tax saving.

Find a provider
Some platforms or insurance companies which offer personal pensions or SIPPs will be happy to do it for you. Some may charge nothing, others a modest fee especially for existing customers. One quoted me £120 including VAT for the whole job. Tell the firm you want to open an immediate vesting pension – or three if you can afford it and have the income needed.

The future
From April 2015 there will be no restrictions on taking a pension fund in cash and the age you can do so will fall to 55. So if you had you made no other pension contributions in the year you could put in £40,000 – the maximum pension contribution allowed in a year – and make £2000 instant profit. A higher rate taxpayer could get double that – £4000 – though there would be a delay before the profit was made. And for a top rate taxpayer the profit would be £4500. You could repeat the wheeze very year. So the Government will close this loophole before Pension Freedom Day in April 2015.

The facts in this blog have been checked with two top accountants and with pension providers and investment platforms. The Treasury has made it clear to me that officials recognised this consequence of the interim changes on 27 March. It seems that it does not intend to block this loophole in the current rules. But the Treasury will make sure that it cannot continue in its present form when the April 2015 changes begin. A spokeswoman told me "We are now consulting on how best to deliver the next step in our radical plan to let people withdraw their defined contribution pensions savings how they wish. This includes ensuring robust anti-avoidance measures are in place.” How small a pot will be caught by these measures will be the interesting thing to watch out for. 

Pension wheeze
Version 1.13
29 March 2014

Monday, 24 March 2014


Tax rates of more than 100%, higher tax rates at £110,000 than £150,000, frozen allowances for pensioners, and when does higher rate tax start? All figures are at 2014/15 rates.

When does higher rate tax start?
People ask me “When does higher rate tax start?” Often preceded by "I’m confused” and attaching an official document which says, unhelpfully, that basic rate tax ends at £31,865.

The confusion is caused by the Treasury which likes to refer to the ‘basic rate band’ as running from £0 to ££31,865 in 2014/15 but without mentioning that amount is on top of the personal tax allowance. So higher rate tax in 2014/15 begins on income above £41,865 made up of the £10,000 tax-free personal allowance plus the £31,865 basic rate limit. The table shows the personal allowance and the higher rate threshold for the last few years
Personal allowance
Basic rate limit
Higher rate starts

After falling for three years the threshold for higher rate tax is now rising by 1% a year. The result has been that the number of taxpayers paying higher rate tax has risen by has increased by around two million under the Coalition Government. Just over five million will pay it in 2015/16 compared with just over three million in 2010/11 (source: IFS).

What is the marginal tax rate on Child Benefit?
The new Child Benefit High Income Charge is a tax on child benefit where either partner has an income above £50,099. The tax on the child benefit is 1% for each £100 above £50,000 thus reaching 100% of the child benefit as income reaches £60,000.

Child benefit is £20.30 a week (£1055.60 per year) for the first child and £13.40 per week (£696.80 a year) for each other child. So for each £100 rise in income the tax charge is 1% of £1055.60 for those with one child; 1% of £1752.40 for two children, 1% of £2449.20 for three children and so on.

People earning between £50,000 and £60,000 pay income tax at 40% and National Insurance of 2%. If they have a student loan they pay another 9% towards that. So their marginal rate of tax is already 42% or 51% with a student loan. If the tax taken from the child benefit is also added the marginal rate for someone with, for example, three children for each £100 earned is

Income tax £40.00
NI £2.00
CBHIC £24.49
Total £66.49

So for those with three children the marginal rate of tax on each extra £100 is 66.5%. Add on £9 student loan repayment and the marginal rate rises to 75.5%.

Marginal tax rate on each £100 for incomes £50,000 to £60,000 where child benefit received

With student loan
As the table shows everyone in this position pays above the notional top rate of tax of 45% and will pay more than 100% on each extra £100 if they have eight children, or with seven children if they are repaying a student loan. So earn £100 and pay for example, £110.30 in tax. 

Why do I pay 60% tax over £100,000?
The top rate of tax is 45% on incomes above £150,000. But people with income between £100,000 and £120,000 actually pay a marginal rate of income tax of 60% on each extra £2 they earn.

Since 2010/11 the personal allowance has been phased out once income exceeds £100,000. It disappears at the rate of £1 off the personal allowance for each £2 of income above £100,000. So an extra £2 of income is taxed at 40% and also brings down the personal allowance by £1. That brings another £1 of income into tax charged at 40%. So a £2 rise in income results in £3 being taxed at 40% which is £1.20. So £2 of income results in extra income tax of £1.20 which is a rate of 60%.

The marginal rate continues until the personal allowance disappears. In 2014/15 that happens as income hits £120,000. Above that the marginal rate reverts to 40%. And then of course rises to 45% above £150,000.

Why do pensioners pay 30% tax?
Only some, and a declining number, of people over 65 pay a marginal tax rate of 30% on a narrow band of income above £27,000 a year. People born before 6 April 1948 – who are now 66, get a higher personal tax allowance than younger people. The allowance is £10,500 for those born 6 April 1938 to 5 April 1948 and £10,660 for those born before 6 April 1938. These age allowances used to apply at 65 and 75 but from 2013/14 were frozen at their 2012/13 rates and retained only for those born before those dates. The higher age allowance is reduced if income exceeds £27,000 in 2014/15.

The age allowance is reduced at the rate of £1 off for each £2 of extra income. So an extra £2 of income is taxed at 20% and also brings down the age allowance by £1. That brings another £1 of income into tax paid at 20%. So a £2 rise in income results in £3 being taxed at 20% which is 60p. So £2 of income results in extra income tax of 60p which is a rate of 30%.

Once the age allowance is reduced to the personal allowance is then stays at that level. So in 2014/15 the marginal rate applies only to income between £27,000 and £28,000 for the younger age group and between £27,000 and £28,320 for the older group.

In 2015/16 the personal allowance will equal the lower age allowance so the problem will disappear for that age group and will almost certainly vanish for the older group in 2016/17 as the personal allowance rises above £10,660.

Why are tax allowances for pensioners frozen when they are rising for others?
In the past people got a higher personal allowance in the tax year they reached 65 and a slightly higher one that that when they reached 75. But in 2013/14 these age allowances were frozen at their 2012/13 rate and only given to those entitled in 2012/13. The allowance is £10,500 for those born 6 April 1938 to 5 April 1948 and £10,660 for those born before 6 April 1938.

The result is that the tax allowances for those age groups have not risen in 2013/14, 2014/15 and will not rise in 2015/16. By then the personal allowance will be £10,500 for everyone so those born 6 April 1938 to 5 April 1948 will get the same as younger people and in 2016/17 should see their allowance rise above that level. The policy is that it will rise by CPI so probably by 2% or about £210 taking it to £10,710.

That should also mean that the older group born before 6 April 1938 should see their allowance rise – though only by around £50. 

Pensioners with incomes high enough not to get age allowance have of course seen their personal allowance rise by the same amount as younger people.

Version 1.00
24 March 2014

Sunday, 23 March 2014


It is always good to have a three point plan. So when the UK Gift Card and Voucher Association (yes, there really is one!) asked me to talk at their conference on 19 March 2014 I decided to draw one up.

It was brave of the Association to ask me. I have been very critical of gift cards, especially in 2012 and 2013 when almost every month a major High Street name disappeared into administration - and with it the gift cards bought in its name.

Gift cards and vouchers are big business. We spent £5 billion on them in 2013 - and when I say 'we' that figure splits almost equally between retail gift cards bought for presents and cards bought by firms to reward their employees. But out of that £5bn about £300 million (6%) paid by loving relatives and kind bosses is never spent by the recipient. So I decided my three point plan would tackle three things that cause that 'breakage' as it is sometimes called.

First, there is the big loss when a firm goes bust. A gift card with £20 on it becomes worthless overnight. Sometimes the administrator honours them and occasionally a new owner will revive them. But usually the whole lot disappears as card holders are unsecured creditors who seldom get anything when the company is liquidated. So point one of three was ring-fence the money paid for gift cards so that if a firm does go bust it is safe for the gift card holders.

Second, the money expires. Money on almost all gift cards can't be used after a certain time has passed. That can be as little as twelve months, though two years is more common. And the clock starts when the card is bought not when it is given. By the time the happy recipient opens the envelope the card can already be a few months old but nothing on the card shows when the money will disappear. So my point two was - scrap expiry dates.

Third, shops won't give change. Cards are for nice round sums like £25. But goods in shops are for odd amounts usually ending in pence. What happens to the change? The cards do not allow retailers to give it in cash. Instead any balance is left as a small sum on the card. So point three was allow shops to give small amounts of change.

To my surprise this three point plan was greeted well. There were those who said regulations made ring-fencing difficult and even that money laundering laws might scupper giving change. But many of the delegates from all parts of the gift card and voucher business said they broadly agreed with it and would take it back to discuss. We'll see.

But for now I still recommend giving the vouchers you can use anywhere, that never expire and which begin with the unbreakable promise "to pay the Bearer on demand the sum of £20" by the Chief Cashier on behalf of the Governor and Company of the Bank of England.

Thursday, 13 March 2014


In April nearly two million of the poorest pensioners will see a rise in their state pension payments of £1.69 a week (£1.22 each for a couple). That will mean a rise in their income of barely 1%.

So does this break the Government’s ‘triple lock’ promise of raising the state pension by earnings, inflation, or 2.5% whichever is the highest?

The basic state pension paid to people who have paid enough National Insurance contributions is £110.15 a week and will rise in the second week in April by £2.95 to £113.10. That is a rise of 2.7% in line with CPI inflation in September 2013. So far, promise kept. Some get higher or lower amounts of state pension. Lower if their NI contributions were not enough for a full pension. And higher if they have SERPS or graduated pension on top. Their total state pension will also rise by 2.7%. Promise more than kept.

But the poorest 3 million pensioners get their state pension topped up by another benefit called pension credit. It can be claimed by any anyone aged 62 or more who has a low income below around £148 (single) or £226 (couple).  And people aged 65 or more can claim extra if their income is below £190 (single) or £278 (couple). All figures apply from 7 April.

These three million split in three –

Group 1: those aged 62-65 with weekly income up to £148 (single) or up to £226 (couple;  older partner that age).
Group 2: those aged 65 or more with weekly income up to £120 (single) or £192 (couple; older partner 65 or more).
Group 3: those aged 65 or more with weekly income £120 to £190 (single) or £192 to £278 (couple; older partner 65 or more).

From April their pensions will rise

Group 1: their total pensions – state pension and pension credit – will rise by £2.95 (single) or £4.45 (couple) a week. That is a rise of 2%.
Group 2: their total income – state pension and pension credit – will rise by £2.95 (single) or £4.45 (couple) a week. That is a rise of 2%.
Group 3: their total income – state pension, pension credit, and any other income – will rise by £2.95 (single) or £4.75 (couple) a week but their pension credit will fall by £1.26 (single) or £2.31 (couple) leaving a net gain per week of £1.69 (single) or £2.44 (couple - £1.22 each).  These are rises of around 1% (between 1.15% and 0.9%) in their total income. Calculations assume other income is flat, from earnings, pension, or savings for example.

The triple lock applies only to the percentage rise in the basic state pension. And that is rising by 2.7%, the rate of inflation at September 2013 measured by the CPI. So the pledge is met in that narrow sense. Someone with £500 a week from work or a company pension will get a 2.7% rise in their state pension adding at least £2.95 a week to it.

But it is not being met in any sense for the poorest pensioners who rely on means-tested pension credit to boost their income. Their rise will be less than 2.7% - somewhere between 0.9% and 2%. And for many it will be less in cash terms - £1.69 instead of £2.95. For couples £2.44 (£1.22) each instead of what will be at least £4.75 on the state pension.

The Government wants to get rid of the means-tested pension credit. It is doing this in two ways. First, the basic state pension will be much bigger for those who reach pension age from 6 April 2016. It will be above the level at which pension credit starts and so groups 1 and 2 will not get any pension credit. The extra pension credit at age 65 will be scrapped from that date. So very few new pensioners will get pension credit.

People already getting pension credit at 6 April 2016 will continue to receive it. But the amounts will be restricted as the extra pension at 65 will be cut each year. Already in three years from May 2010 to May 2013 the cost of this part of pension credit has fallen by more than £780m a year - a fall of 23%. Altogether 320,000 fewer people claim pension credit and, as about 100,000 of those are couples, about 420,000 fewer people rely on it.

Just under a million people claim the part of pension credit that guarantees to bring their income up to £148 (single) or £226 (couple). Adding in partners, that part supports 1,150,000 people. They fall into group 1 or 2 above and will get a cash rise of £2.95 (single) or £4.45 for a couple. That will be a rise of 2%.

Just under 1.5 million people claim the extra part of pension credit (called savings credit). Adding in their partners, that supports 1,780,000 million people. They are in group 3 and generally will get a cash rise of £1.69 (single) or £2.44 (couple - £1.22 each). That will be a rise of around 1%.

The last time there was a fuss about a small rise in the state pension was 2000. A low rate of inflation in September 1999 led to an increase in the basic state pension of 75p taking it from £66.75 to £67.50. The low rise was opposed in the House of Commons by Steve Webb, the young Liberal Democrat MP, who was spokesman on Social Security matters. He said "Pensioners I talk to are insulted by being offered 75p next April" He added that it was "inadequate". Others pointed out that 75p was not enough to buy three first class stamps - then just raised in price to 27p each.

Steve Webb is now the pensions minister in the Coalition government and responsible for this year's increases and the plans not phase out pension credit. The £1.69 a week rise or less for 1.8 million on pension credit is not enough to buy three first class stamps - which rise to 63p each on 31 March. I wonder if he will notice this time?

Source: DWP statistics. My calculations. Weekly amounts rounded down to nearest pound.

Version 1.00 13 March 2014