CPP FINED BUT BANKS IN THE FRAME

When I appear on BBC Breakfast I write a cue and notes of what I am going to say. I never read it but it is a useful aide memoire for me. And where there are allegations it ensures I get them right and am fair and balanced.

This morning my spot on BBC Breakfast was stood down for some breaking news. These things happen. But here are the script and notes I wrote about CPP and its mis-sold insurance products.

CUE: A firm which sold millions of people insurance against ID theft and loss of their bank cards has been fined more than £10 million by the financial regulator and told to pay compensation to customers.

CUE: The Financial Services Authority revealed that CPP had told customers untruths and misled them while selling the insurance, which was unlikely to pay out in any normal circumstances. Paul Lewis is in our London studio

Q: What did CPP sell and why was it mis-sold?

PAUL: Two products were mis-sold. What CPP called card protection plans which were supposed to pay out if you had money stolen from your account – but of course if you do the banks pay out in almost all circumstances so the insurance was generally useless. The FSA revealed CPP charged around £35 a year for it but the product cost it just 60p. The other was ID theft insurance. It was more expensive at £84 a year but it cost CPP just £16. Both products were mis-sold by sales staff who, to put it bluntly, lied. They used false statistics, made misleading claims, exaggerated the value of the insurance – which as I said would almost never pay out – and they gave advice which in the later years they were banned from doing. Their contracts also contained unfair terms.

Q: How did it manage to sell so much?

PAUL: Altogether it sold more than £840m of new and renewed business to 4.4 million people between 2005 and 2011. CPP sold about 10% of its products directly. But the bulk of them – about 4 million new policies – were sold as a result of a partnership with four High Street banks – Barclays, RBS, Santander, and HSBC. In some cases the bank put a phone number on newly issued cards with the instruction to call it to ‘activate’ the card. In fact you got straight through to a CPP sales person. So some banks at the least colluded in this mis-selling to 4 million people.

Q: And have the banks also been censured?

PAUL: No. Not yet. I understand the FSA is in discussions with the banks and other CPP partners. CPP has been fined £10.5m for direct sales and is expected to pay out £14.5m compensation. But ten times as many policies were sold through the banks – so will the fines and compensation be ten times as big? We won’t know that for some time. But it is more bad news for the reputation of those banks.

Q: What compensation will customers get?

PAUL: Anyone mis-sold these products – and the FSA report makes it clear that was widespread, so it may be most or almost all of those with them – will get their premiums refunded plus interest. CPP has been banned from selling these products – in fact its whole website is down at the moment – but those who have them are allowed to renew. Anyone who is offered a renewal should think very carefully about whether it is good value for money. And should prepare to make a claim for compensation when the scheme is announced in the New Year.

Q: What does the company say?

PAUL: In a long statement it apologised, said this was all in the past, it would pay the penalties, and move on to a better future.

You can call CPP in office hours free from a landline on 0808 156 0199

CHILD BENEFIT HIGH INCOME CHARGE

UPDATED AND AMENDED 6 AUGUST 2015

If you get child benefit and you or your partner has an income over £50,099 a year some or all of your child benefit will be taken back in extra income tax. It is called the Child Benefit High Income Charge. If the income is over £60,000 you may prefer to give up the child benefit than pay the charge. But there are alternatives - see 'Avoid the charge' below.

The rules are complicated and may seem illogical and unfair.

The charge
The tax charge began on 7 January 2013. No-one has their child benefit itself taken away. Instead the partner with the higher income pays an extra income tax charge. If their income in a tax year is £60,000 or more the tax charge will equal the child benefit. For a household with three children child benefit is worth £2549.30 in the year 2015/16. So the extra tax will also be £2549.30 (confusingly there are 53 child benefit payments in the tax year this year). It will be collected through self-assessment. If you do not already fill in a self-assessment form you will have to in future. The Revenue estimates that an extra 350,000 people will have to fill in a self-assessment form as a result of the charge. But 45,000 of them may have failed to do so.

If the partner with the higher income gets £50,100 to £59,999 a year the tax charge is less than the child benefit. It will be 1% of the CB for every £100 by which income exceeds £50,000. So if income is £55,000 the tax charge is 50% of the CB. For a household with three children that would be £1250.60 in 2015/16. Work out the charge for earlier years on the official calculator. See 'Avoid the charge' below.

The charge is assessed on the partner with the higher income. If one partner has an income of £60,000 and the other partner has no income then the full tax charge will be made and every penny of the Child Benefit will be taken back in tax. On the other hand if both partners have an income of £50,099 no charge is made even though their household income is more than £100,000.

Paying the charge
The charge began on 7 January 2013. If it applies to you for 2012/13 then you should have informed HMRC by 5 October 2013 and registered for online self-assessment. If the charge begins in subsequent tax years then you must tell the Revenue by 5 October in the next tax year. Click here to tell HMRC. You then have to submit your form online by 31 January in the next tax year. If you are an employee and the total amount due under self-assessment is £3000 or less then it can be paid through your tax code. The full charge itself will be more than £3000 in a tax year if you have four children or more.

If you miss the 5 October deadline then HMRC may charge a penalty as well as the tax when your self-assessment is worked out. The penalty can be up to 100% of the tax due on the child benefit. But HMRC says it only want to charge the big penalties to those who have deliberately avoided paying the tax charge. You can appeal against a penalty.

HMRC estimates that 1.1 million people will be subject to the charge.

The charge is due from the date your first child is born or the date one partner or the other has an income over £50,099. You can choose not to claim child benefit for the child. Otherwise the partner with the higher income will have to pay the tax charge.

Cohabitation
If someone who gets child benefit lives alone then it is their income which is assessed. If they live with another person as a married couple or as civil partners then the partner with the higher income is assessed and – if their individual income is more than £50,099 – charged. It does not matter whether two people are married, including a same sex marriage, or in a legal civil partnership. If they live as if they were in one of those relationships then they are counted as partners. And it does not matter whose children the child benefit is paid for.

This rule can lead to anomalies when relationships begin and end.

• Amanda Smith is divorced and has two children. She earns £35,000 a year and gets £1823.20 in 2015/16 in child benefit. Her income is below £50,099 so the tax charge does not apply to her. She meets Charles Wright. After a few months they start living together. He earns £61,000 and has to inform HMRC and pay the extra tax charge of £1823.20 even though the children are not his and he contributes nothing directly to their upkeep. On the other hand their biological father James Smith, who pays maintenance for his children and who earns £95,000 a year, pays no extra tax.

The rules about living together are the same as those used for tax credits. If two people have a relationship but have two separate homes HMRC can still decide they are living together as partners.

If you live together for part of the year then the higher earner only has to pay the charge for that part of the tax year. That can get very complicated especially if both partners have an income above £50,099.

If your partner will not tell you if they get child benefit or what their income is then you can ask HMRC. It will answer two questions - 'Does my partner xxx receive child benefit?' and 'Is my partner xxx's income higher than mine?'

Marginal tax rates £50,100 to £59,999
A person liable to the charge whose income is between £50,099 and £60,000 faces very high rates of tax on each extra pound they earn. They pay income tax at 40%, National Insurance at 2%, and then the child benefit charge. If there are three children that charge is 25.5%. That means for every extra £100 they lose two thirds of it to tax and keep just £32.50. If they have a student loan and pay the graduate tax of 9% they will keep less than a quarter of any extra earnings, losing £76.50 of every £100 to tax.

The more children there are in the household the higher the child benefit tax. If there is one child it adds 11% to the tax rate. For two it is 18.2%, three children is 25.5% and four adds 32.8%. Five children adds 40%. If there are eight children it is 61.8%, taking the total tax take to more than the money earned. For every £100 earned the total tax is £103.80. And if graduate tax is paid then a partner in a seven child family will pay £105.50 on every £100 earned. In other words they will be better off not earning the extra money.These calculations use the 53 week child benefit year for 2015/16.

The child benefit tax charge means that anyone with even one child and an income between £50,099 and £59,999 will pay a higher marginal rate of tax than someone with an income of £1,000,000. Everyone with even one child will pay at least 53% in tax for each extra £1 earned. That is a higher rate than the 47% income tax and NI charged on those with an income above £150,000. And even higher than the 52% that was due in 2013/14 before the additional rate was cut to 45%.

Income
The income which is assessed is called 'adjusted net income’ though in fact it is more like gross income before tax. It is your total taxable income from all sources including earnings, rent, dividends, and savings interest before any tax allowances are deducted. However, you do adjust it by deducting pension contributions, gift aid donations, and salary sacrificed for child care vouchers or a cycle to work scheme. So someone who earns £60,000 and would face the full 100% tax charge could pay £10,000 gross into a pension scheme and avoid the charge altogether. As most of the contribution would be tax relief that would be a very good deal. But check that the pension tax rules allow you to make that contribution.

For people with simple tax affairs who are employees then the key figure is on their P60 form. That is given to every employee after the end of the tax year. Find your P60 for 2014/15 and look at the pay box 'total for year'. If that is £50,099 or less and you have no other income then no tax charge will be due and you do not need to register for self-assessment. If it is more than £50,099 then you may have to pay the tax but you can deduct the gross amount of any Gift Aid payments or pensions you pay into separate from your job. If you have more than one job or you get a pension and pay then you will have to find all your P60s and add up the total income boxes.

You can check your net adjusted income using the official calculator. Put the P60 figure in the 'Salary before tax' box. Assume that includes taxable benefits and deducted amounts like work pension contributions, cycle to work scheme and childcare vouchers. Then put in other income including income from savings and any pension contributions or gift aid donations. Gross amounts in both cases. That should give the correct figure for your adjusted net income.

Avoid the charge
You can avoid the tax charge and the hassle of self-assessment if the person who gets the child benefit tells HMRC they do not want to receive it. The child benefit will stop and the tax charge will not be due for subsequent tax years - though if any child benefit is received in a tax year (6 April to next 5 April) then the higher earner will still have to be in self-assessment and pay the tax on the child benefit received for that year.

Although child benefit is not received, entitlement to it will continue. So it can be reinstated if circumstances change and National Insurance credits will continue to be available for the person entitled to it. Those credits build up entitlement to state pension if National Insurance is not paid at work.

Giving up child benefit should not affect a current or future entitlement to widowed parent's allowance as you will still be 'treated as entitled' to child benefit even if your late spouse/civil partner or you have given it up.

If you give up child benefit but it turns out that the tax charge is not due you can reclaim it for up to two years.

Giving up child benefit is only sensible if the higher earner has an income well above £60,000 and the relationship between them and the person entitled to child benefit is stable. Even then there are good reasons for keeping the child benefit. It can be put into a savings account where it will earn interest and the money in the account can be used to pay the tax charge up to 21 months later leaving a small profit on the interest. If the account is an ISA no tax will be due on the interest.

In 2015 the Revenue estimated about 800,000 people have given up their child benefit to avoid the tax charge.

More information
This brief guide covers the basics. Always get advice and study official documents before making changes in your personal circumstances. The Government has some information here.

Version 2.0
5 August 2015