TRIPLE LOCKED DOWN

The basic state pension would be £1.15 a week higher from April 2015 if the Coalition Government had not changed the rules which the previous Government used to increase it. 

2001-2010
Under the previous Labour government the state pension was increased each April by inflation or 2.5% whichever was the higher. The measure used for inflation was RPI, the Retail Prices Index.

This rule was announced to Parliament by Chancellor Gordon Brown in his Pre-Budget Report on 27 November 2001.

"the Secretary of State for Work and Pensions and I have decided that...in future, the [basic] state pension will rise by at least 2.5 per cent...or more if inflation is higher." (col. 836-837)

The rule was confirmed as government policy by the Secretary of State for Work and Pensions on 15 June 2005 and again in the Pre-Budget Report on 9 December 2009 and was used for nine pension upratings from April 2002 to April 2010.

Brown's 'double lock' rule was a response to the embarrassment in April 2000 when the the basic state pension went up by just 75p – from £66.75 a week to £67.50. At the time the pension was increased each April by the rise in prices the previous September as measured by the RPI. The April 2000 rise in the pension was in line with this rule. At the time inflation was low and the pension was increased by 1.1%, the RPI in September 1999. But when this rise was announced in November 1999 it was widely condemned both in the press and among pensioners, some of whom felt so insulted they sent 75p - which was less than the price of three first class stamps - to Gordon Brown.

The Coalition
Before the May 2010 General Election the three main parties - Conservative, Liberal Democrats, and Labour - had all committed themselves to raise the state pension by the rise in earnings rather than prices and the understanding was that the rule would be earnings or prices whichever was higher, although that was not always specifically stated. Historically earnings have nearly always risen more rapidly than prices, though from early 2008 that stopped being the case and from 2010 earnings rose barely at all and even fell on some occasions.

The Liberal Democrat party went further and proposed in its manifesto (p.18) to raise the pension by earnings, prices or 2.5% whichever was the higher. That policy of a 'triple guarantee' was adopted by the Coalition government (p.26). The phrase 'triple lock' was in use by 6 July 2010.

However, the value of the triple lock was weakened by the Coalition Government's separate decision to change the index used to measure prices. Its June 2010 Budget announced  (para 2.32) that it would change the index used to raise benefits each year from the RPI to the Consumer Prices Index or CPI. Although the CPI was preferred by statisticians, the maths it uses ensures it is nearly always lower than the RPI by around one percentage point.

That cost-saving measure began for most benefits from April 2011 but was delayed for the basic state pension (para 2.33) until April 2012. But then for four upratings 2012, 2013, 2014, and 2015 the basic state pension was increased by the highest of earnings, CPI, or 2.5%.

In two of those years CPI was below 2.5% so 2.5% was used instead. But under the Brown 'double lock' rule the RPI would have been used for four years and the 2.5% floor only in 2015 when RPI was lower than 2.5%.

Source: ONS, DWP and Paul Lewis calculations using September indices and official uprating and rounding rules.

The result is that the basic state pension would have been higher for four years of the Parliament. And by April 2015 it would have been £117.10 a week instead of £115.95, an extra £1.15 a week or £59.80 a year. The total loss to a person receiving the full basic state pension is £163.80 over five years of Coalition upratings. The loss is due entirely to the change in price uprating from RPI to CPI.

Government response
The Coalition Government has claimed that Labour would have raised the state pension only by earnings. On 9 December 2014 Andrea Leadsom, Economic Secretary to the Treasury, told a Conservative MP that the triple lock had benefited pensioners by £560 compared with the Labour policy. That claim is based on Labour's 2010 Manifesto which states "we will restore the link between the basic state pension and earnings from 2012" (p.6:4) with no mention of prices or the 2.5% floor.

The Labour promise is the same as that in the Conservative Party Manifesto for the 2010 election which committed the party to "restoring the link between the basic state pension and average earnings" (p.12). It is implausible that a Conservative or Labour government would not have used an alternative price measure if that was higher than earnings and unlikely that either would have abandoned the 2.5% floor.

In any case this note compares the actual Coalition Government policy with the actual policy of the previous Labour Government and does not speculate about what would have happened if the 2010 General Election had turned out differently.

30 March 2015
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SAVINGS REVOLUTION

The major savings revolution in George Osborne's final Budget of this Parliament was a promise to scrap the automatic deduction of tax on interest earned on savings from April 2016.

At the moment banks and building societies take 20% off our interest and pass it straight to the Treasury. In 2013/14 that raised £1.8 billion. But a chunk of that tax is taken from interest earned by non-taxpayers. They have to go through a complex two-form process to claim it back and then stop it being deducted in future. Many do not do that and Her Majesty's Revenue & Customs has estimated that £200m a year is taken from them and never reclaimed. From April 2016 all that will end. Interest will be paid gross without tax deducted for everyone.

The new rule will apply to any interest earned on money in savings or current accounts including fixed rate savings bonds and the 65+ National Savings Guaranteed Growth Bond. Any payment that arises in 2016/17 or later will be paid without tax being deducted.

The rule was changed because 95% of people will no longer pay tax on the interest their savings earn thanks to a new savings tax allowance which begins at the same time. For basic rate taxpayers the first £1000 of interest on savings will be free of tax from 6 April 2016. The maximum tax saving will therefore be £200. 

That saving will only be achieved by those with high five figure sums earning interest. For example £71,400 in the top instant access account paying 1.4%. Or £192,300 in the average which pays just 0.52%. A three year fixed term bond paying an average 1.94% would need £51,500 to earn £1000. So it is only those with considerable savings who will benefit to the maximum. 

For the five million (one in six) taxpayers who pay higher rate tax the allowance will be only £500 so they will hit the maximum saving with half those amounts. Those paying the top rate of 45% tax will not be given the allowance.

All other savers will gain - though often not much. Someone with £5000 in a savings account paying 1% will save a tenner a year. But if you saw a ten pound note on the floor would you bother to bend down and pick it up? Of course you would. And ending the hassle of claiming back wrongly deducted tax will help hundreds of thousands of people. Tax breaks always benefit the better off the most. But everyone with savings will get see some gain from these changes. 

The allowance is per person so a couple gets one each and the rules leave the way open for couples with unequal incomes to maximise their tax saving by moving money from one to the other, as they can now if one pays no tax. 

Anyone with savings which earn interest which totals more than £1000 (or £500 for a higher rate taxpayer) will have to pay tax on the excess. That will be collected through PAYE from 2017 or self-assessment. Those not in either system should contact the Revenue in 2016/17 to find out how to pay.

The allowance applies to any interest earned in a bank or building society so the interest paid on current accounts will be paid gross and count towards the £1000 total. It makes the Santander 1-2-3 account which pays 3% on up to £20,000 and the 5% paid on some balances by Nationwide and TSB seem even more attractive. 

The new regime will also apply to the 65 plus Guaranteed Growth Bond from National Savings & Investments and any interest arising after 5 April 2016 will be paid gross, though NS&I has yet to set out the full details. It will still be taxable in the year it arises and the interest on the three year bond will have to be paid each year by all taxpayers, including those on basic rate due to pay tax.

The savings tax allowance begins in 2016/17 and is separate from the new £5000 savings tax band which begins in 2015/16 where the interest is taxed at 0% for those with incomes below £15,600. That band is explained in my Taxfree Savings blogpost.

22 March 2015

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MARRIED COUPLE'S ALLOWANCE

MARRIED COUPLE'S ALLOWANCE 

The Marriage Allowance cannot be claimed if either spouse was born before 6 April 1935 because they can already get a bigger tax break called Married Couple’s Allowance. That is a hangover from a concession that all married couples used to get until it was scrapped from 6 April 2000. But an exemption said that anyone aged 65 then (ie born before 6 April 1935) could still have the allowance.

Married Couples Allowance is worth up to £1127 off one partner’s tax bill. If income exceeds £37,700 the allowance can be reduced but it can never be less than £436. It can be claimed by a member of a couple now if one of them meets the age criteria. So an 83 year old marrying a 55 year old can claim it. It is normally given to the spouse with the higher income and part of it is transferable to the other spouse. If you can claim it then get it backdated for up to four tax years if you were eligible then. More information on Married Couple's Allowance or here 

BLIND PERSON'S ALLOWANCE

There is a third allowance that a married couple can transfer between them. The Blind Person’s Allowance is £2290 in 2016/17 so is worth £458 to a basic rate taxpayer. However, if the blind person cannot make use of it all – has an income below £13,290 in 2016/17 – the unused portion of it can be transferred to their spouse.

To qualify for Blind Person's Allowance in England, Wales, and Northern Ireland you have to be registered with your local councils as blind or severely sight impaired. In Scotland you qualify if you cannot do work that requires sight. If both partners qualify they each get one allowance. More information on Blind Person's Allowance.

30 January 2017

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TAX CUTS FOR THE BETTER OFF

UPDATE 13 MAY 2015
It is likely in view of Conservative election promises that the rises in personal allowance and higher rate threshold will be higher in the earlier years than set out here. See Income tax cuts ahead. That does not affect the overall conclusion.

BUDGET 2015 CUTS IN TAX
The biggest income tax cuts from the 2015 Budget will be enjoyed by the better off. Anyone with an income between £43,300 and £120,000 will see a cut of £487 in their income tax in 2017/18 compared with 2014/15 . People with incomes between £11,000 and £41,865 will see a cut of less than half as much - just £200 in 2017/18. And those with an income below £10,000 will see no change as they pay no income tax anyway.

Year by year over the next three tax years 2015/16 to 2017/18 the biggest cut in income tax will be enjoyed by the better off sixth of taxpayers - about 5 million out of around 29 million income tax-payers. Only above £150,000 - the top 1% - do the better off pay more in 2017/18 than in 2014/15 (indicated by a negative cut in the table). Incomes not included in the left hand column will see tax cuts between the amounts in the row above and below.

Income tax cut on previous year
Tax year	2015/16	2016/17	2017/18	Total cut 2017/18
Income
£10,000 and below	£0.00	£0.00	£0.00	£0.00
£11000-£41,865	£120.00	£40.00	£40.00	£200.00
£43,300-£120,000	£224.00	£103.00	£160.00	£487.00
£150,000 plus	£16.00	-£23.00	-£80.00	-£87.00

The tax cuts follow from the increases in the personal tax allowance and the threshold at which higher rate tax is paid announced in Budget 2015.

	2014/15	2015/16	2016/17	2017/18	Total increase
Personal tax allowance	£10,000	£10,600	£10,800	£11,000	£1,000
Higher rate threshold	£41,865	£42,335	£42,700	£43,300	£1,435

The Chancellor mentioned this benefit for the better off thus:

"For the first time in 7 years, the threshold at which people pay the higher tax rate will rise not just with inflation – but above inflation."

However, the consequences were not made clear either in the speech or in the detailed notes. The rather different figures there remain a puzzle.

Future rises

The Chancellor also made clear his - and his party's - plans for a personal allowance of £12,500 and a threshold for higher rate tax to begin at £50,000.

"an £11,000 personal allowance. An above inflation increase in the higher rate. A down-payment on our commitment to raise the personal allowance to £12,500 and raise the Higher Rate threshold to £50,000."

If that is done in the next Parliament the Government will need increases in the final three years of £500 a year on the personal allowance and £2233 a year on the higher rate threshold.

Tax threshold changes 2015/16 to 2017/18, projected to 2020/21
	2015/16	2016/17	2017/18	2018/19	2019/20	2020/21	Increase
Personal tax allowance	£10,600	£10,800	£11,000	£11,500	£12,000	£12,500	£1,900
Higher rate threshold	£42,385	£42,700	£43,300	£45,500	£47,700	£50,000	£7,615

The result will be that basic rate taxpayers with incomes between £12,500 and £42,385 will see a tax cut of £380 in 2020/21 compared with 2015/16. But higher rate taxpayers with incomes of £50,000 to £121,200 will enjoy a tax cut in 2020/21 over 2015/16 of £1903 - five times as big.

Past changes

These plans reverse the trend over the current Coalition government of squeezing higher rate taxpayers - either to deny them any of the tax gain given to basic rate payers or to limit the gain to the same cash amount. The higher rate threshold was cut or frozen for the three years 2011/12 to 2013/14. In 2010/11 the threshold was £43,875, which is higher than it will be in 2017/18.

Excluded
These calculations only look at income tax not at National Insurance. They exclude the new savings allowance and marriage allowance and do not include the extra personal allowance which some over 67s got in 2014/15 and some over 78s got in 2015/16. After 2016/17 these age allowances will finally disappear.

13 May 2015
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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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