BENEFITS FOR WIDOWS AND CHILDREN SLASHED

New widows and their children will get thousands of pounds less benefit from April as the Government reorganises the way they are paid.

Benefits for people whose spouse or civil partner dies on or after 6 April will be cut substantially. 

This major change in bereavement benefits will save the Government £100 million a year. 

A spouse (or civil partner) of someone who dies from 6 April 2017 will get a new benefit called Bereavement Support Payment. People without dependent children will get £2500 and then up to 18 monthly payments of £100. Those who are entitled to child benefit for dependent children will get £3500 plus up to 18 monthly payments of £350.

This payment will replace three existing benefits – a one off Bereavement Payment of £2000, a weekly Bereavement Allowance of up to £113.70 depending on their age for 52 weeks for those without children, and for those with children a weekly Widowed Parent’s Allowance of £113.70 a week until the youngest reaches 18. All rates are for 2017/18.

The arithmetic means that from April 6 new widows without children will get £4300 over 18 months instead of a maximum £7912 over 12 months. And widows with children will get £9800 over 18 months instead of a possible maximum if the old system had continued of more than £108,000 over 18 years.

The changes will not affect anyone already on bereavement benefits or who is widowed before 6 April 2017.

The Government estimates that three out of four bereaved parents with children will be worse off under the new system and that grows to nearly nine out of ten - 88% - among those who work. The Child Bereavement Network says a typical working widowed parent will be worse off by more than £12,000 compared with the old system. 

Other concerns were raised about the new payment during the consultation but the Government rejected them.

First, unlike the current weekly allowances the new Payment is not linked to inflation. Campaigners fear it will be treated like the old £2000 Bereavement Payment which has not been increased since its introduction in 2001. If it had risen with inflation it would have been around £3000 today. They fear the new Payment will also be frozen.

Second, the Government has not extended the Payment to long-term partners who are not married or civil partners. Campaigners say that penalises the children of unmarried partners.

Third, by limiting support to eighteen months it is estimated that 91% of parents will get help for a shorter time than in the present system. That could leave the children of widows in poverty and their parent relying on means-tested benefits. 

On the other hand it comes with a much simpler single National Insurance condition – the deceased must just have paid one year’s contributions in their lifetime. And it is paid to childless widows under 45 who at the moment only get the £2000 payment. Childless widows under the age of 47 will be better off under the new scheme.

None of the new or old benefits are paid to widowed people over state pension age. 

The Government insists the purpose is not to save money but to focus help where it is most needed. In other words those who are left in hardship can claim means-tested benefits. Unlike the old allowances the whole Bereavement Support Payment will be ignored when entitlement to those is worked out. 

Although the long-term savings will be £100m a year there will be extra costs in the first year will be £40m as the new Payment is paid over a shorter period than the weekly allowances. The Department for Work and Pensions tells me those figures, produced in 2014, are out of date and that it expects to spend £70m a year more on Universal Credit for widowed people. A revised impact assessment will be published in April after the change begins.

The last time benefits for the bereaved were changed the excuse of the Labour Government in 2001 was that it had to be done to equalise benefits for men and women. However, it also saved £500m a year. Over the following 12 months many newly widowed women complained to me that there had been no publicity about the cuts that were now affecting them. 

The DWP has told me there will be no paid advertising campaign for the new Bereavement Support Payment. It was relying on statements to Parliament and expected 'stakeholders' to inform people. Plus ça change!

Based on my weekly Money Box newsletter 24 March 2017. Subscribe here.

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25 March 2017

INFLATION TO HIT 4.1% BY CHRISTMAS

The Chancellor expects to deliver an unwelcome Christmas present to us all. Inflation will hit 4.1% in the last three months of the year, the latest forecasts say.

I know Philip Hammond’s last Budget was a U-turn ago (and perhaps it's not called his last Budget for nothing! Boom, boom). But after the announcement a week after his Big Day that he would scrap plans to bring in £2bn over four years from raising National Insurance for self-employed people my wide eyes lighted on some small print I had missed.

Inflation. We’ll get the actual numbers for February on Tuesday 21st March. But when the Chancellor announced in his Budget on 8th March that he would “make no changes to previously planned upratings of duties on alcohol and tobacco” the plans he referred will raise the duty on alcohol by inflation and on tobacco by 2% above inflation.

So far so sneaky. But when I checked the actual alcohol duties they were rising by 3.9%. Duty on the alcohol in spirits and wine rose on 13 March by £27.66 per litre to £28.74. When he made that statement the latest CPI inflation was less than half that at 1.8%. Time to call the Treasury who, after a bit of toing and froing, explained. The inflation rate used for duties is not the CPI but the RPI. Hmmm. Four years ago the Office for National Statistics decided the RPI was such a poor measure of inflation they demoted its status and it is no longer a national statistic, though it is still published. The good thing for the Chancellor about the RPI is that the maths used to work it out makes it higher than CPI under almost all circumstances. So it's ideal for raising taxes.

Back to the figures. The January inflation figures - the ones the Chancellor had access to on Budget Day - show RPI at 2.6% not 3.9%. So back to the Treasury. More toing and froing. Aha. I'm told that the Chancellor doesn’t use past figures for raising duties he uses a forecast figure for RPI. The one he uses is the forecast for the third quarter (Q3) ie the months July to September 2017. And the forecast for RPI inflation for Q3 2017 is 3.9%. What! 3.9% inflation by the late summer?! Sure enough a bit more burrowing found the forecast tables from the Office for Budget Responsibility showing the Q3 forecast for RPI inflation is indeed 3.9%. Hence the hefty rise in your beer, wine, and spirits bill. And hence the 5.9% rise in tobacco duty, underpinned by a minimum pack price of £7.35 to put a lower limit on cheap brands.

Just to confuse things the actual January RPI figure is used for other things like Air Passenger Duty which will rise from 1 April for journeys over 2000 miles by £2 to £75 per flight or by £4 to £150 if you want to feel special by flying in anything other than economy. The cost of owning a car will also rise from April as Vehicle Excise Duty rises by £5 for anything but the least polluting vehicles and by £10 and £20 for the more and most polluting. At least petrol duty is frozen – as it has been for seven years the Treasury was keen to tell me. Without adding that the Chancellor has a bit of a windfall anyway from the rising price of petrol and diesel which has put up the VAT take by around 20% as the pump price rises from £1 to £1.20.

But back to inflation. By Christmas the OBR forecasts RPI inflation will be 4.1% before it starts falling. And the official measure of inflation, the CPI, will be 2.7% by Christmas. After that of course it is on a downward path to the 2% target which the Bank of England must – but almost never does – meet. Even the independent OBR never forecasts that the Bank will miss its target two years hence.

The February figures, published two weeks after the Budget, show inflation is indeed rising. CPI was up 0.5 to 2.3%. That is rather ahead of the 1.9% forecast by the OBR and close to the 2.4% it predicts for Q2 (April to June). RPI was up 0.6 to 3.2%, also slightly above the 3.0% predicted for Q1. So the latest figures do nothing to ease fears about inflation being back.

So the key takeaway from these figures is that Christmas 2017 is going to be much more expensive than last year.

Updated from my Money Box newsletter 17 March 2017. Sign up and get it every week with a full agenda for Saturday's programme. 

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22 March 2017

NO TAX LOCK FOR POOREST SELF-EMPLOYED

Self-employed people who make profits of less than £6000 will still face a massive rise in their National Insurance contributions in 2018/19 despite the Chancellor's U-turn over National Insurance rises. They will pay more than £600 extra to ensure they get a full state pension.

People who earn less than the Small Profits Threshold - £6025 in 2017/18 - do not have to pay National Insurance Contributions at all. But if they choose to do so they can buy them for £148.20 a year. They might do that to fill a gap in their contribution record to make sure they have the 35 years needed to get a full New State Pension of £159.55 a week.

But from April 2018 the cost of these voluntary contributions will quintuple to around £750. That is because the contributions they can pay now - called Class 2 - are being abolished. So they will be left with no choice but to buy the much more expensive Class 3 contributions. They are £741 a year in 2017/18 and will rise by inflation to reach more than £750 from April 2018. So their bill for a year's National Insurance contributions will rise from £148.20 to £750 - a difference of more than £600.

The Government will not say how many choose to pay voluntary Class 2 contributions. But figures published in December 2016 indicate it is around 100,000.

They are not helped by the Chancellor's extraordinary U-turn a week after his Spring Budget to scrap his plans to raise the Class 4 contributions paid by more than three million self-employed to raise another £2 billion over the next four years. Those on very small profits do not pay National Insurance at all so would not have been affected by that rise.

The Chancellor announced his U-turn in a letter to Conservative MPs on the morning of Wednesday 15 March, almost exactly seven days after he made the proposals. He made it clear that he changed his mind so that "the tax lock...commitments we have made...should be honoured in full."

That tax lock was of course in the 2015 Conservative Manifesto which Philip Hammond and more than 300 of his colleagues were elected on. It said four times in almost identical terms that a Conservative government “will not raise VAT, National Insurance contributions or Income Tax”.

Although the law that implemented this tax lock only applied to the contributions paid by employee's and employers - called Class 1- the Chancellor's letter admitted that "it is clear that compliance with the 'legislative' test of the Manifesto commitment is not adequate."

But it seems the tax lock will not protect the million poorest self-employed who need to fill a gap in the NIC record. They face a £600 rise - at least 10% of their low profits.

Unless of course there is another U-turn.

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15 March 2017

NOTE:

The Government response to the Consultation on abolishing Class 2 says

• "Analysis suggests that those expected to pay Class 3 NICs in any one year following the abolition of Class 2 would represent only 5% of those with profits below the SPL [now called the Small Profits Threshold] in 2018-19, and around 2% of all self-employed individuals who may have self-employment profits. This is based on HMRC forecasts showing that there will be over 5 million self-employed individuals who may be liable to NICs in 2018-19."

That implies 50,000 to 100,000 will be affected. However, researchers say that any estimates of self-employed by income band are "flaky". I am trying to get real figures from HMRC but so far a veil of secrecy has been drawn across them.

BOXED IN CHANCELLOR

You’ve got to feel sorry for Philip Hammond. No, really. The day after his Budget he admitted on the Today programme that he was “working within an extremely constrained environment…where most taxes cannot be raised and much of our spending is also ring-fenced and committed. We are navigating within those confines”.

And now he has had to U-turn on one of his flagship policies where he thought he had wriggle room - raising National Insurance Contributions for self-employed people. It would have brought in £2bn over four years to pay towards the growing bill for social care.

The truth is he was boxed in by the tax lock introduced by his predecessor. That was more than a Manifesto commitment – a Manifesto on which Philip Hammond and more than 300 other Conservative MPs were elected. It said “we will not raise VAT, National Insurance contributions or Income Tax”. After winning the election Chancellor George Osborne and Prime Minister David Cameron were so keen on this tax lock they passed a law to prevent themselves and future governments raising the taxes that bring in three quarters of all the Government’s income – VAT, income tax, and national insurance.

So a Chancellor who needs to raise extra money has to look to the other smaller taxes. Philip Hammond has already announced a rise in one of those – insurance premium tax. That will rise by a quarter in June from 8% to 10%. But after that his options for his first Budget on 8 March were severely limited.

• Corporation tax brings in £44bn a year but the Government has already announced it will be cut to 19% from April and 17% from April 2020. 
• Duty on petrol and diesel raised nearly £27bn in 2015/16 and the Chancellor had already ruled out a rise in that duty, perhaps comforting himself that the rise in pump prices will bring in more VAT. 
• The Bank Levy collected £3.4bn but that really could not be raised at a time when banks are threatening – and some considering – leaving the UK when the UK leaves the EU. 
• Air Passenger Duty raises just over £3bn and that may fall slightly after recent changes to exclude children. But with the Scottish Government planning to slash that by 50% when it introduces its own Air Departure Tax in April 2018 it was impossible to increase APD in the rest of the UK. Already Northern Ireland has its own lower rates. 
• Stamp Duty Land Tax raises nearly £11 billion but another restructuring was impossible after the two recent ones. 
• Inheritance Tax will probably raise less than last year’s £4.6bn as the partial exemption for the family home is phased in from April. Any increase there would not be possible for a Conservative government. 
• Higher Landfill Tax might be popular except that rising costs have already caused a growth in illegal fly-tipping blighting many country areas.

So Hammond fell back on raising car tax and alcohol duty by inflation – using the higher Retail Prices Index even though it is no longer a national statistic – and tobacco by 2% above the RPI. In fact he got a slight windfall because the rate of RPI used by the Treasury for duty is the forecast rate for July to September 2017. And that is 3.89%, way above the latest RPI figure he had to hand for January 2017 which was 2.6%. And, of course, he announced the now infamous rise in self-employed Class 4 National Insurance contributions from its present level of 9% to 10% in April 2018 and 11% a year later. That would still be less than the 12% paid by employees. But he has now been forced to withdraw that as it became clear he could not get enough of his own MPs to support it

Despite the Manifesto promise, this increase was allowed by the Tax Lock law which was passed to implement it. The law only covered “the main primary percentage” which “shall not exceed 12%”, omitting the 9% rate paid by the self-employed. None of the MPs who have now scuppered the proposed rise in self-employed NICs seemed to notice that when they passed the National Insurance Contributions (Rate Ceilings) Act 2015 with little debate, on 3 November 2015. Perhaps he hoped they wouldn't notice again. But they did.

Amended from my Money Box newsletter 10 March 2017, Sign up for future editions here

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15 March 2017

SELF-EMPLOYED NATIONAL INSURANCE BENEFITS

UPDATED 15 MARCH 2017 AFTER HAMMOND U-TURN

Self-employed people pay two sorts of National Insurance contributions (NICs). They are called Class 2 and Class 4 contributions. Class 4 contributions are a percentage rate of tax on profit. It is 9% on profits between £8164 and £45,000 of 9%. A 2% rate applies above £45,000. The Government has now abandoned plans to raise the 9% rate to 10% from April 2018 and to 11% from April 2019 which would have brought Class 4 more in line with the 12% Class 1 paid by employees on the same band of income. So self-employed people get a considerable subsidy by paying less tax for almost identical benefits.

Class 2 is a flatrate £2.85 a week from April, 2017. Class 2 used to be paid weekly but from April 2015 has been paid after the end of the tax year either with self-assessment or as a one off payment of £148.20 which HMRC will ask for in October after the end of the tax year. . 

At the moment only Class 2 gives entitlement to the state pension and other benefits. Class 2 will be abolished from April 2018. The government is planning to use Class 4 contributions as the key to getting benefits. At the moment Class 2 has to be paid if profits are above £6025 a year. The Government plans to introduce a new 0% rate of Class 4 between £6025 and £8164 to ensure that entitlement to benefits does not change.

Class 2 contributions give entitlement to all the main National Insurance benefits paid out of the National Insurance Fund.

• New State Pension - £159.55 a week with 35 years of contributions. Some people who have been employed will get less than that.
• Contributory Employment & Support allowance of £73.10 a week. It can start seven days after you are incapable for work and lasts up to 12 months as long you are too sick to work.
• Maternity Allowance of £140.98 - or 90% of your weekly earnings if that is less. It lasts for 39 weeks. Because it depends on Class 2 contributions it can be more difficult to qualify now that the payment is annual. If you haven't paid enough at the right time you must claim first and then HMRC will tell you how to pay the Class 2 you need to qualify. Crazy but true. Full details here. I am told that self-employed mothers on Maternity allowance have tougher restrictions on doing any work while claiming it than employed women.
• Bereavement Support Payment if your spouse or civil partner dies. It is £2500 with 18 monthly payments of £100 if there are no children or £3500 with eighteen monthly payments of £350 if there are dependent children. This benefit applies for deaths from 6 April 2017. Benefits for earlier deaths are very different.

Class 2 contributions do not give entitlement to the following benefits which are paid out of the National Insurance Fund.

• Contributory Jobseeker’s Allowance of £73.10 a week. It last for 26 weeks and involves strict conditions on looking for work. However, self-employed people who give up their self-employment and register with JobCentre Plus can claim means-tested Jobseeker's Allowance if they fulfil the conditions.
• Redundancy payment. This is paid by an employer when an employee is made redundant. But if the employer goes bust or otherwise cannot pay it then the payment comes from National Insurance Fund. There is no equivalent for the self-employed who go out of business.

Class 2 contributions do not, of course, give entitlement to benefits which are paid purely by an employer not by the National Insurance Fund.

• Statutory Sick Pay £88.45 for 28 weeks. Employers may pay much more than the statutory amount. Self-employed can get Employment & Support Allowance - see above. 
• Statutory Maternity Pay. It is 90% of average weekly earnings (before tax) for six weeks then £140.98 (or 90% of weekly pay if that is less) for the next 33 weeks. However, self-employed people can get Maternity Allowance - see above.
• Statutory Paternity Pay, Shared Parental Pay, or Adoption Pay. There is no equivalent benefit if the employer does not or cannot pay. So self-employed people cannot qualify for these benefits through paying Class 2.
• Holiday pay and other paid leave - maternity, paternity, parental - is purely a matter for an employer, so self-employed people do not get it.
• Employer pension contributions. Self-employed people must pay all the contributions into a pension scheme if they have one. Auto-enrolment does not apply to them but they can pay into the state sponsored pension scheme called NEST as employers do.
• Salary sacrifice enables employees to avoid NICs on their pension contributions and to get a bicycle or childcare free of tax and National Insurance. Self-employed people may be able to claim the cost of a bicycle as an allowable expense against their tax if they use it for work travel.
• Other perks paid by an employer

Self-employed people can claim means-tested benefits on the same terms as anyone else. But when their income is assessed the calculation may assume they earn the statutory minimum or living wage even if their profits are lower than that. At the moment that applies only to Universal Credit and to Council Tax Support in some parts of England. 

For the week (8-15 March 2017) that the Government's policy was to raise the rate of Class 4 contributions from 9% it said it would also consider extending the benefits they are paid. It still might.

The value of Jobseeker's Allowance and Redundancy Payments is very small and on my calculations means that a fair rate for the main Class 4 rate for the benefits they get is 11.98% compared to the 12% paid by employed people.

• All the rates and rules described in the blogpost relate to the tax year 2017/18.
• This blogpost gives only a very brief guide to the benefits mentioned. It is for information only and you should not rely on it to make financial decisions. Find out more about benefits at www.gov.uk and search for the benefit you want.

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15 March 2017

TAXING A SELFIE

Self-employed people pay up to £1,000 a year less in National Insurance contributions (NICs) than employed people on the same pay. That is because employees pay 12 per cent of their earnings between £8,060 and £43,000 but the self-employed pay only 9 per cent on the same band. For someone on average pay the selfie saving is £568 a year — nearly £11 a week. A selfie earning more than £43,000 will save £1048 this tax year, a gain of £20 a week over their similarly paid employed colleague.

The present system began in 1978. Employees who paid the full rate of NICs were paying into the state earnings related pension scheme (SERPS) which would give them a higher state pension. The self-employed did not pay into SERPS so they paid lower national insurance contributions.

However, those reaching pension age from 6 April 2016 no longer get SERPS (or its successor State Second Pension). Everyone with at least 35 years of national insurance contributions will in future get a flat £155.65 weekly state pension – employees and self-employed alike. So there is no longer any justification for the 3% difference in the national insurance contributions they pay. This concession to the selfies costs nearly £1bn a year.

In fact the loss to the Treasury is even greater. An employee also generates NICs from their employer at the rate of 13.8% on every pound earned over £8060 a year. If selfies also paid employer’s contributions that would bring in another £4 billion a year.

The higher paid also get a big National Insurance concession. Most taxes go up as income rises. But not NICs. Once £43,000 a year is reached the rate of NICs plummets from 12% (or 9%) to just 2%. If everyone earning more than £43,000 paid the full rate of NICs estimates by HMRC indicate the Treasury would gain by more than £9 billion a year.

Because NICs are a tax on earnings they do not apply to unearned income such as interest from savings and dividends. In fact both of those have their own special income tax allowance as well. £1000 of savings interest is normally free of income tax (and it can be up to £6000 in some circumstances). Dividends are taxed at a lower rate than other income and now the first £5000 is tax-free. Those extra allowances are on top of the tax free personal allowance of £11,000. No NICs are due on rental income either. These concessions mean that every £1 of unearned income is worth far more net than a pound of income earned by work. Even pensions – which are often described as deferred pay – are exempt from National Insurance contributions. I have not been able to put a figure on the cost to the Treasury of these various concessions.

But I have found another £1 billion concession given to pensioners. Although more than a million over 65s work they do not pay NICs. Once state pension age is reached (65 for men and about 63y6m for women) NICs stop. That concession began nearly a century ago when almost everyone who reached pension age retired from paid work completely.

I have to declare an interest. I have been self-employed for 30 years. I have earned more than the higher rate threshold for much of that time. And I have now reached the age when I no longer pay NICs. So changing all these things would cost me a lot. But it should be considered.

All figures relate to 2016/17 tax year.

Based on my piece in FT Money 18 February 2017 and my Money Box newsletter of the same week.

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6 March 2017