Protect Child benefit - £50k+ Earners

On 21st March 2012 in the Budget the Government announced plans to withdraw child benefit from parents who earn higher levels of income.


This was justified by George Osborne with the statement that “all sections of society must make a contribution to dealing with the deficit.” He went on to say the welfare budget needed to be cut back because social security would consume one-third of public spending if left unchecked.

Until now, child benefit has been universally paid to families of all backgrounds. From January 2013, Households with one person earning more than £50,000 a year will lose some of their child benefit.

Child benefit had been due to be removed from all families with at least one parent paying the higher, 40% rate, of income tax - about £43,000 - from January 2013.

But Mr Osborne said he wanted to avoid a “cliff edge” effect - so it would now only be withdrawn when someone in a household earned more than £50,000, at a rate of 1% of the benefit for every £100 up until £60,000, when it would be cut entirely.

The benefit would only be withdrawn entirely from those where one partner earns more than £60,000 a year.

The benefit will be withdrawn gradually from those where one parent earns more than £50,000. Child benefit totals £20.30 a week for the first child, and then £13.40 for each subsequent child. There is no limit to the number of children that can be claimed for.

So, for a family with two children, one parent would receive £33.70 per week or £1,752.40 per year.

The equivalent in terms of earnings, taking income tax into account, would make it worth £2,190.50 for a basic rate taxpayer and £2,920.67 for a higher rate taxpayer.

Perceived problem

The government had planned to remove the benefit from households in which someone earns more than £42,475 in January 2013.

The perceived problem was an anomaly that a family with a single earner taking home more than £42,475 would lose child benefit, but a couple each earning slightly less than this could take home £80,000 and keep the benefit.

The other issue of debate was the “cliff-edge”. That meant someone earning £42,475 or below would receive the full child benefit. As soon as they earned £42,476, they would lose every penny of the child benefit.

To address this, the benefit will now fall by 1% for every £100 earned over £50,000. That means those earning more than £60,000 will lose the entirety of the benefit.

Entitlement under the original proposals

Some 7.8 million families receive child benefit, of which 1.2 million would have lost their entitlement under the original proposals. The number affected will be lower under the renewed plans.

Three million taxpayers earning over £50,000 will be sent letters in the autumn asking if they or anyone in their household receives child benefit - in order for some to be clawed back through tax from January 2013.

The income tax charge could be levied from monthly pay cheques, via people’s personal tax codes. Otherwise, the first tax bills for child benefit will have to be settled by the end of January 2014.

One possible solution

Brad and Angela have two children and receive child benefit of £20.30 per week for the eldest child and a further £13.40 for the youngest. (that’s the £1,752 mentioned previously). Brad’s salary is £50,000 and Angela’s is £60,000.

On Angela’s income, between £50,000 and £60,000 she will face income tax at 40% and an additional £1,752 (there’s that number again) due to the loss of child benefit, an effective rate of 57.5%

Now, what if Angela made a pension contribution? – to a good pension, mind, not one that has been in the news recently with high & hidden charges, but a decent scheme, with competitive charges, managed and monitored performance and with a financially strong provider – of £10,000.

Because basic rate tax relief of 20% is given automatically, Angela could write a cheque for just £8,000 or pay around £667 per month to get the £10,000 in. She will also receive a further £2,000 rebate when she submits her tax return. Therefore, the net cost of the £10,000 contribution is just £6,000.

In addition to the £4,000 tax relief, she will continue to receive child benefit. This is because the £10,000 pension contribution is deducted from her taxable pay, thus making her salary, for child benefit calculation purposes, £50,000.

So in this example, the family are £5,742 better off.

Financial Planning in the Middle Ages

Welcome to my Middle Age blogpost. No serfs here and hopefully with sensible financial planning in the early years there are no peasants. Maybe we are not all Lords of the Manor but we may be landowners (or a freeholder in any event). And the only plague like viruses are being killed by our software.

Following their previous informative video on the early years, Morningstar have followed up with the middle years [yes, my title is much better, isn’t it?!]

In this episode they discuss the fact that you're in a stage where you're perhaps coming senior in your job, you have children, you have a house, other responsibilities. You're starting to think a little bit more about coming into retirement and what the future might start to look like.

http://www.morningstar.co.uk/uk/news/articles/106999/Financial-Planning-in-Your-Middle-Years.aspx

Nick Cann, from the Institute of Financial Planning continues “… it's really important to get a handle on where you are in your personal balance sheet. If you’ve been successful, you've looked at your income and expenditure, you started saving monies, you had a variety of strategies I imagine in different areas to invest, and to save in pensions. You have various life insurances and everything there, but it's now starting to get really important to focus that down to a financial plan to understand fully where you are, how likely you are to be able to retire when you'd like to retire or to do other challenges in your life, where there's things around other important aspects of your family, and other areas are also taken care of.

So, middle years is really important to start making sure you really are on track to have the later years in good order. Because you don't all of a sudden want to panic around 55, 60, and think I really haven't got enough. I wish I had done more in earlier years.”

If this sounds like you, have a look at our ‘How much is Enough? page on the website http://www.iangreen.com/timeline.php

Some readers may be thinking surely I could just do this myself, why do I need a financial planner? Well, a few folks can do this themselves. But many of our clients engage us for a financial plan not through lack of capability, but through a lack of capacity (they just don’t have the time to learn how to do it all properly themselves) or through desire (they’d rather not spend their spare time pouring over numbers and graphs).

That said, if you love DIY finances, Go For It!

But in the same way that professional athletes have coaches and many people report greater results at the gym with a personal trainer, why not consider engaging a financial planner to power up your financial plan and make sure your money isn’t going to run out before you do.

Did you know?
The largest Mint in the middle ages was located in the Tower of London

There is an American website with interesting material on it called ‘Get Rich Slowly’ ( http://www.getrichslowly.org/guide-to-money/ ). The middle ages are covered by the middle three of the following list within the early and later years (see previous blog post http://greenfinancial.blogspot.co.uk/2012/06/are-you-aged-25-to-50.html )

The stages are:

Plan


Protect


Save


Spend


Invest


Live


Retire

If you need any financial help with any of those stages,
for you or your family,
please get in touch, we’d love to hear from you.

The Financial Year End, The Budget & A Tax Planning Ticklist

Financial folk speak of the end of the tax year and rush to finalise fiscal matters.

But what exactly is the tax year, what needs to be done and why?


Whether a layperson, interested observer, lapsed expert or those simply in need of a memory jog there follows a quick introduction to the tax year, a brief guide to the budget and a short tax planning ticklist.

THE FINANCIAL YEAR END

The UK tax year, or financial year, runs from 6th April until 5th April the following year. It is a twelve month period used for, amongst other things, measuring earnings and calculating income and the tax payable on them. Confusingly for the purposes of corporation tax and government financial statements the year starts April 1st (no fooling!) and finishes March 31. And those readers who run companies or know someone that does will know a company year can start and end whenever the owner wants and a company year can even be longer than 12 months! But that is for another blog post…

Back to the UK taxpayer fiscal year. Why April 6th? Surely running the tax year the same as the calendar year would make life easier? The sensible Swedes and the economical Germans do exactly that. But we Brits are not alone in our quirky dates. Across the pond Americans run from October to September and down under our Australian cousins have a tax year that starts in July and ends in June.

The April 5th year end for personal tax and benefits reflects the old ecclesiastical calendar, with New Year falling on March 25 (which was known as ‘Lady Day’), the difference being accounted for by the eleven days "missed out" when Great Britain converted from the Julian Calendar to the Gregorian Calendar in 1752. The British tax authorities and landlords were unwilling to lose 11 days of tax and rent revenue so under the ‘Times of Payment of Rents, Annuities, &c’ of the Calendar Act 1750, the 1752–3 tax year was extended by 11 days. From 1753 until 1799, the tax year in Great Britain began on April 5, which was the "old style" new year of March 25. A 12th skipped Julian leap day in 1800 changed its start to April 6. It was not changed when a 13th Julian leap day was skipped in 1900. So since 1800 the start of the personal tax year in the United Kingdom has been April 6th.


THE BUDGET

The next Budget will take place on Wednesday 21 March 2012. Readers who are up to speed with social media will be able to follow the official HM Treasury Twitter channel with the #Budget2012 hashtag.
Or me at @ianjamesgreen

Most of us recognise budget day as when the Chancellor appears on his doorstep with the famous red box. The Budget box or 'Gladstone box' was used to carry the Chancellors speech from Number 11 to the House for over 100 consecutive years. The wooden box was hand-crafted for Gladstone, lined in black satin and covered in scarlet leather. The word “budget” derives from the term “bougette” – a wallet in which either documents or money could be kept. And one more fascinating budget fact … Chancellors are allowed to refresh themselves with alcoholic drinks during their Budget speech - no other Member of Parliament can do this although we could be forgiven for thinking otherwise with some of the hullabaloo we witness!

The Budget is the single most important economic and financial statement made each year by the Chancellor of the Exchequer to Parliament and the nation. There is an act of parliament that requires the Government to produce a Budget Report for each financial year. There is a ‘Charter for Budget Responsibility’ which sets out what the Budget Report must cover.

The Office for Budget Responsibility (OBR) has to publish two economic and fiscal forecasts for each financial year, one of which is to be the official forecast on which the Chancellor sets out the Government’s fiscal policy in the Budget. The OBR’s duty is to examine and report on the sustainability of the public finances and it is required to do so objectively, transparently and impartially.

The Budget is actually the Chancellor’s response to the OBR’s forecasts.

Historically, the chancellor would often announce in the budget (end of March) a new measure, such as the removal of a benefit, or an increase in an allowance, and give a number of days to act, normally the start of the new tax year (first week of April). Buy now, while stocks last, in other words. Sadly, those days are gone with any new measures (that usually make us worse off!) implemented immediately. This is why the market for budget forecasters is now so big, as those of us that read the financial pages know too well. In the run up to the budget the press is full of ‘what might happen’

Rather than go over here what can be read elsewhere with a quick google, let’s look at just one personal financial matter, that has been mentioned as possibly going every single year I can remember since starting as a financial planner in 1995. Higher rate tax relief on pension contributions. Will this finally be the year it goes? Those against say it is the last thing that should happen. We need to be encouraging private pension provision, not the opposite. Those for say it is a fair tax, that only hits higher earners and will raise billions. Which camp are you in? Tune in to George on March 21 to find out…

What are my predictions? Clients of Green Financial will know that in all matters, whether financial, legal, political or investment I do NOT claim to own a functioning crystal ball! But climbing down off the fence, albeit briefly, I think a budget for growth is needed. I think there will be a few hard decisions for the chancellor and a few unpopular items, normally hidden away in the small print rather than announced in the House. But I also think the nation needs good news, so maybe a few pleasant surprises could be in store.


TAX PLANNING TICKLIST

In terms of personal financial planning, a few items to consider. Please remember, if you are in any doubt as to whether any of these tips apply to you or your family, either please ensure you know exactly what you are doing or preferably seek professional independent financial advice.

ISA – open and use your ISA allowance. You’ll pay no income tax or capital gains tax on any gains. You can choose cash or stocks and shares versions. This year’s allowance is £10,680 per person.

ISA – next year. The allowance rises to £11,280 on 6th April but you can apply now. For those that contribute monthly amounts you’ll need to change your direct debit amount from £890pm to £940 per month

Junior ISA – introduced in November 2011 the allowance is £3,600 per eligible child and the benefits are similar to adult ISAs

Capital gains – we all have a CGT allowance of £10,600 a year. Many of our clients sell shares to realise a gain and use the proceeds to fund the next year’s ISA.

Pension – Will this be the last hurrah for higher rate tax relief? (see above). Currently tax relief up to 50% is available. But pensions are a long term commitment with seemingly ever changing rules. Weigh up the pros and cons for your situation before committing too much.

Junior pension – parents and grandparents can contribute to a pension for a child, placing up to £3,600 away at a cost of only £2,880, a tax break of £800. But will the child thank you for a present they can only open when age 55?!

National Savings – the rates have dropped massively and the number of accounts on sale has also fallen. But there are still tax shelters available including the ever popular premium bonds

Inheritance Tax – There are a number of gifts one can make to reduce the liability including giving away up to £3,000 from capital.

Personal allowances – Ensure you make full use of these, especially if one of a couple is a lower rate tax payer than the other.

As at the start of this part of the article, PLEASE seek professional advice if in any doubt whatsoever over the suitability of these tips for your own situation.

There is a FREE download on end of year tax planning here:

http://www.iangreen.com/downloads/tax2012.pdf


and a FREE wealth & tax tips guide with FIFTY tips here:

http://www.iangreen.com/GFA-Tax&WealthTips2011.pdf


Both of the above are also available as photos to view at www.facebook.com/GreenFinancial

NEST Update- for employERs

Starting now, October 2012, ALL employers will have to make compulsory pension provision for their employees


But before you panic, don’t worry. This is being phased in over four years. This process is known as ’staging’

At its simplest, the bigger the company, the earlier the ‘staging’ date.

Employers with more than 50 (fifty) employees in their PAYE scheme as at 1st April (yes, really, it’s not an April Fool!) 2012 will have a staging date between October 2012 and July 2014 with the same rule applying, that the bigger you are, the earlier the date.

Anyone with fewer than fifty employees will have staging date after April 2014 but before February 2016

It is possible to bring forward your staging date if you wish to but only to a set number of dates already listed by The Pensions Regulator (TPR). There is no facility to defer or delay your staging date

The Pensions Regulator has a reasonably clear website: http://www.thepensionsregulator.gov.uk/ if you'd like to read more yourself

As the months roll by, the TPR will be communicating with employers and have promised to do so at least twice in the run up to their staging date.

For all Green Financial clients, I am happy to confirm your date, so you can be prepared in good time, as well as let you know what else, if anything, you need to do.

For me to do this please confirm:

Your PAYE scheme reference number(s) and the size of your PAYE scheme (as above).

Note: If you have more than one PAYE scheme, your staging date will be the one that's earliest.


I can also help clarify any duties you will have under the new rules and contribution levels that will apply

Please contact me if you wish me to help

Ian Green
iangreen@iangreen.com

19th October: I have been asked by a few clients what my fees are for assisting in this area- it will depend on the size of the scheme and the amount of work involved but the first stage(s) are generally just a nominal sum to cover the admin time involved if you don't want to do it yourself