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Old Mutual Wealth Budget 2017 Comments

08/03/2017

Budget comment: Tax on the self-employed and business owners

The Chancellor has today announced an increase to the national insurance contributions payable by the self-employed, while also taking away tax advantages for business owners.

Currently the self-employed pay only a small weekly contribution through ‘class 2’ national insurance and then 9% on income between £8,060 and £43,000. This is lower than standard 12% rate for employees, and the government also miss out on employer national insurance payments as well. Meanwhile, company owner-managers can currently get even lower tax rates because they can take income from their company through lightly taxed dividends.

It is estimated that a £5bn subsidy arises from this gap in national insurance rates and that the self-employed account for over two thirds of the £7bn underpaid tax through self-assessment.

Comment from Jon Greer, pensions expert at Old Mutual Wealth:

“The news could have been worse for the self-employed. A small increase to 10% and then 11% will still see the self-employed paying a lower rate of national insurance than their employed peers. But the dividend allowance cut was a surprise and will be really unwelcome for business owners and investors, effectively reducing the amount you can take free of tax from their business by 60%. The measure will also undoubtedly prove controversial and attract criticism from those that believe it breaches the government's pledge not to boost personal taxes

“The number of self-employed people in the UK has risen steadily over the last two decades, and has accelerated significantly since the economic downturn in 2008. The most recent ONS figures show well over 4.5 million people are registered as self-employed and the growth in self-employment has made a substantial difference to employment figures and economic recovery since the financial crisis. But it is estimated an NICs cross-subsidy of around £5bn exists between the self-employed and employed. These concerns will have been exacerbated by the rise of the so-called ‘gig’ economy, with online platforms creating an increasingly flexible workforce with more opportunities to work for themselves.

“By updating the national insurance system, Hammond has guarded the government’s coffers against the risk of a growing tax gap, but stopped short of completely equalising national insurance for the self-employed.

“Reducing the tax-free dividend allowance from £5,000 to £2,000 for 2018 will impact people who have direct holdings over £50,000. With the ISA allowance increase to £20,000, people would be wise to maximise ISA contributions if they aren’t already doing so.

“Despite this double-whammy tax change, pitched as a measure to ensure ‘fairness’ for the employed, it should not be forgotten that while the self-employed currently enjoy a reduced rate of national insurance, they also miss out on sick pay, holiday entitlement and other perks enjoyed by those in employment. However, the Government will consult on changes to Parental benefits in the summer. Also, later this year the government will review the pension reforms, known as auto-enrolment, which ensure all employees save by default for their retirement. They benefit from tax-relief and pension contributions from their employer in the process. But the self-employed are currently excluded from the private pension system unless they make their own arrangements. Today’s news strengthens the case for the government to address this imbalance and ensure the self-employed enjoyed a comparable opportunity to save for their retirement.”

 

Budget comment: Social care  

Comment from Gordon Andrews, financial planning expert at Old Mutual Wealth:

“Savers will be hugely relieved to hear that the Chancellor has ruled out exhuming the ‘death tax’ on estates to fund social care. Such a measure would have been hugely controversial and Hammond was clearly keen to stifle speculation by taking it off the table.

“Long term social care is going to be a big headache for government. There is no quick fix to the enormous demographic shift we will experience as society ages. Government tried to tackle the issue in 2011 but the fact that firm action has been kicked into the long grass shows how tricky the matter is.

“We are still a long way from realising a long-term policy solution to the question of social care. Tweaks, such as giving councils the freedom to raise care funding through tax increases, or the £3bn of social care funding announced today might provide a sticking plaster. But there is still serious work to be done to tackle the question of long-term care. 


“Today the Chancellor indicated the government Green Paper on social care is likely to look at merging NHS and social care. But there the speech was light on detail. There are a myriad of options available. In terms of helping people save for their own care, government could focus its efforts on ensuring the pensions system allows people to fund retirement, including care needs at the end of their lifetime. This would be far simpler than re-inventing the savings system with new products designed to meet the cost of care.”

 

Budget comment: Reduction in the MPAA

Comment from Jon Greer, pensions expert at Old Mutual Wealth.

“The government had an opportunity to repeal the reduction to the money purchase annual allowance (MPAA). By confirming it, they’ve stuck to a proposal that is at odds with the current trends developing in the retirement market and the spirit of pension freedoms.

“By reducing the MPAA to £4,000 the government may be inadvertently penalising individuals that want to continue funding pension contributions in their late 50s and beyond after they have flexibly accessed some money purchase income.

“The goal of the MPAA was to meet concerns of recycling. However, there was a number of alternative proposals that would not have caused these issues. a better measure would have been a general anti-abuse rule. This would prohibit abuse of the pension tax system through recycling exercises designed solely to take advantage of a tax arbitrage. Similar anti-avoidance rules have been applied to tackle tax avoidance without creating onerous rules that discourage good financial planning.   

“These and other suggestions were given to the government by the industry in response to the consultation and we have yet to understand their rationale to following through with the reduction. A government response to the consultation is not expected until 20 March.

“The annual allowance tax taper should also have been reversed. It only saves £260m a year according to government figures, but creates great uncertainty and complexity for people saving toward retirement. Part of the complexity means that firms may apply a cap on contributions for staff, increasing its affect by more than the intended impact.

“The good news is there are lots of things people can do to plan ahead.

“Taking tax free cash, for example, will not trigger the £4,000 money purchase annual allowance. Nor will anyone already in drawdown before April 6 2015 see their annual allowance reduced, provided they remain within capped drawdown limits. They should also consider using other assets to fund income other than their pension fund.”

 

Budget comment: Partial withdrawals from bonds

In the 2016 Autumn Statement the Government confirmed that from 6 April 2017, it will allow HMRC to correct the inequitable tax position which can arise when someone withdraws money from their life policy (bond) in the wrong way.

In this Budget, the Government has updated its draft legislation which confirms that any tax payer who believes that any gain is wholly disproportionate as a result of a part-surrender can appeal the outcome with HMRC.  This must be done in writing and must be within two years of the event. 

Comment from Gordon Andrews, personal financial planning expert at Old Mutual Wealth:

“While the confirmation provided in the draft legislation that tax payers can appeal the outcome of a chargeable event where the gain is wholly disproportionate is to be welcomed, the legislation doesn’t provide enough detail. The number of customers taking withdrawals from bonds in the wrong way is minimal and so the Government needs to be clear how the process will work and what the indicators are to determine if a gain is wholly disproportionate, or not. 

“It sounds like HMRC will have discretion on whether or not to accept and therefore this is a safety net and not something people should rely on.

“We hope that guidance will be issued by HRMC soon so advisers can manage the expectations of any customer hoping to use this from 6 April 2017. Guidance will be key to helping advisers understand the calculation basis HMRC is proposing and when they can apply.”

Background information:

There are two ways in which a customer can withdraw money from an investment bond; they can either make a partial withdrawal from all policy segments or they can do a complete closure of individual policy segments. The way a customer is taxed in each scenario can be significantly different, and often the customer is unaware of the implications.

As a general rule of thumb, it may be more tax efficient to withdraw money (over and above the annual 5% allowance) through surrendering individual policy segments rather than taking the money through a partial surrender across all policies.  However, each case needs to be reviewed on its own merits.

If a customer asks for money to be withdrawn from across all policies, where this is in excess of their 5% tax deferred allowance, the customer could be faced with a significantly greater tax liability than would have otherwise been the case. Mistakes can happen and may lead to extreme tax consequences which are completely disproportionate to the growth received on the investment (as in the case of Lobler). This is what has prompted the review by HMRC.

 

Budget comment: QROPS

Comment from Rachael Griffin, Old Mutual Wealth financial planning expert:

“The Government has been veering towards a level playing field for UK and overseas pension schemes for a while now, but this is perhaps the boldest step yet. We need to see past the headline of ‘25% tax charge on QROPS’ to see what the actual impact is on those wishing to move their pension overseas. Not all jurisdictions will be affected in the same way, with the EEA being impacted the least. It is disappointing the Government did not consult on these changes ahead of implementing them, as this will now result in confusion and concern for many advisers and clients who are currently going through the transfer process.”

Background:

The Government estimate that this will only impact a small proportion of QROPS transfers, so the majority may still be ok to continue without the tax charge.

For people moving to a country within the EEA, the 25% tax charge will not apply provided the QROPS provider is also based in the EEA. The person and the QROPS provider do not need to be in the same country, they just both need to be within the EEA. So, potentially, the new rules will have a lesser impact on people within the EEA.

The greatest impact will be on people moving to countries outside the EEA. If the person moves to a country outside the EEA then the QROPS provider will also need to be based in that country or a 25% tax charge will apply. This may create an issue as not all jurisdictions will have a QROPS provider that meets the qualifying criteria for HMRC.

The added layer of complexity is that should the QROPS member’s circumstances subsequently change within five years of the pension transfer, it will be necessary to re-assess whether or not an overseas transfer charge applies.

The new tax charge will apply to transfer requests made on or after 9 March 2017. Anyone currently transferring their pension to a QROPS could be left in limbo, and will need to see their financial adviser to ensure the transfer is still the right decision.

QROPS providers have until the 13 April to reapply to HMRC for their qualifying status if they wish to remain a QROPS.

 

For more information contact

Tim Skelton-SmithOld Mutual Wealth02380 916 99807824 145 076tim.skelton-smith@omwealth.com
Michael GlenisterOld Mutual Wealth020 7778 963807469 144535michael.glenister@omwealth.com
Kathleen GallagherOld Mutual Wealth023 8072 629307990 004932kathleen.gallagher@omwealth.com

Notes to Editors:

Old Mutual Wealth is a leading wealth management business in the UK and internationally, helping to create prosperity for the generations of today and tomorrow.

Old Mutual Wealth oversees £131.3 billion in customer investments (as at 30 September 2017).

It has an adviser and customer offering spanning: Financial advice; investment platforms; multi-asset and single strategy investment solutions; and discretionary fund management.

The business is comprised of two segments: Wealth Platforms and Advice and Wealth Management.

Wealth Platforms includes the Old Mutual Wealth UK Platform; Old Mutual International, including AAM Advisory in Singapore; and the Old Mutual Wealth Heritage life assurance business.

Advice and Wealth Management encompasses the financial planning network, Intrinsic; Old Mutual Wealth Private Client Advisers; discretionary fund management business, Quilter Cheviot; and Old Mutual Wealth’s multi-asset investment solutions business.

Old Mutual Global Investors (‘OMGI’) is the asset management business of Old Mutual Wealth with £39.8bn funds under management (as at 30 September 2017). On the 19th December 2017, Old Mutual Wealth announced that it has agreed to sell its Single Strategy asset management business to the Single Strategy Management team and funds managed by TA Associates. The proposed transaction is subject to customary closing conditions, including regulatory approvals. 

Following managed separation from Old Mutual plc, Old Mutual Wealth will rebrand to Quilter plc. Each of the businesses within the Quilter Plc group will be rebranded over a two-year period, with the exception of Quilter Cheviot, which will retain its existing name.

Old Mutual Wealth is part of Old Mutual plc, a FTSE 100 group that provides life assurance, asset management, banking and general insurance. Old Mutual is trusted by more than 19.4 million (as at 31 December 2016) customers across the world and has a total of £212.3 billion of assets under management (as at 30 June 2017).

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