One thing we know for sure is that the Chancellor will be reviewing the changes to tax credits after the House of Lords voted down the Statutory Instrument which contained the cut backs.
He has promised to 'continue to reform tax credits...while at the same time lessening the impact on families during the transition'. The key changes originally proposed were:
- lowering the income threshold for Working Tax Credits from £6,420 to £3,850 a year from April 2016
- increasing the rate at which those payments are cut. Currently, for every £1 claimants earn above the threshold, they lose 41p. It was proposed that from April 2106, the taper rate would accelerate to 48p.
We accountants don't normally regard tax credits as tax matters - they relate to the welfare system don't they? But they do have a potentially significant affect for employers of the low paid. As Alistair Darling said in 2014, the sheer scale of Tax Credits is 'subsidising lower wages in a way that was never intended.' That quote made its way into the George Osborne's speech in the Summer Budget. And then he said:
'We have been clear that we want Britain to move from a low wage, high tax, high welfare economy, to a higher wage, lower tax, lower welfare society'.
The government's introduction of a new national living wage for workers aged 25 and above from April 2016 is part of the move to a higher wage economy.
There are some tax issues which may also be progressed in the Autumn Statement. Two to look out for are:
- Pensions tax relief.
HMRC issued a discussion document on IR35 in July which effectively admits that the personal service company (PSC) legislation introduced in 2000 has been a flop. It states that in 2011/12 'around 10,000 people paid tax under IR35, an estimated 10% of those who should have paid tax on at least part of the income their PSC receives under the legislation'. The government estimates there were around 265,000 PSCs. So 90,000 of these 'failed' to operate IR35.
The discussion document makes some suggestions for improving the effectiveness of IR35 and invites views from interested parties. One option it seems to think is worth pursuing is for engagers 'to take on more of a role in ensuring the right amount of employment taxes are paid'. Some of you may recall that the initial proposals in 1999, pre the issue of IR35, placed the responsibility very much on the shoulders of the engagers by requiring them to deduct tax from payments to PSCs.
The responses from the interested parties may be published along with the Autumn Statement together with a statement as to whether the government has decided to reform the rules. Any proposals will undergo a full consultation. The government doesn't want any new legislation to back fire as well.
Pensions tax relief
The government's enthusiasm for limiting the amount of tax reliefs for pensions shows little sign of waning. HM Treasury issued a consultation in July with the central remit to ensure:
- the tax relief system provides incentives for individuals to save
- the costs of pension tax relief are affordable.
The principle of the current system is that contributions to pensions are exempt from tax when they are made, but taxed when they are paid out to the individual. A broad characterisation of the structure is 'Exempt-Exempt-Taxed' (EET) - the middle E being the tax free investment growth of the pension fund. Pensions tax relief is designed to provide an incentive for individuals to defer their income until their retirement. However, the gross cost of pensions tax relief is significant. Including relief on both income tax and NIC, the government forwent nearly £50 billion in 2013/14. The government has sought to manage this cost through the lifetime and annual allowances and is projected to save £6 billion a year.
However the system is poorly understand by many and it is argued that, particularly in respect of basic rate taxpayers, the structure of the tax reliefs do not provide sufficient incentives to save.
So the government is interested in views on the various options that have been suggested for how the system could be reformed. These range from a fundamental reform of the system (for example moving to a system which is 'Taxed-Exempt-Exempt' and providing a government top-up on contributions) to less radical changes (such as retaining the current system and altering the lifetime and annual allowances), as well as options in between.
In the House of Commons on the 27 October, the Chancellor was asked about the current status of the consultation and he said this: 'we are receiving a lot of interesting suggestions on potential reform. We will respond to that consultation fully in the Budget.'
We'll see if any views will be expressed on an interim basis in the Autumn Statement. Many in the pensions industry are expecting an end to tax relief at the highest marginal rate of tax. However the Chancellor did say: 'it is a completely open consultation and a genuine Green Paper'.
The media coverage of the Autumn Statement has grown over the years and sending information to your clients about the Statement and the prospective tax legislation is worth considering.
Details of what we are offering can be found here.
The Chancellor will make his 2015 Autumn Statement on Wednesday 25 November.