TAXING THE 5%
The shadow chancellor has said that the Labour Party would finance its policies by increasing income tax on the top 5%, were it to win the election. So how do the numbers stack up?According to the ever useful oddschecker.com, you can get 17:1 on Labour forming the next government. Thus, it might seem that what John McDonnell, shadow chancellor, says about future tax policy is unlikely to become reality after 8 June. However, it is worth remembering that following the last election Mr Osborne 'borrowed' several policies from the Labour manifesto, including a crackdown on non-doms and the introduction of a sharply increasing minimum wage (an indirect form of tax on employers).
Labour's tax plans, as revealed so far, are that those earning £80,000 and above would pay more income tax, although how much more has not (yet) been specified. This is a jump from the £70,000 threshold which John McDonnell had previously suggested would catch the top 5% of taxpayers. The actual numbers, courtesy of HMRC, are revealing:
- The HMRC data say that in 2014/15 a total income (not just earnings) of £71,700 was required to hit the 95th Alas, this is the latest HMRC data, published two months ago.
- The most recent Annual Survey of Hours and Earnings (ASHE) data from the ONS show that the top 5% of earners saw income rise by 2.5% in 2015/16 (against a median increase of 2.2%). For 2016/17, the earnings change is likely to be very similar - the median year-on-year figure was 2.3% in February. Add say 7.5% to the HMRC figure to cover three years and the 2017/18 95% threshold comes out at £77,200 in round numbers. If you assume that any McDonnell income tax changes take effect from 2018/19, then £80,000 looks very close to the likely top 5% threshold.
- Although the HMRC data include the 95% threshold, their analysis sticks with round numbers for totalling income tax receipts, making it impossible to accurately assess how much the top 5% paid to the Exchequer. However, we can get quite close as one of HMRC's round numbers is £70,000.
- In 2014/15, 30.7m income taxpayers supplied £167bn to the Exchequer. That was about 28% of total Exchequer income, underlining why a promise to freeze income tax rates is a folly in most economists' eyes. The 1.61m (5.24%) with income of £70,000 and above handed over £80.19bn - 48% of the total income tax paid. So, in politically smoothed shorthand, the top 5% already pay half of all income tax.
- It is at this point that the maths starts to get questionable. We do not know how much more tax Labour would want to raise or how much they would spend. The two numbers are not the same as McDonnell has made clear he would increase borrowing to fund capital expenditure. What we can say is that adding a tenth to the income tax bill of the top 5% could raise about £9bn by 2018/19, not a huge amount when public sector current expenditure for that year is forecast by the OBR (on today's policies) to be £730.9bn and total managed expenditure, which includes capital expenditure, £817.2bn. The same £9bn could be raised by adding 2p to basic rate or 1% to the employee and employer Class 1 NIC rates.
- In practice a tax change at the top end will be accompanied by significant behavioural effects and may not deliver the anticipated cash flows to the Exchequer. The introduction (and subsequent reduction) in the additional rate income tax and dividend tax changes have highlighted this distorting effect.
The top 5% of taxpayers are the people most likely to be able to manipulate how and when (or even if) they receive their income. Again, the dividend changes provide an example: HMRC estimate that the pre-announcement of the dividend reform cost the Exchequer £0.8bn, of which £110m went to just 100 individuals, drawing an average pre-emptive dividend of £30m.
“Taxing the rich” appears to work on the same principle as the wisdom of robbing banks - that's where the money is. However, as with bank robbery, knowing where the money is will usually be very much easier than extracting it.
FINANCE BILL AMENDMENTS
In view of the impending election, the government has backed off from reducing the money purchase annual allowance (MPAA) from £10,000 to £4,000 from this April.
While this change was included in the government's Finance (No 2) Bill 2017, in the latest government amendments this clause has been left out.
The clause, which would have cut the tax-free dividend allowance from £5,000 to £2,000 from April 2018, has also been left out.
PENSION PROTECTION FUND TO INCREASE FRAUD COMPENSATION LEVY 2017/18
In a press release the Pension Protection Fund (PPF) confirms plans to raise the Fraud Compensation Levy in 2017/18. Due to compensation claims the PPF expects to have to pay in the next few years, the levy is being raised for the first time in five years.
The PPF, which runs the Fraud Compensation Fund (FCF), has been notified of a number of possible claims which may come to the FCF in the next few years. Therefore, with forward planning in mind and to smooth the impact to schemes over time, the PPF is raising a levy of 25p per member - the same as in 2012/13. The levy is expected to raise around £5 million in total.
DELAY OF SPA ANNOUNCEMENT
The government is reported to have delayed an announcement on changes to the state pension age that was due next week.
Section 27 of the Pensions Act 2014 reads as follows:
(1) The Secretary of State must from time to time-
(a) review whether the rules about pensionable age are appropriate, having regard
to life expectancy and other factors that the Secretary of State considers
relevant, and
(b) prepare and publish a report on the outcome of the review.
(2) The first report must be published before 7 May 2017 [our italics].”
You might think that sounds quite categorical - the word “must” occurs twice - but reports, including from the BBC, say that the government will not meet the deadline. There is no indication of this on the DWP website, but “sources” are claiming that pre-election 'purdah' rules prevent any announcement from being made.
A somewhat similar argument was thrown out by the High Court last week. In that case, the government argued that purdah prevented it from publishing draft air pollution plans, even though the High Court had ruled last November that DEFRA should publish its plans by 24 April 2017. In giving his decision, Mr Justice Graham said that the government could not simply use purdah as a “defence…not to comply with court orders. It is not a trump card to be deployed at will by one litigant”. While purdah is an established practice, it has no specific legislation behind it.
Given the controversy already surrounding the future of the pensions “triple lock”, it is understandable that the government wants to divert attention away from state pension issues. Bringing forward the increase in state pension age to 68 by seven years, as was proposed by the final Cridland Report, is not an obvious vote winner.
The High Court refused the government right to appeal in last week's case, although the government could still go directly to the Court of Appeal. The DWP may be awaiting the next steps in the DEFRA case before making any (non-) announcements about state pension age.
The end of the triple lock - what will it cost pensioners?
Will the Conservatives abandon the ‘triple lock’ - the promise that the state pension will rise by the highest of one of three measures: wage growth, inflation or 2.5%? And if they do, what could this cost pensioners? The Telegraph got experts to crunch the numbers and showed that if the state pension had risen only in line with prices since 2010, it would now be £365 a year lower than its current £6,253 level. One pointed out that thanks to changes in the structure of the state pension, it will cost the government £8 billion less a year so it could well afford to keep the triple lock in place.
Too much tax on pension withdrawals
Up to 800,000 pensioners could be paying too much tax on their pension income, says the Telegraph. This is because the wrong tax codes are being used by HMRC, usually because the individual has more than one source of income. In this case, if the first – say a part-time job – is regarded as the main source of income, the personal income tax allowance is set against that, and then any other sources of income have tax at 20% deducted at source. This is what often happens to withdrawals from personal pension accounts. It’s important to check the codes and tax payments, says the Telegraph: you can’t assume HMRC have got it right.
Company problems for Buy To Let (BTL) owners
Owners of BTL properties need to think carefully about changing to a company ownership structure, says the Financial Times (FT). Most of those who do this are trying to avoid the restriction on mortgage interest deductions – from April 2017, tax deduction of interest at 40% is being phased out and by 2020, only a 20% relief will be available. But the FT points out that interest rates on loans to companies are usually higher than for individuals, and that company owners may pay more tax when drawing money out of a company, depending on their own personal tax position. So they need to do all the sums carefully before making the change.
Smarter ways to meet the school fee bills
Despite average annual fees of £14,100, a record number of children are in private education, says the Telegraph. But the cost pressure means more families can only afford a shorter period of private schooling, with the pupil numbers rising sharply from year 7 (the start of secondary schooling). Save early, says the Telegraph – £200 per month over the first 12 years of a child’s life with a 4% return accumulates a lump sum of £37,000, almost half the fees needed throughout secondary school. And if grandparents face inheritance tax bills, it can make sense for them to make gifts early to pay for the fees.
Give millennials a leg up
Financial planners are urging grandparents to give grandchildren enough capital for the deposit on a home, says the Times. The 4.5 million Britons aged over 65 collectively own over £1.07 trillions worth of property and most say they are worried about financial prospects for the younger generation. Already, over 30% of first time buyers get help from parents and grandparents with their deposit. Provided the donor survives for seven years after making a gift, it escapes liability for inheritance tax at 40%.
Bomad lending soars 30%
Bomad - otherwise known as the Bank of Mum and Dad - is now the UK’s ninth biggest mortgage lender, says the Financial Times. Its lending has soared by 30% to £6 billion this year and it helps fund 26% of UK house purchases, almost as many as Yorkshire Building Society. The proportion of people aged under 35 seeking financial help from family members with house purchase has reached 62%.