Election-watch: the business of politics

The old joke used to be that the Church of England was the Conservative Party at prayer. Almost as true, the Confederation of British Industry (CBI) was once the Conservative Party at work. No longer: “Theresa May’s Conservatives” – the manifesto’s brand – has retreated from business. The party’s proposals include:

• A corporation tax rate of 17% in 2020 (already in legislation).
• A simplification of the tax system which “…remains too complicated”.
• “…longer-term reforms” to, and “a full review”, of, the business rates system, including an exploration of “self-assessments in the valuation process”.
• Action “to ensure that the interests of employees on traditional contracts, the self-employed and those people working in the gig economy are all properly protected”.
• Giving the Pensions Regulator “the right to scrutinise, clear with conditions or in extreme cases stop mergers and, takeovers or large financial commitments…” There will also be an “update (to) the rules that govern mergers and takeovers, with a focus on overseas takeovers.
• Executive pay packages will be “subject to strict annual votes by shareholders and listed companies will have to publish the ratio of executive pay to broader UK workforce pay”.
• A doubling of the Immigration Skills Charge to £2,000 a year, alongside widespread tightening of immigration controls. The CBI labels the immigration approach as the manifesto’s “Achilles’ heel”.

Labour’s business proposals are more immigration-friendly, but other aspects are not:

• A staged increase in corporation tax to 26% (21% small profits rate) by 2020/21.
• An “efficiency review” of corporation tax reliefs, expected to yield £3.8 billion a year.
• “A package of reforms to business rates…exempting new investment in plant and machinery”. Longer term, there would be a review of “the entire business rates system” and possibly a land value tax.
• A new “Ministry of Labour”, the strengthening workers’ rights and empowerment of their trade unions.
• Amending the takeover rules “to ensure that businesses identified as being systemically important have a clear plan in place to protect workers and pensioners” on takeover.
• Introducing an “Excessive Pay Levy”, payable by employers, on total compensation exceeding £330,000.

The Liberal Democrats’ proposals are a blend of the other two parties’ ideas, including:

• Corporation tax would rise to 20%, backed up with “tough action against corporate tax evasion and avoidance”.
• A review of business rates and their possible replacement with a Land Value Tax.
• “Modernise employment rights to make them fit for the age of the ‘gig economy’.
• A requirement for “binding and public votes of board members on executive pay policies”.

If all that sounds unappetising from a business viewpoint, then remember, another truism: businesses do not have a vote…

Election-watch: pensions, pensioners and politics

Politicians worry about pensioners. One major reason why was highlighted in a report from a House of Commons committeee in late 2014 on voter turnout in the 2010 election. The report estimated that 44% of people aged 18-24 voted, overall turnout was 65.1%, but 75% of those aged over 55 voted. On those figures, it is surprising that the Conservatives’ 2017 pension proposals were less generous than previously:

• The triple lock for basic and new state pension increases would continue to 2020 and then be replaced by a double lock, removing the current 2.5% floor.
• Winter fuel payments would be means-tested, although how was not detailed. All other pensioner benefits would be maintained “for the duration of this parliament”.
• On social care in England, the manifesto proposed four reforms:

1. To raise the upper capital limit for a full contribution to costs to £100,000 (no comment was made about the £14,250 lower limit).
2. To include the value of the home when means-testing for in-home care.
3. To allow payments for in-home care to be deferred until death.
4. To drop the £72,000 Dilnot cap on total personal contributions, “which mostly benefited a small number of wealthier people”. However, four days after the manifesto’s publication, an unspecified cap was back on the agenda.

Labour was more generous in its manifesto plans:

• The triple lock would be guaranteed “throughout the next Parliament”.
• Winter fuel payment and free bus passes would be “guaranteed as universal benefits”.
• Pension Credit would be extended to women caught by state pension age (SPA) changes and “further transitional options” would be explored.
• A(nother) commission would be established to review SPA rises beyond 66.
• On social care, there would be an unspecified maximum on personal contribution and an (unspecified) capital limit increase. Options for funding include “wealth taxes, an employer care contribution or a new social care levy.

The Liberal Democrats’ manifesto plans sit between the Conservatives and Labour:

• The triple lock would remain “for the next parliament”.
• The Winter Fuel Payment would be withdrawn from higher rate taxpayers, a move worth only about £100 million a year. Bus passes would survive.
• The party would “finish the job of implementing a cap on the cost of social care”.

In practice, maintaining the pension triple lock will not cost much for the next few years because of higher inflation. As for the other ideas, suffice to say there seems to be a convenient lack of detail…

 

Zero hours contracts – the rights versus flexibility battleground

It’s been called the ‘gig economy’, which sounds almost fun and for hundreds of thousands of workers it’s a way of life. But even before the election, zero hours contracts were a political issue pitting flexibility against workers’ rights. A government-commissioned review into employment practices is expected to state that workers on zero-hours contracts should be entitled to request guaranteed hours.

The right to ask for fixed hours is supported by the Confederation of British Industry (CBI), which represents employers. If this is implemented, it would mirror the rights of all employees to request flexible working, which was introduced in 2014. The CBI said that all employees should receive a written statement that sets out the key terms of their employment and their rights.

Detrimental effects

Of course, zero hour contracts may actually suit some workers if flexibility is what they’re looking for. But they could run into problems when it comes to gaining access to some financial products such as mortgages, credit cards or even mobile phone contracts.

Over 900,000 people are on zero-hours contracts across sectors in the UK such as large retailers, restaurants and hotels. They are subsequently not entitled to guaranteed working hours or sick pay and their employment status is likely to have a detrimental effect on their pension and future financial planning. Often, employees on zero-hours contracts will be juggling several jobs, according to the Office for National Statistics.

For those who believe that zero-hours contracts are exploitative, this proposal is likely to be welcomed. However, it should be stressed that while workers have the right to ask, the employers have no obligation to grant them guaranteed hours.

If your clients employ staff on such contracts, it’s worth keeping them posted on the outcome of this review in mid to late June.

Election-watch: the manifesto truth about income tax

Income tax and national insurance contributions (NICs) – the income tax that dare not speak its name – are major revenue raisers for governments of all hues. Together they will produce £305bn for the Exchequer in 2017/18, 44% of all tax revenue, according to the Office for Budget Responsibility’s March 2017 estimates.

That proportion explains when economists were so critical of the Conservatives’ pledge at the 2015 election to freeze rates for income tax and NICs (and VAT). Locking down the major source of government cash flow is overly-constraining, as Mr Hammond so recently discovered – possibly at the cost of his post-election occupancy of 11 Downing Street.

Conservatives

For the 2017 election, the Conservatives have made no fresh manifesto promises on either tax. With the Taylor review on modern employment practices due to report soon, there is an understandable reluctance to revisit the spring Budget’s class 4 problems. On income tax, the oft-repeated goals of a £12,500 personal allowance and £50,000 higher rate tax threshold “by 2020” (at least for non-Scots) remain, but that is all. Keeping tax “as low as possible” receives several mentions, but who would promise anything different?

Labour

Labour does not, at least for the roughly 95% of income taxpayers with income under £80,000. The unlucky 5% – about 1.5 million – would face a 45% band starting at £80,000 (rather than the current £150,000) and a new 50% top rate beginning at £123,000. That odd number is presumably to avoid hitting the band between £100,000 and £123,000 where the phasing out of the personal allowance increases the effective marginal tax rate by a half.

In its “Funding Britain’s Future” document, separate from the manifesto, Labour says these changes would raise £6.4bn a year, less an unspecified adjustment for “… the inherent difficulty of forecast receipts from new taxes, bands and thresholds”. The manifesto says “…. everyone will be protected from any increase in personal National Insurance contributions”, the use of the word ‘personal’ suggesting that employers may not be so fortunate.

The Liberal Democrats

The Liberal Democrat approach to raising income tax is much simpler. Its manifesto promises “An immediate 1p rise on the basic, higher and additional rates of Income Tax” to raise £6bn for the NHS and social care. The party would also scrap the marriage allowance – an arguably regressive move that would only hit basic rate taxpaying couples. The manifesto’s only reference to NICs is an oblique one about funding health and social care: “In the longer term and as a replacement for the 1p Income Tax rise, [the government would] commission the development of a dedicated health and care tax on the basis of wide consultation, possibly based on a reform of National Insurance contributions”.

It is noteworthy that the manifestos all shy away from addressing the complexities which have accumulated in the UK income tax regime through the efforts of both Labour and Conservative chancellors. Neither do any of the parties risk mentioning the logic of combining income tax and NICs instead of maintaining the current make-believe two tier system. But there is always hope – what is not said in a manifesto is often more significant that what is said.

All change for the pound coin

The UK’s new 12-sided £1 coins, which were first announced during the 2014 Budget, entered circulation today (28 March).

The existing, round £1 coin will continue to be legal tender alongside the new one until 15 October 2017 so the public are being encouraged to use their current £1 coins or take them to the bank before they expire.

That’s easy, you might think, as you rummage through the depths of your handbag or wallet, but the government estimates that around a third of the £1.3 billion worth of coins stored in piggy banks or savings jars around the country are £1 coins. One in 30 old £1 coins is also thought to be counterfeit, hence the drive for a more complex design.

Some of the round coins will be melted down and used to make the new version. The Royal Mint has dubbed them ‘the most secure coin in the world’ and they have the following features:

• 12-sided (technically a dodecagan) – it stands out by sight and touch.
• Bimetallic – the coin’s outer ring is gold coloured (nickel brass) and its inner ring is silver (nickel-plated alloy).
• It has a hologram-like image that changes from a ‘£’ symbol to the number ‘1’ when viewed from different angles.
• A hidden security feature has been built-in but what that is exactly is a mystery for now (just to keep the counterfeiters guessing).
• The edges have ‘ONE POUND’ written on them in micro-lettering.
• There are grooves on alternate sides of the coin.

There are more changes on the currency front. 2016 saw the ‘plastic’ £5 note enter circulation. A new polymer £10 featuring Jane Austen is expected in September. And the Bank of England has now announced a new polymer £20, featuring the artist JMW Turner to be launched in two years’ time. There will also be 2 versions of the £2 coin – one depicting Jane Austen and the other, the Royal Flying Corps.

So, check down the back of the sofa and take a hammer to the piggy bank now – you don’t want to discover a round pound coin on 16 October!

Learning from your elders never goes out of fashion

Swimming with dolphins, visiting every continent, upgrading to a dream home. These are things that frequently appear on people’s so-called ‘bucket lists’, particularly as activities to look forward to once we can stop working full time. But how are these activities to be funded once we retire?

A recent poll by Sun Life asked Britons over 50 what their biggest regrets were, and not seeing enough of the world topped the poll. However, failing to start a pension early enough wasn’t far behind. Understanding and appreciating the importance of saving for retirement should start as early as people’s twenties to allow time for the build-up of as substantial a retirement fund as possible. It’s common sense and should help avoid the regret of not saving enough into a pension, making poor investments or underfunding investments.

One way to avoid these pitfalls of course is seeking expert, professional advice. However, a poll by LV= of just over 1,000 British adults aged over 55 who are retired or plan to be within ten years, found that 61% do not intend to speak to a professional expert about their retirement funding. After the Chancellor’s Budget on 8 March, now is a good time to remind your clients of the importance of thinking as far ahead as possible in financial planning.

With a new tax year around the corner, take the opportunity to look at how your communications to existing and prospective clients will help them receive the best advice for their ongoing plans and ultimately retirement. Although who said a bucket list was just for retirees?

Taxbriefs Chancellors – 9 George Osborne 2010 – 2016

George Osborne took over as Chancellor in May 2010, replacing Alistair Darling after an inconclusive general election which gave the UK a coalition government under David Cameron. He had been Shadow Chancellor for the previous five years, having been allegedly the third choice of Michael Howard after the Conservatives lost the 2005 general election.

Mr Osborne’s term as Chancellor ran for just over five years (May 2010 to July 2016), ending when he was sacked by Theresa May in the fall out from the Brexit vote. He came from a wealthy background, his father being the co-founder of the Osborne & Little wallpaper company.

What he did

His first Budget, classed as an emergency Budget, was in June 2010. It took place in the wake of the financial crisis, with government debt ballooning to 10.8% of GDP in 2009/10 and annual economic growth having hit a low of -6.1% in the first quarter of 2009:

• The standard rate of VAT was raised by 2.5% to 20% from January 2011.
• Capital gains tax was revised, with the single flat rate of 18% kept for basic rate taxpayers only. Higher rate taxpayers saw their rate increase to 28% from the day after the Budget. However, the entrepreneurs’ relief limit was raised from £2m to £5m.
• Corporation tax cuts of 1% a year for four years were promised, starting in 2011.
• Insurance Premium Tax was put up by 1% to 6% from January 2011.

In 2010, Osborne also set in train what was to become the Office for Budgetary Responsibility (OBR). The main aim of the OBR’s creation was to end the manipulation of Treasury forecasts that marked Gordon Brown’s era as Chancellor. In October 2010, he revealed the results of a Spending Review, fixing departmental spending through to 2014/15. This contained average real term cuts of 25%, except for health and international aid. Osborne’s deficit reduction efforts were split roughly 80/20 between spending reductions and tax increases. His first Spring Budget in 2011 was presented as a “Budget for Growth”:

• Corporation tax was cut by 1% more than announced in the 2010 Budget, to 26%.
• The personal allowance was increased by £1,000, with the promise of another £630 increase in 2012/13 (and a £630 cut in the size of the basic rate band).
• EIS and VCT rules were reformed, with EIS income tax relief increased from 20% to 30% and the EIS investment limit doubled to £1 million.
• The annual allowance was cut to £50,000 from 2011/12 and the lifetime allowance to £1.5 million from April 2012.
• The lifetime limit for entrepreneurs’ relief was doubled to £10 million.
• The tax screw was tightened on non-doms.
• The default basis for indexation of direct taxes was changed to CPI from 2012/13.

Osborne’s third Budget in 2012 was labelled the “omnishambles Budget”, by Ed Milliband, with the introduction of the notorious “pasty”, “cathedral” and “granny” taxes. In addition:

• The additional rate of income tax was cut from 50% to 45% from 2013/14.
• The personal allowance was given an increase of £1,100 from 2013/14, but again there was a reduction (£1,025) in the basic rate band to limit the benefit for higher rate taxpayers.
• A tax on child benefit, in the form of an income tax charge for those with incomes above £50,000 was announced, to take effect from January 2013.
• The top rate of SDLT was raised to 7% on residential properties valued at over £2 million and a new 15% rate was introduced for residential properties valued at over £2 million and a new 15% rate was introduced for residential properties owned by companies and trusts – another attack on non-doms.
• A cap on unlimited income tax reliefs of £50,000 or 25% of income was announced.

After his 2012 Budget, Osborne has little choice but to be more cautious in his 2013 Budget.

• The personal allowance was increased by £560 to £10,000 for 2014/15.
• The single tier pension’s arrival in 2016 was confirmed.
• The £2,000 NIC Employment Allowance was announced, to start in 2014/15.
• Corporation tax was to be unified at a 20% rate for all companies, from 2015.
• The annual allowance was cut to £40,000 and the lifetime allowance to £1.25m from 2014/15.
• The annual investment allowance was increased from £25,000 to £250,000 for two years from 2014/15.
• The annual investment allowance was increased from £25,000 to £250,000 for two years from January 2013.

Osborne’s fifth Budget in 2014 was the one which stands out in many people’s minds, as it saw radical reforms to pensions announced which, somehow, had avoided the usual pre-Budget leaks:

• Drawdown for money purchase pension became available without limits or restrictions on entitlement, heralding a precipitous fall in annuity business.
• The commutation rules for turning small pension pots into cash were greatly relaxed.
• The savings rate of tax was reduced from 10% to 0% and the band widened from £2,880 to £5,000 from 2015/16.
• The ISA limit was increased from £11,880 to £15,000.
• The annual investment allowance was doubled to £500,000 from April 2014 to the end of 2015.
• A new fixed rate savings bond for pensioners was announced, to be launched in January 2015.

His 2015 Budget was a game of two halves, either side of the general election (which it is thought Osborne expected the Conservatives to lose):

First half:

• The Help to Buy ISA was announced, to start in late 2015.
• The lifetime allowance was cut to £1m from April 2016.
• The higher rate threshold was given its first above-inflation increase in seven years.
• The personal savings allowance was announced, to take effect from 6 April 2016.
• Following on from his earlier pension reforms Osborne announced plans to permit sales of existing pension annuities from April 2016 (though this idea was eventually abandoned).

Second half:

• A new tax treatment of dividends, including a £5,000 dividend allowance, was announced.
• Non-doms UK resident for at least 15 of the last 20 years would be treated as UK domiciled for tax, including inheritance tax (IHT) from April 2017.
• Corporation tax cuts to 19% in 2017 and 18% in 2020 were announced.
• A cut in the annual investment allowance to £200,000 from 2016 was announced.

Osborne’s final Budget, in 2016, came a few months before the referendum, which at the time looked like a probably ‘remain’ victory.

• The Lifetime ISA was announced, to be launched in April 2017.
• Capital gains tax rates were unexpectedly cut by 8% (apart from residential property and carried interest).
• The ISA limit was increased to £20,000 from 2017/18.
• A further corporation tax rate cut to 17& in 2020 was announced.
• Stamp duty on non-residential property was restructured onto a band basis.

The referendum result effectively ended Mr Osborne’s career as Chancellor. It is perhaps too early to know what his six years at the helm will be remembered for, but the creation of the OBR and pension tax reform seem certain to be on the list.