TAX BONANZA FROM PENSION 'FREEDOM'

UPDATED 16 JUNE 2015

The Chancellor is set to make £17 billion in extra tax over 16 years from Freedom and Choice in Pensions that began on 6 April 2015. From that date millions of people over 55 have the right to cash in their pension pot if they want to do so.

Usually cashing in a pension will not be a good idea. But where an individual does it they will face a big tax bill on the money taken from the pension fund. Three-quarters of the withdrawal will be added to their income and taxed. So the whole fund will normally have at least 15% taken off and paid to HMRC. If the total income in the year exceeds the level at which higher rate tax is paid - £42,385 in 2015/16 - then 40% tax will be paid on some of it. And if the total income is taken above £100,000 the tax rate will be more as the personal tax allowance is withdrawn - effectively a 60% tax on £21,200 of income - and then at £150,000 the top rate 45% tax will be due.

The deduction will normally range from 15% to 45% of the total withdrawn and settles down at 34% for the very highest combinations of income and pension withdrawals. Some with other income which is too low to pay tax could face deductions below 15%. Table 1 below shows the tax taken from the total pension withdrawals at various incomes. Table 2 shows the percentage of the total withdrawal that will be taken in tax.

Both tables use the total pension withdrawal including the tax-free part and give the tax taken on the taxable part. So £10,000 withdrawal has £1500 tax deducted which is 20% tax on three quarters of the total.

These tables give the tax due. In fact the amount taken off by the pension provider will be different. In many cases it will be more as HMRC insists that they assume the same withdrawal will be made every month for the rest of the tax year. That will result in much more tax being taken off in many cases. Any excess can be reclaimed using HMRC Form P53 or on the self-assessment form after the year end. In some circumstances the tax taken will be too little and further tax will be due.

This Fidelity calculator will work out the tax deduction if you enter your pension pot and income.

The tables assume that 25% of your pension fund can be taken tax-free. If you were a member of a scheme at work before 6 April 2006 it is possible that you can take a bigger percentage - conceivably up to 100%. That is called protected tax-free cash (sometimes called a pension commencement lumpsum). These arrangements are easily lost especially if you transfer your money from one scheme to another. Ask your scheme or adviser to tell you if this applies to you. If it does then the tax charge on the whole fund will of course be less. 

Warnings not given

Although pension providers will have to point out that some tax may be due on a pension withdrawal, they will generally not calculate the amount due or the amount that will be taken, though some have online calculators you may be able to use. The Government's Pension Wise service will not do the calculation either. So use the Fidelity calculator to work out your own approximate tax deduction.

Good independent financial advisers should be able to work out the tax you will have to pay - and the protected tax-free cash if you are entitled to it. The best independent financial advisers are chartered or certified financial planners. Find one through vouchedfor or unbiased. If you have a large fund the cost of consulting one may well be worthwhile. But if your fund is small they may not be interested in your business.

Remember that the money you take out will have to last fro the rest of your life. The Government has produced a life expectancy calculator to show what you can expect.  

Treasury savings

In the 2014 Budget when the pension 'freedom' was announced the Treasury estimated that the extra tax taken would be £320 million 2015/16 rising to £1220 million by 2018/19, a total of £3 billion in the first four years. The Treasury will continue to make money from the change until 2030/31 taking an extra £17 billion over those sixteen years. It will take another 56 years before that £17 billion is recouped from reduced tax receipts of around £300m a year on annual pensions that are not being paid. These estimates may well be too low as enthusiasm for withdrawal seems higher than anticipated. Updated figures published in the Budget on 18 March 2015 broadly confirmed the amounts estimated a year earlier.

Not annuity buy-back

These calculations are for pension withdrawals made from 6 April 2015. They do not apply to the proposal to sell annuities. Normally the tax due on a lump-sum payment for an annuity will be more than the figures show here as there will be no tax-free element in the amount. The details of how annuity buy-back might work are awaited and it will not happen until 6 April 2016 at the earliest.

16 June 2015

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THE BUDGET LEAK THAT WASN'T

UPDATE 19 MARCH 2015
No increase in the personal allowance for 2015/16 was announced in the Budget on 18 March. So Nick Clegg's pressure and his hopes for one clearly didn't work.
                                                                                                             

"Nick Clegg announces increased Worker's Bonus for low and middle earners.

"Nick Clegg has said that next week's budget will include an extra £100 for low and middle earners on top of tax cuts already promised"

So began a statement on the Liberal Democrats website on Friday 13 March timed at 10:08. 

It seemed a clear preview of the Budget due in five days time. Not least because it was picked up by a press release service and circulated as a Lib Dem press release. 

There had already been suggestions in the press that another £200 or £400 on the personal tax allowance might be announced in the Budget. But this politically managed expectation is very different from a clear statement by the deputy Prime Minister that the Budget "will include an extra £100". To give people "an extra £100" means raising the personal tax allowance by £500 - even more than other papers had been speculating in the previous week. 

So the Liberal Democrat statement was big news, both for the amount of the rise and the fact it was a clear Budget leak - albeit by a member of the Government. 

When I rang the Lib Dems press office no-one had heard of the press release and a press officer denied it had been issued. I pointed out it was on the front page of their website and being circulated as a press release. After hasty consultations she continued to deny it and promised to call back.

She didn't. When I checked about an hour later the original link on the website www.libdems.org.uk/nick-clegg-announces-increased-workers-bonus failed to work and when I found one that did link to the story with a more acceptable url, three statements had been amended. 

• The headline "Nick Clegg announces" was changed to "Nick Clegg pushes for". 
• The phrase "next week's budget will include" had been watered down to "he would like to see next week's budget include" 
• And "an extra £100" had been replaced by "as big a tax cut as possible". 

One thing that hadn't changed was the time on the story. It was still timed at 10:08 though this version had been published more than an hour later. 

I called the press office. They said it had been an error which was corrected. Then a top press spokesman in Nick Clegg's office called me to deny that anything had been issued as a press release. He blamed 'a junior member of our staff' who had 'misinterpreted' an interview Nick had done for the Mail and put it on the website. He went on to stress this "was not an announcement" the person "had no access to any government information whatsoever" and "no press release was issued at all". All my pressure had done was to get a very junior member of staff hauled over the coals.He added "I promise you Paul, it is not true".

So the Lib Dem defence is that just days before the Budget and two months before the General Election, a very junior member of staff was able to update the Liberal Democrat website on the basis of a misunderstanding of a newspaper story published the day before without anyone checking it until a journalist rang to confirm it.

PS if you click on the original link you get to an example of Lib Dem humour. Its 'page not found' page says 'Just like David Cameron's courage, this page does not exist' and invites you to comment on the PM's refusal to take part in a TV debate

16 March 2015
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THE GREAT TAX TAKE

Every year banks and building societies take nearly £2 billion straight out of the savings accounts of millions of their customers and pass it on to HM Revenue & Customs. They do this without asking or checking if those customers are taxpayers or not. Half the UK population does not pay income tax. The result is that more than £200 million is given to HMRC which should never have been taken at all. 

Don’t blame the banks and building societies. They are obliged to hand HMRC this annual windfall. And for ten years HMRC has made no little effort to give it back. The last campaign appealing to everyone was in 2004. It got very little response as did targeted messages to low income pensioners in 2008 and 2009. Thirty million people in the UK – young and old – do not pay income tax and many of them have savings. But HMRC happily taxes them unless they ill in the right form to ask it to stop. And doesn't repay tax it shouldn't have had until they fill in another form - one for each year the great tax take applied.

In 2014/15 you can have £10,000 income without paying a penny of income tax. If you were born before 6 April 1948 the amount is slightly higher – £10,500 for those born April 6, 1938 to April 5, 1948 and £10,660 for anyone born before 6 April 1938. These allowances are personal – so it does not matter what income your wife or husband may have. If your total income is at or below that level then you should pay no tax on it and every penny of interest your savings earn should be tax-free. But unless you fill in the correct form tax at 20p in the pound will be deducted from that interest automatically. 

A lot of the people affected are over 65. But there are also children, teenagers, low paid workers, full time mothers, non-working spouses, people with illnesses or disabilities, in fact anyone of any age with an income below the £10,000 personal allowance who has savings. HMRC gets some of their savings interest whether they should pay it or not. It gets at least £200 million a year it should not have and it may be a lot more.

To stop HMRC getting this annual bonus you need to fill in a form called Form R85. You can download it from the gov.uk website – just put ‘tax on savings interest’ in the search box of that site and scroll down to find it. Fill it in and give it to the bank or building society which holds your savings. You will need one for each. Some current accounts pay interest so they will need one too. That will stop this tax being wrongly taken in future.

Next you have to claim it back for previous years. You need another form called Form R40 from the same web page. You need one for each year back to 2010/11. In those years the amount of income you could before tax is due was lower – just £6475 for those under 65 in 2010/11. But if your income was low enough you could claim tax back from those years too. 

You will get back one quarter of the net interest your savings have earned in those years. It could be hundreds of pounds. Fill in the forms and send them to HMRC, Leicester & Northants (Claims), Saxon House, 1 Causeway Lane, Leicester LE1 4AA. In a few weeks you should get a cheque refunding the amount wrongly taken – plus a small amount of interest on it. 

Dolly is 61 and has not worked full time since she was made redundant at 55. She has a couple of part-time jobs locally but she is lucky if she earns £150 a week. Her £30,000 redundancy money is sitting in a fixed term savings account where it has been for some time and earns her around £1000 a year. But she is left with just £800 after HMRC snaffles £200 of this. She decides to claim the over paid tax back to 2010/11. She is owed even more for the earlier years when rates were higher and before she took out the fixed rate bond.  She even claims the bit of tax paid from April to June this tax year as well. And she registers with the bank to have the interest paid gross in future. So she gets nearly £1000 back from HMRC and is £200 a year better off in future.

Even more tax back

There is another tax refund that some people with savings could get even if their income is a couple of thousand pounds or so above the personal allowance. Savings income just above the personal allowance is taxed at a lower rate – 10p in the £ rather than 20p in the £. But it is still deducted by banks and building societies at the full 20p.

It works like this. Interest on savings is like cream – it floats on top of the rest of your income such as pensions or earnings. So if that other income takes up all your personal allowance or a bit more the savings interest that floats on top of that is taxed. But if it is within £2880 above your personal allowance the tax rate on it is only 10% (called the starting rate) instead of the basic rate of 20%. So half the tax taken automatically should be refunded.

Violet is 75. She has state and private pensions totalling £11,500 a year. And interest from her £50,000 which is £1000 this year. That is above her personal allowance of £10,500 so she pays some basic rate tax on £1000 of her pensions. But the £1000 interest takes her income only up to £12,500 and that is within the £10,500+£2880=£13,380 limit for the starting rate band. So the £1000 of interest is taxed at 10% not 20%. In other words she should pay £100 tax on it not the £200 that was automatically deducted. She can claim this back using form R40. She can also claim back for previous years as the £10,500 allowance has not changed for people of her age for some time. Altogether she should get several hundred pounds.

You claim it back using the same form Form R40. If you have some savings income and your taxable income is £12,880 or less then you can claim back half the tax taken on the savings. If you were born before April 6, 1938 it can be as high as £13,540 and £13,380 if you were born 6 April 1938 to 5 April 1948. Previous years allowances and bands are set out in the table.

This story first appeared in Saga Magazine April 2014. 

Published here with updates and amendments 8 March 2015
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TAX-FREE SAVINGS INTEREST

If your total taxable income is no more than £15,600 in 2015/16 any interest paid on your savings will be tax-free. But only if you fill in a form so that your bank or building society knows it should pay it gross. If you don't fill in the form R85 then 20% basic rate tax will be automatically deducted from your interest.

If your income before adding on your interest is less than £15,600 but your total income including interest is more than £15,600 then some of your interest will be tax-free. But the bank or building society will still deduct tax at 20p in the £. You will have to claim back the excess using another form called R40. 

BACKGROUND
The interest on savings is taxed before it is paid. Basic rate tax is taken off automatically. So at the end of the year savings interest of 1% a year on £1000 is credited not as £10 but as a post-basic-rate tax amount of £8. Almost £2bn tax is automatically deducted from interest every year. 

If your income is low enough not to pay tax (below £10,600 in 2015/16) then you can claim back the £2 using a form called R40. And can stop it being deducted in future by filling in another form called R85. But £200m a year is taken from non-taxpayers and never reclaimed because people do not bother to do so – or do not know they can. 

NEW RULES
From April 2015 on top of the £10,600 personal allowance another £5000 of savings interest will be tax-free (in fact taxed at 0%). But – and it is a big but – that only applies in full if the person has no other income on top of their personal allowance. 

Think of savings interest as floating on top of other income from earnings or pensions. Like the cream on the milk. The first £10,600 of total income – cream and milk – is free of tax. The next £5000 is taxed at 20% if it is milk (earnings or pension) but at 0% if it is cream (interest). So someone with £10,600 of earnings or pension can have £5000 of income from savings on top of it tax-free. But if they have £11,600 earnings or pension then only £4000 savings interest is tax-free. And if they have £15,600 of earnings and pension then they get no tax-free savings.

HOW MUCH
For those it helps it can be valuable. Someone with state and private pensions which come to £10,600 pays no tax on those as they use up the personal tax-free allowance. And if they have £500,000 in a savings account earning 1% a year then all the £5000 interest will also be tax-free from April. That would be a saving of £712 compared to the current regime for these half-millionaires. Or as the Chancellor said in March when relaunching the new scheme “Putting money in the pockets of those who need it most.”

The cost of this concession to the Exchequer is expected to be more than £200m a year – or more if married couples move funds between them to take advantage of it.

WHAT NEXT
To see if you can gain from the concession us the Government's free calculator. If you can then you should register to get your interest paid gross using Form R85. If you have paid tax on savings interest when you shouldn't, then claim it back to 2010/11 on Form R40. You will need one R40 for each tax year. To go back to 2010/11 you must claim before 6 April 2015. From that date the earliest you can go back is 2011/12. The rules in past years were different. If your total income was less than the personal allowance then you can reclaim all the tax deducted from your savings interest. And if your income was no more than around £2500 or so above the personal allowance you can claim back half the tax deducted. Full details in The Great Tax Take.

NB the new 65+ Guaranteed Growth Bond from National Savings & Investments always has basic rate tax deducted - you can't use Form R85 to stop it. But you can use Form R40 to get it back.

This blogpost is an expanded version of my Money Box newsletter for 6 March 2015. If you want future newsletters every Friday sign up here. 

10 March 2015
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BANKS TO REPAY MILLIONS

UPDATE: DEADLINE APPROACHING
You must make your claim by 18 March 2016

Two million people who were mis-sold card protection insurance can get compensation which may be more than £300 - but only if they claim it. 

You should make a claim if you have got a letter that begins like this:



Why am I due compensation?
The compensation is for insurance which was supposed to protect you from financial loss if your credit or debit card was stolen or misused. It promised to reimburse you for any money spent on the card after it was lost. But it was a waste of money.

The banks selling the insurance knew perfectly well that they would bear any loss incurred after you told them you had lost your card. And they also knew they would reimburse all but £50 of any money stolen before they were notified – and in practice they usually reimbursed the first £50 too. So this insurance was useless and should never have been sold. Selling it amounted to fraud - it was misleading you to make money. Don't expect any prosecutions. But you can expect compensation.

When will I get a letter?
Letters and claim forms are being sent out in August and September to the people who can claim. The four page letters are from AI Scheme Limited and include a four page form headed CARD SECURITY PRODUCT: COMPENSATION CLAIM FORM.

You must complete and return that form by a deadline in order to get the compensation. Don't worry if you cannot remember the dates or details of when you started or ended the product. AI Scheme will have that information.

Section B of the claim form has an empty box where you explain why are you are claiming compensation. 

The first page helpfully explains why the insurance was mis-sold. 

• You did not need this cover as the bank or card issuer is responsible for transactions after you report the card lost or stolen. 
• You are only liable for a maximum of £50 of losses before you informed the card issuer. In practice many card providers covered that amount too.

If you paraphrase that information into the box adding ‘these matters were not explained to me’ then your claim will almost certainly be accepted.

The original form (not a copy) must be completed with your name and signature and dated. It comes with a pre-paid envelope. The quicker you return it the sooner you will get paid. It must arrive by 18 March 2016. You should hear back from AI Scheme within eight weeks. It is just about certain that everyone making a claim will get compensation. You will be sent a cheque for the premiums you paid, less any money paid out on the product, plus simple interest at 8% a year on the amounts you paid from the time you paid them to September 2015. Basic rate tax will be deducted from the interest but not the premiums. The total could be more than £300 per card.

If you return the form the insurance you have will be cancelled. Some people like the product and may decide to keep it and not make a claim. You must choose between keeping the product and making a claim. My advice? Make the claim. If you want the protection offered you can always find a similar product on the market. But generally these products are very expensive and offer very poor value for money.

Lost or missing letters
If you have had the letter and thrown it away or lost it you can get another from AI Scheme. Do not use a copy or a downloaded version as it will not be accepted. 

Firms and brands

The insurance was marketed by a firm called Affinion International through almost all the major High Street banks. The firms in the scheme are 

• Allied Irish Bank
• Bank of Scotland
• Barclays
• Capital One (Europe)
• Clydesdale
• Cooperative Bank
• Danske Bank
• First Trust Bank
• Halifax
• HSBC
• Lloyds
• NatWest 
• Northern Bank
• Royal Bank of Scotland
• Santander
• Tesco Personal Finance
• Yorkshire Bank

These firms have all agreed to reimburse customers for the premiums they should never have paid. The premiums cost around £25 per card per year and the mis-selling went on for more than eight years. With 8% simple interest on the premiums from the day they are paid to September 2015 the total compensation could be more than £300 per card.

The brands covered are 

• Card Protection 
• Sentinel 
• Sentinel Gold 
• Sentinel Protection 
• Sentinel Excel 
• Safe and Secure Plus.

If you bought or renewed this insurance from a bank, credit card provider, or Affinion International between 14 January 2005 and 31 August 2013 and have not received a claim form by the end of September contact the scheme helpline on 0800 678 1930 or 0208 475 3103.

A similar scheme for a similar mis-sold product by another insurer called CPP resulted in barely a third of the people involved ever being paid. So it is important you make sure you get your entitlement.

You can get more information from AI Scheme and from the Financial Conduct Authority.

If you have one of these products that was sold as part of a current account you paid a monthly fee for, then it is NOT covered by the scheme. You should complain about it to the bank you bought it from using the information about mis-selling above. If you are refused go to the Financial Ombudsman Service.

If you have one of these products sold to you by a bank or firm not in the list above you should complain about it to the firm you bought it from using the information about mis-selling above. If you are refused go to the Financial Ombudsman Service. 

13 September 2015

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BURN BABY BURN

UPDATED 3 February 2017

Did you miss Bonfire Day? And I mean Day, not Night. Not 5th November but 1st February. It is the day when eleven million people who do self-assessment can celebrate getting their form in by the 31 January deadline. Because the day after that they can burn some of their older financial records.

If you are in business, self-employed or you rent out property, then you must keep records for five years after your self-assessment form was due in. The return for 20010/11 was due in on 31 January 2012 and five years from then was 31 January 2017. So the next day you could destroy all records which relate to the tax year 2010/11.

If your annual accounts are made up to 5 April then you can destroy documents dated between 6 April 2010 and 5 April 2011. But if your accounting year begins on 1 May, as many do, then you must keep almost another year’s documents. So on 1 February 2017 you could destroy records dated 1 May 2009 to 30 April 2010. The rule is that you must keep financial records used in a tax return which are all those for your accounting year which ends in that tax year. That accounting year ends in the financial year 2010/11 so can be destroyed on 1 February 2017. See Keeping your selfemployment records

If you are VAT registered then you must keep documents for six years after the most recent item mentioned on them. So on 1 February 2017 that would be those dated up to 31 January 2011. So some documents may have to be kept a little longer than 1 February, depending when your year end is. There is a different VAT rule if you sell digital goods to other EU countries - the VAT MOSS scheme. Then you must keep records of those sales until 31 December after their tenth anniversary. So sales in February 2017 need to be kept until 31 December 2027. See VAT record keeping

If you do self-assessment but are not in business then you have to keep records for one year not five so on 1 February 2017 you can destroy records for the 2014/15 tax year – 6 April 2014 to 5 April 2015. However, it is cautious to keep records for a bit longer. Overpaid tax claims can go back four previous tax years. So wait until 6 April 2017 to have another bonfire and burn the records from 2012/13 as it will then be too late to make a claim for that year. The ultra-cautious may note that some legal claims can go back up to six calendar years and mis-selling claims such as PPI have gone back much further.
See Keeping your tax records

NB If your tax return was sent in late – after 31 January – then you should keep records for fifteen months after it was sent and if there is a live tax enquiry into your affairs you must retain records that relate to the year of the enquiry until it is settled.

If you do not fill in a self-assessment form you do not have to keep records for any particular time. Four previous tax years or even longer is cautious - see above.

Of course never destroy documents about loans, mortgages, investments, insurance, or other financial contracts that are current. If you had work done on your home it is safest to keep receipts and guarantees until you sell it.

If you do the probate on someone's estate you should keep the probate records for 20 years.

And a cross-cut shredder might be safer and more secure than a bonfire.


Version 3.1
3 February 2017

DEFLATING INFLATION

Rail fares frozen in real terms. That was the boast of the Chancellor George Osborne in September announcing that the rise in regulated rail fares such as season tickets and day returns would be no more than inflation in 2015. He used the Sun on Sunday for this announcement telling the paper 

"I can announce that no regulated rail fares will rise by more than inflation in 2015, which together with last year's freeze will save season ticket holders around £75 over 2014 and 2015."

In the past governments have allowed rail fares to rise by a percentage point or two above inflation. Hence George’s boast that in real terms they would be frozen as they were in 2014 and passengers would save money compared with what they would have spent.

The result is that on 2 January 2015 regulated rail fares in England rose by 2.5% - the rate of inflation measured by the Retail Prices Index in July 2014. Similar rises in some fares will be allowed in Scotland and Wales too, though they are frozen in Northern Ireland.

But hang on a minute, the Retail Prices Index was scrapped as an official measure of inflation by the UK Statistics Authority in March 2013 because it did not conform to international standards. And much of the Government has replaced RPI with the Consumer Prices Index or CPI which is generally almost one percentage point less. The latest figures, for example, show RPI at an annual rate of 2.0% but CPI at 1.0%. And in July last year –  the month used to fix rail fares – RPI was 2.5% but CPI was 1.6%. Using CPI would have saved passengers £19 million. CPI is compiled according to acceptable international standards. 

Analysis of the items which are linked to RPI shows it is still used to index link items where changing to CPI would cost the Government money. So duties on fuel, alcohol, and vehicles, as well as the interest on some student loan repayments, are linked to the higher RPI. The only items which remain with RPI and cost the Government money are index-linked bonds and gilts which rise each year in line with the RPI or a fixed amount above it. But it would be very difficult to change those as they have RPI written into the contract. 

Triple Lock picked
The areas where the lower CPI is used are the ones that save the Government money such as tax allowances and social security benefits. The state pension is another victim of the change to CPI. It is protected by what the Government calls the 'triple lock'. Each April it rises in line with earnings, prices, or 2.5% whichever is highest. The change is measured in the September before the April rise. Earnings have risen less than prices and prices have risen more than 2.5% so for the years 2011, 2012, 2013, and 2014 the basic state pension has risen in line with prices. And in the last three of those years the increase has been the CPI not the RPI. The result is that the basic state pension is now £1.05 a week - £54.60 a year - less than it would have been if RPI had been retained. From April 2015 the basic state pension will rise to £115.95 a week. If RPI had been the measure of prices rather than CPI the basic pension would be £117. 

ReviewSo why is the discredited RPI used by the Department of Transport to fix rail fare rises? When I asked the Department for Transport why rail fares were in the RPI list rather than the CPI list I was told the Department was waiting for a review by the UK Statistics Authority on the use of price indices across government. At least part of that is due out on 8 January. I wonder if it will include whether the Chancellor should claim rail fares would not rise by 'more than inflation' when in fact they have just risen by two and a half times the current rate of inflation as measured by an index which conforms to international standards.

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