Fine: A Sum of Money Imposed As a Penalty For An Offense

 

 

It feels almost a daily or weekly occurrence at best that a bank is fined millions for foul play or cheating someone or other.

 

In the past few weeks we have seen Barclays fined £284 million over rigging foreign exchange markets and Lloyds £117 million over failing to pay the right redress to customers it had already mis-sold PPI.

 

I am often asked……who gets this fine money? I guess the short answer is George Osborne.

 

In the past, fines by the regulator were small (a few thousand here or there) and the money was used to offset some of the costs of regulation. But from April 2012 that all changed. Seeing the large number of substantial fines coming through for banks that had cheated the markets by rigging LIBOR interest rates the Government decided that it would follow the US Treasury and keep the money itself (after the costs of enforcement of around £45 million a year had been deducted by the regulator……the Financial Conduct Authority).

 

Initially the Government sweetened the pill of snaffling this money by dedicating the fines to good causes. The first announcement in October 2012 allocated £35 million of the LIBOR fines to ‘support Britain’s armed forces community’. A year later, in his 2013 Autumn Statement, George Osborne announced he would “make a further £100 million of LIBOR fines available to our brilliant military charities and extend support to those who care for the work of our police, fire and ambulance services.”

 

The money has partly been used to pay for rehabilitation of injured soldiers. The fines for cheating on the Forex markets are earmarked for the NHS. And before the General Election the Conservatives promised to use a £227 million fine imposed on Deutsche Bank to fund 50,000 apprenticeships. All things which you may think the Government would be paying for anyway!

 

The amounts that are now being raised are nothing short of eye-watering. In 2014 alone fines totalled £1.4 billion, mainly from the big banks over foreign exchange and LIBOR fixing. And so far this year another £814 million has been clocked up for similar transgressions.

 

With just a bit more effort, I am sure the 2014 total can be beaten!

Pensions Prying

 

It’s fair to say that our pensions are a political football. In return for the generous tax relief we receive on the way in (getting less generous with each passing budget) politicians believe they have carte blanche to meddle.

        

Moan we must not as pension savers and persevere regardless. Kicked are we……by Labour, the Coalition Government and now the Conservatives……who are launching a consultation on the future of tax relief. It could well go altogether. I wouldn’t be surprised.

 

Of course, political meddling is occasionally effective in the long-term savings market as it has been with ISA’s. These savings / investment vehicles, after a long gestation period, are now just about fit for purpose. Just a shame it took 16 years to get there!

 

ISA’s are more user-friendly than ever……higher annual allowances than ever before……a great tax shelter that can enable you and your children to build a meaningful tax-free pot. I guess it should be a ‘thank you’ to George Osborne if I wasn’t so suspicious that it was all simply a vote winning exercise!

 

Yet not so much ease to cheer in pensions. Every time politicians interfere, they bring more complexity into an already fiendishly complicated savings regime, usually chipping away at the tax breaks in the process. That leaves the general public scratching their heads in bewilderment and running for the hills screaming ‘pensions, bloody pensions’……again!

 

One of the crassest bits of meddling is the latest reduction in the lifetime allowance, from £1.25 million to £1 million (effective from April 2016). It is nonsensical at best and spiteful at worst. It discourages successful management of your pension. The existence of this allowance brings a big chunk of doubt into pension planning. Will I hit the lifetime allowance? Will I not? Should I stop saving into a pension? Should I be doing something about it? It destroys confidence in pensions to deliver a meaningful income in retirement……and let’s face it, confidence is far from high as it is.

 

So there you go……yet more meddling of pensions politically. I think we can pretty much guarantee that it won’t stop here either!

Budget July 2015 (4) – Tax Efficient Investments

 

 

ISA

• The ‘Help to Buy’ ISA will be available from 1 December 2015. This new product will enable first time buyers to save up to £200 per month towards a first home, with an initial one-off deposit of £1,000. The Government will boost savings by 25% up to a maximum of £3,000, which will be paid when a property is purchased.

 

• The Government confirmed its commitment to introduce new flexible ISA rules from 6 April 2016. The rules will allow investors to pay withdrawals from a cash ISA back in to the account before the end of the tax year, without reducing their subscription limit further. The change will also cover cash held in stocks and shares ISAs.

 

• The Government will introduce the Innovative Finance ISA, for loans arranged via a peer to peer platform, from 6 April 2016. It is also consulting on whether to extend the list of ISA eligible investments to include debt securities and equity offered via a crowd funding platform.

 

Personal Savings Allowance

•  From 6 April 2016, a tax-free savings allowance of £1,000 will be available to those with taxable income of less than £43,000 i.e. basic-rate payers and below. Higher rate taxpayers benefit from a £500 tax-free allowance. Those earning over £150,000 are not entitled to an allowance.

SEIS, EIS and VCTs

• The Government announced a range of essentially more restrictive technical changes to the rules governing investments eligible for Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs).

 

GENERAL IMPACT

• ‘Help to Buy’ ISAs are sure to boost the property market further alongside other initiatives such as the initial ‘Help to Buy ‘scheme.

 

• The personal savings allowance provides more incentive for savers with even higher rate taxpayers benefiting from an allowance. However, it’s most generous for low earners who will potentially pay no tax on their savings where total taxable income is less than £17,000 in 2016/2017. This has increased from £16,800 when originally announced, as a result of the further increase in the personal allowance to £11,000.

 

• New flexible ISA rules allowing cash withdrawals to be returned to an ISA by the end of the tax year will help to maximise the benefits by removing an effective penalty on those who are forced to access their savings temporarily.

Budget July 2015 (3) – Tax

 

 

INCOME TAX

• In 2016/2017 the income tax personal allowance will see another substantial increase of £400 to £11,000. A further increase to £11,200 was announced for 2017/2018.

 

• The basic rate band increases to £32,000 for 2016/2017. Those entitled to the full standard personal allowance will pay 40% tax on income above £43,000. The threshold for higher rate income tax increases by £615 for 2016/2017.

 

• The basic rate limit will increase to £32,400 for 2017/2018. Together with the planned increases in the personal allowance, this means the higher rate threshold will be £43,600 for 2017/2018. These are the next steps in the Chancellor's stated aim of increasing the higher rate threshold to £50,000.

 

• The tax relief on mortgage interest will be restricted to basic rate for mortgages on 'buy to let' residential properties. The restriction will be phased in over 4 years from April 2017.

 

• ‘Rent a room’ relief will be increased from £4,250 to £7,500 from April 2016. The relief had been frozen since 1997.

 

CAPITAL GAINS TAX (CGT)

•  No changes were announced with individuals continuing to be entitled to an annual exempt amount of £11,100 for 2015/2016 and trustees to a maximum of £5,550.

 

• The 18% and 28% rates of capital gains tax remain, as does the interaction with the amount of the taxpayer's unused basic rate income tax band (if any) to determine at which rate tax will be paid. The potential exists to reduce the rate at which a gain is charged to CGT by extending the basic rate income tax band by making a pension contribution.

 

INHERITANCE TAX (IHT) & TRUSTS

 

• The Government aims to reduce the number of estates paying IHT by introducing an additional nil-rate band from April 2017. This will apply where the main residence passes on death to direct descendants such as children and grandchildren. This will be worth up to £100,000 in 2017/2018, £125,000 in 2018/2019, £150,000 in 2019/2020 and £175,000 in 2020/2021 with CPI indexation applying thereafter. As with the existing nil-rate band, any unused nil-rate band will be able to be claimed on the death of their surviving spouse or civil partner. Those with net estates worth more than £2 million will see the additional nil-rate band scaled back by £1 for every £2 over this threshold. Consultation will be published in September 2015 with details of how the additional nil-rate band will apply to those who have downsized or ceased to own a home on or after 8 July 2015.

 

• The IHT nil-rate band is currently frozen at £325,000 until 5 April 2018 and this will continue to apply until April 2021.

 

• The Summer Finance Bill will include new legislation targeting IHT.

 

CORPORATION TAX

 

• The corporation tax rate will be cut from 20% to 19% in 2017 and then to 18% in 2020.

 

• For accounting periods starting on or after 1 April 2017, corporation tax payment dates will be brought forward for companies with annual taxable profits of £20 million or more. This threshold will be divided by the number of companies in a group. These companies will pay corporation tax in quarterly instalments in the third, sixth, ninth and twelfth months of their accounting period.

 

• The permanent level of the Annual Investment Allowance (AIA) will increase from £25,000 to £200,000 for all qualifying investment in plant and machinery made on or after 1 January 2016.

 

NATIONAL INSURANCE

• The £2,000 National Insurance employment allowance, which reduces the overall cost of employer National Insurance Contributions (NICs) for employers, will increase from £2,000 to £3,000 from April 2016. From the same date, companies where the sole employee is the director will no longer be able to claim this allowance.

 

• The Government will actively monitor the growth in salary exchange (also known as salary sacrifice) schemes used to reduce the amount of employee and employer NICs.

 

GENERAL IMPACT

 

Income Tax

• Higher rate taxpayers will welcome the further increases in the higher rate threshold, however, the rates from 2016/2017 and 2017/2018 are still a long way off the Chancellor's stated aim of a £50,000 higher rate threshold. In the meantime pension contributions benefiting from higher rate relief remain an attractive savings option.

 

• Mixed news for property lettings. Those who rent out a room will welcome the increase in the tax free allowance to £7,500. However, the loss of higher rate relief on mortgage interest may impact the property market. High earners with mortgaged property portfolios will see a substantial increase in costs over time.

IHT

 

• As widely expected, the headline measure removes the family home from the IHT net for all but the wealthiest homeowners although the maximum benefit of £1m won't be available until tax year 2020/2021 due to phasing of the allowance.

 

• Those with larger estates will still need advice on steps they can take to mitigate IHT.

 

• The specific measure affecting trusts restricts the ability to gain an advantage of multiple nil-rate bands through setting up a series of trusts. It will still be possible to place property in trust up to the nil-rate band every seven years.

Budget July 2015 (2) - Dividends

 

 

A huge change was announced in relation to the taxation of dividends and this will be of significant interest to any investor or owner of a limited company.

• From April 2016, the current 10% dividend tax credit will be abolished. It will be replaced with a new £5,000 a year dividend tax allowance.

 

• The new rates of tax on dividend income above the allowance will be:7.5% for basic rate taxpayers32.5% for higher rate taxpayers38.1% for additional rate taxpayers.

 

GENERAL IMPACT

• The Government's stated intention is for these reforms to reduce the incentive to incorporate and remunerate through dividends. The tapered annual allowance for those with incomes including pension contributions of over £150,000 will also apply from April 2016. There will be considerably less scope to use dividends and employer pension contributions to maximise tax efficient director's remuneration in future. Companies with undistributed profits should consider taking advantage of the last chance to make the most of these strategies before the end of the current tax year.

 

• Higher rate and additional rate taxpayers with modest dividend income from share/OEIC portfolios will welcome the change, with a potential saving of up to £1,250 a year for a higher rate tax payer, compared to now.

Budget July 2015 (1) - Pensions

 

 

The biggest area of interest and change related to the subject of pensions. The following is an overview of the key points.

 

Annual Allowance

• The standard annual allowance in 2016/2017 will be £40,000.

• The money purchase annual allowance in 2016/2017 will be £10,000.

• The annual allowance for high earners will be reduced to between £10,000 and £40,000.  

Higher Earners Tapered Annual Allowance 

• The reduced annual allowance will affect those with both 'adjusted income' of more than £150,000 and 'net income' of more than £110,000.

• ‘Adjusted income’ includes employer and employee pension contributions. ‘Net income’ excludes pension contributions, unless paid under a salary sacrifice agreement, set up on or after 9 July 2015. This is to prevent tax avoidance. Where adjusted income and net income exceed the respective thresholds, the taxpayer's annual allowance will be reduced by £1 for every £2 of adjusted income in excess of £150,000. The maximum reduction is £30,000, which would result in an annual allowance of £10,000. The level of adjusted income at which the maximum reduction in the annual allowance is reached, is £210,000.

• All pension input periods will be aligned with the tax year from 2016/2017, with no option to vary the period. The Government will consider at a later date if this can be simplified further by removing pension input periods altogether. The alignment of pension input periods with the tax year will be achieved by ending all open periods on 8 July 2015. A further pension input period will then cover the period from 9 July 2015 to 5 April 2016. To ensure no tax charges arise against those who had fully funded their pensions in advance of the Budget, the total annual allowance for this tax year will be increased to £80,000, only £40,000 of which is available to cover pension input amounts paid after the Budget.

• ‘Carry forward’ will be available as normal, but will be based on the tapered annual allowance rather than the standard annual allowance.

• The money purchase annual allowance of £10,000 will still be available. However, taxpayers who are affected by both the money purchase annual allowance and the tapered annual allowance will retain the £10,000 money purchase annual allowance but will suffer a reduced annual allowance for funding non-money purchase schemes.  

Lifetime Allowance (LTA)

• The LTA will reduce to £1 million for 2016/2017 and 2017/2018. There will be a new round of transitional protection. However, we still await the detail on this. 

• The LTA will then be index-linked in line with the consumer prices index (CPI) from 2018/2019.

• Those who want to apply for Individual Protection 2014 must do so online by 5 April 2017. 

Tax Relief

• Other than for higher earners as noted above, there's no change to the rate of tax relief for member contributions, which will continue to be based on the individual’s highest marginal rate. 

Pension Tax Relief Reform

• The Chancellor said he was ‘open to further radical change’ in the pension industry. A Green Paper/Consultation has been announced which will look into possible new radical approaches such as ISA-style pensions where people would lose the tax relief when they pay in, but would be able to take their money out tax free. More subtle changes will also be considered, such as further adjustments to the annual or lifetime allowances. Responses are due by 30 September 2015.  

Extension of Freedom & Choice Agenda To Existing Annuitants

• The ability to sell annuities in payment is being deferred for a year, from April 2016 to 2017. This is in line with industry calls for it to be introduced over a more sensible timescale. The Government will set out its plans for the secondary annuities market in the autumn.  

Lump Sum Death Benefits

• The change in taxation of lump sum death benefits for members who die aged 75 or over was confirmed. Currently a temporary flat rate tax of 45% is applied. From 2016/2017 this rate will reduce to the beneficiary's marginal rate of income tax. 

• As expected, where payments are made to a discretionary trust the rate of tax will remain at 45%.  

Pension Transfers

•  The Government plans to consult shortly on pension transfers. They want to make the process quicker and smoother and to look at excessive penalties. The aim is to ensure people can access the new pension flexibilities easily and without excessive costs.  

Salary Exchange

•  Whilst there were no changes to salary exchange the Government noted that these arrangements are becoming increasingly popular and so increasingly costly to the tax payer. The Government stated that it will actively monitor the growth of schemes and the impact on tax receipts.

GENERAL IMPACT

 

• Those who had paid less than £80,000 between 6 April 2015 and 8 July 2015 can make further contributions without exceeding the annual allowance. The maximum contribution that can be made without an annual allowance tax charge arising is the amount of the unused £80,000 annual allowance for the tax year, up to a maximum of £40,000 plus carry forward.

• Higher rate taxpayers with adjusted income below £150,000 or net income below £110,000 will still benefit from higher rate relief on contributions of up to £40,000 a year. With further potential restrictions to tax relief being considered, those with sufficient funds could consider funding sooner rather than later while full tax relief is still available.

 

• The reduction in the Lifetime Allowance to £1 million from 6 April 2016 will greatly widen the scope of those within the restrictions. While the introduction of index -linking from April 2018 is welcome, it’s far short of a return to the £1.8 million LTA in place in 2011/2012 which itself was originally intended to rise in line with inflation.