We all know what a HNWI [pronounced "hinwee"] is, yes? (A ‘high net worth individual’) asks Wendy Bradley.
After the Budget I reckon we need a new acronym for another group. They are the thousands of people affected by the cliff edges in at the bottom end of the liability range. Let's call them the SIHMRs (pronounced "simmers"): Small income high marginal rate taxpayers.
My specialist subject is tax simplification and better regulation. One of the cardinal rules of better regulation is to "think small first" - can thresholds be set that exclude those with the smallest amounts of affected income from compliance. Let’s apply “think small first” to individuals.
So. Higher personal allowance? (£11,000 for 2016/17 and £11.500 in 2017/18) For a pensioner, state pension £155.65 a week (ignoring the many, many complexities involved because of the new rules and qualifying ages) comes to£8,094 a year, all covered by the allowance. Tax code goes to the payer of any private pension, the slice of private pension over £2,906 (£11,000-£8,094) is taxed at basic rate and job done, you might think?
No. Savings income. Before the Budget we knew there were going to be different rules for slices of income from savings. There’s a £5,000 disregard for savings interest, provided you don’t have other income of more than £5,000. If you have, the disregard becomes £1,000 when you’re at lower rate. Dividends are different, the dividend tax credit is gone and there’s another £5,000 disregard that doesn’t count towards your personal allowance but does count towards the higher rate threshold and already my brain hurts. Can anyone work this kind of thing out with pen and paper any more or is it just me?
Two new allowances were announced in the Budget for 2017/18 and beyond: One for digital trading and one for property income, both disregards of £1,000 of income from each, convertible into a flat rate allowance if income is higher and this is a better option than using actual expense deductions. So theoretically your pensioner could have the state pension, a bit of private pension, a grand of interest and another five grand of dividends, a grand of Ebay trading profits and another grand of Airbnb income from letting out their spare room on weekends (not to mention the £7,500 increased rent a room allowance for a full time lodger) I make that a potential tax-free £27,000, which sounds like it can’t be right but who knows.
Carol Pavely, operations director at Tax Help for Older People, said:
“One of the things that most confuses Tax Help clients is the amount of choices and allowances they may be available to them. Most people are blissfully unaware and many have sleepless nights worrying about getting it wrong. All the information they require to answer their questions is online and 40% of pensioners are digitally excluded, many of the rest have low digital skills, lack printers and suffer with broadband issues.”
She also says her organisation has identified issues with tax codes containing out of date information: Sometimes retaining out of date one off figures (redundancy payouts, pension lump sums and the like) as if they were ongoing income:
“Many pensioners are querying the savings income figures in their tax code calculations. It appears that HMRC systems are holding out of date information which until the change for 2016-17 had remained hidden. We are urging pensioners to check tax codes and calculations carefully.”
Anthony Thomas, chairman of the Low Incomes Tax Reform Group, also noted that the issues aren’t confined to pensioners:
“Because entitlement to tax credits is assessed on pre-tax income, tax credit claimants on incomes above £11,500 a year should receive the full benefit of any future increases in the personal allowance. But because universal credit, like other means-tested benefits, is assessed on after-tax income, claimants will see a reduction in their universal credit equivalent to the cut in their tax bill. The net result is that they will receive only 35% of the benefit of any increase in the personal allowance.”
“If the Government want to improve work incentives for those on the lowest incomes too they should increase the work allowance in universal credit and the first income threshold in working tax credit. The work allowance in universal credit is the amount a claimant can earn before their benefit starts to be progressively withdrawn. The first income threshold fulfils a similar function in tax credits. At present both are frozen year-on-year, but increasing them would help those on the lowest incomes who see no benefit from any increase in the personal allowance.”
Few professional firms will have the capacity, or the desire, to give advice to SIHMRs where the level of complexity far outweighs the level of income. The problem is, at this level of income people can be very anxious about getting their taxes right. They want to know they are doing the right thing, that they aren’t going to “get in trouble” with HMRC, and to get the answers to practical questions like how much can they give under Gift Aid without finding they’ve put themselves back into self assessment. But they don’t want to pay accountants’ fees to find out, and the over the counter customer service offering from HMRC has vanished, and people of pension age are more likely than most to have hearing issues so not want to engage by phone, or to be digitally excluded and not want to look at a website.
Is HMRC even trying to develop a website which will give people assurance their tax position is correct rather than just endless links to click and read up for themselves?
About Wendy Bradley
Wendy Bradley is a retired tax inspector, now working as a freelance journalist.