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Monday, 30 March 2015

TRIPLE LOCKED DOWN

The basic state pension would be £1.15 a week higher from April 2015 if the Coalition Government had not changed the rules which the previous Government used to increase it. 


2001-2010
Under the previous Labour government the state pension was increased each April by inflation or 2.5% whichever was the higher. The measure used for inflation was RPI, the Retail Prices Index.

This rule was announced to Parliament by Chancellor Gordon Brown in his Pre-Budget Report on 27 November 2001.

"the Secretary of State for Work and Pensions and I have decided that...in future, the [basic] state pension will rise by at least 2.5 per cent...or more if inflation is higher." (col. 836-837)

The rule was confirmed as government policy by the Secretary of State for Work and Pensions on 15 June 2005 and again in the Pre-Budget Report on 9 December 2009 and was used for nine pension upratings from April 2002 to April 2010.

Brown's 'double lock' rule was a response to the embarrassment in April 2000 when the the basic state pension went up by just 75p – from £66.75 a week to £67.50. At the time the pension was increased each April by the rise in prices the previous September as measured by the RPI. The April 2000 rise in the pension was in line with this rule. At the time inflation was low and the pension was increased by 1.1%, the RPI in September 1999. But when this rise was announced in November 1999 it was widely condemned both in the press and among pensioners, some of whom felt so insulted they sent 75p - which was less than the price of three first class stamps - to Gordon Brown.

The Coalition
Before the May 2010 General Election the three main parties - Conservative, Liberal Democrats, and Labour - had all committed themselves to raise the state pension by the rise in earnings rather than prices and the understanding was that the rule would be earnings or prices whichever was higher, although that was not always specifically stated. Historically earnings have nearly always risen more rapidly than prices, though from early 2008 that stopped being the case and from 2010 earnings rose barely at all and even fell on some occasions.

The Liberal Democrat party went further and proposed in its manifesto (p.18) to raise the pension by earnings, prices or 2.5% whichever was the higher. That policy of a 'triple guarantee' was adopted by the Coalition government (p.26). The phrase 'triple lock' was in use by 6 July 2010.

However, the value of the triple lock was weakened by the Coalition Government's separate decision to change the index used to measure prices. Its June 2010 Budget announced  (para 2.32) that it would change the index used to raise benefits each year from the RPI to the Consumer Prices Index or CPI. Although the CPI was preferred by statisticians, the maths it uses ensures it is nearly always lower than the RPI by around one percentage point.

That cost-saving measure began for most benefits from April 2011 but was delayed for the basic state pension (para 2.33) until April 2012. But then for four upratings 2012, 2013, 2014, and 2015 the basic state pension was increased by the highest of earnings, CPI, or 2.5%.

In two of those years CPI was below 2.5% so 2.5% was used instead. But under the Brown 'double lock' rule the RPI would have been used for four years and the 2.5% floor only in 2015 when RPI was lower than 2.5%.



Source: ONS, DWP and Paul Lewis calculations using September indices and official uprating and rounding rules.

The result is that the basic state pension would have been higher for four years of the Parliament. And by April 2015 it would have been £117.10 a week instead of £115.95, an extra £1.15 a week or £59.80 a year. The total loss to a person receiving the full basic state pension is £163.80 over five years of Coalition upratings. The loss is due entirely to the change in price uprating from RPI to CPI.

Government response
The Coalition Government has claimed that Labour would have raised the state pension only by earnings. On 9 December 2014 Andrea Leadsom, Economic Secretary to the Treasury, told a Conservative MP that the triple lock had benefited pensioners by £560 compared with the Labour policy. That claim is based on Labour's 2010 Manifesto which states "we will restore the link between the basic state pension and earnings from 2012" (p.6:4) with no mention of prices or the 2.5% floor.

The Labour promise is the same as that in the Conservative Party Manifesto for the 2010 election which committed the party to "restoring the link between the basic state pension and average earnings" (p.12). It is implausible that a Conservative or Labour government would not have used an alternative price measure if that was higher than earnings and unlikely that either would have abandoned the 2.5% floor.

In any case this note compares the actual Coalition Government policy with the actual policy of the previous Labour Government and does not speculate about what would have happened if the 2010 General Election had turned out differently.

30 March 2015
vs 1.01




Sunday, 22 March 2015

SAVINGS REVOLUTION

The major savings revolution in George Osborne's final Budget of this Parliament was a promise to scrap the automatic deduction of tax on interest earned on savings from April 2016.

At the moment banks and building societies take 20% off our interest and pass it straight to the Treasury. In 2013/14 that raised £1.8 billion. But a chunk of that tax is taken from interest earned by non-taxpayers. They have to go through a complex two-form process to claim it back and then stop it being deducted in future. Many do not do that and Her Majesty's Revenue & Customs has estimated that £200m a year is taken from them and never reclaimed. From April 2016 all that will end. Interest will be paid gross without tax deducted for everyone.

The new rule will apply to any interest earned on money in savings or current accounts including fixed rate savings bonds and the 65+ National Savings Guaranteed Growth Bond. Any payment that arises in 2016/17 or later will be paid without tax being deducted.

The rule was changed because 95% of people will no longer pay tax on the interest their savings earn thanks to a new savings tax allowance which begins at the same time. For basic rate taxpayers the first £1000 of interest on savings will be free of tax from 6 April 2016. The maximum tax saving will therefore be £200. 

That saving will only be achieved by those with high five figure sums earning interest. For example £71,400 in the top instant access account paying 1.4%. Or £192,300 in the average which pays just 0.52%. A three year fixed term bond paying an average 1.94% would need £51,500 to earn £1000. So it is only those with considerable savings who will benefit to the maximum. 

For the five million (one in six) taxpayers who pay higher rate tax the allowance will be only £500 so they will hit the maximum saving with half those amounts. Those paying the top rate of 45% tax will not be given the allowance.

All other savers will gain - though often not much. Someone with £5000 in a savings account paying 1% will save a tenner a year. But if you saw a ten pound note on the floor would you bother to bend down and pick it up? Of course you would. And ending the hassle of claiming back wrongly deducted tax will help hundreds of thousands of people. Tax breaks always benefit the better off the most. But everyone with savings will get see some gain from these changes. 

The allowance is per person so a couple gets one each and the rules leave the way open for couples with unequal incomes to maximise their tax saving by moving money from one to the other, as they can now if one pays no tax. 

Anyone with savings which earn interest which totals more than £1000 (or £500 for a higher rate taxpayer) will have to pay tax on the excess. That will be collected through PAYE from 2017 or self-assessment. Those not in either system should contact the Revenue in 2016/17 to find out how to pay.

The allowance applies to any interest earned in a bank or building society so the interest paid on current accounts will be paid gross and count towards the £1000 total. It makes the Santander 1-2-3 account which pays 3% on up to £20,000 and the 5% paid on some balances by Nationwide and TSB seem even more attractive. 

The new regime will also apply to the 65 plus Guaranteed Growth Bond from National Savings & Investments and any interest arising after 5 April 2016 will be paid gross, though NS&I has yet to set out the full details. It will still be taxable in the year it arises and the interest on the three year bond will have to be paid each year by all taxpayers, including those on basic rate due to pay tax.

The savings tax allowance begins in 2016/17 and is separate from the new £5000 savings tax band which begins in 2015/16 where the interest is taxed at 0% for those with incomes below £15,600. That band is explained in my Taxfree Savings blogpost.

22 March 2015
vs 1.00

Friday, 20 March 2015

MARRIAGE BREAKS

UPDATED 14 January 2017


There are three distinct and separate income tax breaks for those who are married. One is new. Another is being phased out. And the third is not well known at all.

Married couples and civil partners are treated equally by these laws. So throughout this piece I use the word 'marriage' to include 'civil partnership' and 'spouse to include 'civil partner'. The rules do not apply to couples who are not married or civil partners.

MARRIAGE ALLOWANCE
This new tax break began in April 2015. It is called Marriage Allowance and applies to a married couple where (a) one partner has an income at or below below the personal tax allowance, currently£11,000 a year, and (b) the other partner does not pay higher rate tax, which means they have an income no more than £43,000 this tax year, and (c) neither was born before 6 April 1935. 

If a couple qualifies then the non-taxpayer can effectively transfer £1100 of their unused personal allowance to their spouse. That will save the taxpaying spouse basic rate tax on that amount which is £220 this tax year (£18.33 a month or £4.23 a week) in income tax.

Savings: If the person transferring the allowance has savings income then that is tax free certainly up to £1000 and in some cases up to £5000 on top of their personal allowance. If that takes their income above £11,000 they can still transfer the allowance. Similarly income from an ISA does not affect it. It is more accurate to say taxable income must be no more than £11,000. These non-taxable amounts do not count towards that limit.

Dividends: There are complexities for people who have dividend income. Some accountants believe that HMRC is not operating the rules correctly. 

Future value: In future years the Marriage Allowance will rise. It is fixed at 10% of the personal tax allowance. So on present plans it will be £1150 in 2017/18, and £1250 by 2020/21.

Claiming: To get the allowance you can claim online or on the phone through the income tax helpline 0300 200 3300. You will need National Insurance numbers and dates of birth for you and your spouse. You will also need some ID. Just a bank account will do. Lines are open 0800-2000 Mon-Fri or 0800-1600 Saturday. Feedback from readers is that the process is now very straightforward. 

The Revenue wants to encourage online or telephone claims. It will not be producing a paper form to fill in. However, it has confirmed to me that it can be claimed by simply writing a letter. It is not clear how quickly such a claim will be dealt with. If you can claim online that is the best way to do it.

Tax code: Once the transfer has happened the one receiving the extra allowance will have a suffix M added to their tax code and the code itself will be 110 higher representing the full £1100 transferred. The one making the transfer will have a suffix N and their tax code will be 110 lower. These suffix letters are a handy way to check if the transfer has been done.

Once the tax code has been changed the benefit of the transfer will be felt in the next salary or pension payment. It will be backdated to the start of the tax year and then be reflected in in a reduced amount of tax for the rest of the tax year.

Once you have got the allowance it should carry on in future. If your circumstances change so you no longer qualify you must tell HMRC.

If you successfully claim for this tax year you may also be entitled for 2015/16 as well. You will have to claim that as part of your claim. It will not be done automatically. If your claim is successful the cash amount of £212 will be paid to the taxpaying spouse by check or bank transfer. The allowance for 2015/16 can be claimed up to 5 April 2020.

Fiddly bits:
Full amount: One rule puzzles people. The transfer can only be for the full amount of £1100. That can be done even if the person transferring the amount has an income at or close to their personal tax allowance. So someone with an income of £10,500 who is a non-taxpayer can transfer the full £1100 leaving themselves with a personal allowance of £11,000-£1,100=£9,900. So they will start being a taxpayer and pay basic rate tax on £10,500-£9,900=£600. So their tax bill will be £120. But their spouse will save £220 leaving the couple £100 better off.

Both taxpayers: The law does allow the allowance to be transferred if both partners pay basic rate tax and neither pays higher rates of tax. However, if it is transferred that will not leave them better off as a couple. One will pay less tax, the other the same amount more. That is why the gov.uk guide does not mention it. The online claim form allows the claim to be made. The helpline should point out that you will be no better off.

Transfer of the allowance: Some accountants will tell you that the allowance is not transferred. Rather the £220 is just a deduction off the tax bill of the other partner. This is a technical matter which does not affect most people.

Abroad: Normally the person receiving the allowance must have an income below £43,000. But if both spouses live abroad and have some income arising in the UK it is possible that someone with a high overseas income will still be able to receive the transferred tax allowance.

Take-up: When the policy was announced in December 2013 the Government estimated that 4.2 million couples would be eligible for the new allowance. HMRC says it hopes all of them will get it. But the latest figures show less than a third of them, around 1.3 million, have in fact claimed.

More information on Marriage Allowance.

MARRIED COUPLE'S ALLOWANCE 
The Marriage Allowance cannot be claimed if either spouse was born before 6 April 1935 because they can already get a bigger tax break called Married Couple’s Allowance. That is a hangover from a concession that all married couples used to get until it was scrapped from 6 April 2000. But an exemption said that anyone aged 65 then (ie born before 6 April 1935) could still have the allowance.

Married Couples Allowance is worth up to £835.50 off one partner’s tax bill. If income exceeds £27,700 the allowance can be reduced but it can never be less than £322. It can be claimed by a member of a couple now if one of them meets the age criteria. So an 83 year old marrying a 55 year old can claim it. It is normally given to the spouse with the higher income and part of it is transferable to the other spouse. If you can claim it then get it backdated for up to four tax years if you were eligible then. More information on Married Couple's Allowance

BLIND PERSON'S ALLOWANCE
There is a third allowance that a married couple can transfer between them. The Blind Person’s Allowance is £2290 in 2016/17 so is worth £458 to a basic rate taxpayer. However, if the blind person cannot make use of it all – has an income below £13,290 in 2016/17 – the unused portion of it can be transferred to their spouse.

To qualify for Blind Person's Allowance in England, Wales, and Northern Ireland you have to be registered with your local councils as blind or severely sight impaired. In Scotland you qualify if you cannot do work that requires sight. If both partners qualify they each get one allowance. More information on Blind Person's Allowance.

30 January 2017
vs 1.82


Thursday, 19 March 2015

TAX CUTS FOR THE BETTER OFF

UPDATE 13 MAY 2015
It is likely in view of Conservative election promises that the rises in personal allowance and higher rate threshold will be higher in the earlier years than set out here. See Income tax cuts ahead. That does not affect the overall conclusion.

BUDGET 2015 CUTS IN TAX
The biggest income tax cuts from the 2015 Budget will be enjoyed by the better off. Anyone with an income between £43,300 and £120,000 will see a cut of £487 in their income tax in 2017/18 compared with 2014/15 . People with incomes between £11,000 and £41,865 will see a cut of less than half as much - just £200 in 2017/18. And those with an income below £10,000 will see no change as they pay no income tax anyway.

Year by year over the next three tax years 2015/16 to 2017/18 the biggest cut in income tax will be enjoyed by the better off sixth of taxpayers - about 5 million out of around 29 million income tax-payers. Only above £150,000 - the top 1% - do the better off pay more in 2017/18 than in 2014/15 (indicated by a negative cut in the table). Incomes not included in the left hand column will see tax cuts between the amounts in the row above and below.


Income tax cut on previous year
                Tax year 2015/16 2016/17 2017/18 Total cut 2017/18
Income
£10,000 and below £0.00 £0.00 £0.00 £0.00
£11000-£41,865 £120.00 £40.00 £40.00 £200.00
£43,300-£120,000 £224.00 £103.00 £160.00 £487.00
£150,000 plus £16.00 -£23.00 -£80.00 -£87.00

The tax cuts follow from the increases in the personal tax allowance and the threshold at which higher rate tax is paid announced in Budget 2015.

2014/15 2015/16 2016/17 2017/18 Total increase
Personal tax allowance £10,000 £10,600 £10,800 £11,000 £1,000
Higher rate threshold £41,865 £42,335 £42,700 £43,300 £1,435

The Chancellor mentioned this benefit for the better off thus:

"For the first time in 7 years, the threshold at which people pay the higher tax rate will rise not just with inflation – but above inflation."

However, the consequences were not made clear either in the speech or in the detailed notes. The rather different figures there remain a puzzle.

Future rises
The Chancellor also made clear his - and his party's - plans for a personal allowance of £12,500 and a threshold for higher rate tax to begin at £50,000.

"an £11,000 personal allowance. An above inflation increase in the higher rate. A down-payment on our commitment to raise the personal allowance to £12,500 and raise the Higher Rate threshold to £50,000."

If that is done in the next Parliament the Government will need increases in the final three years of £500 a year on the personal allowance and £2233 a year on the higher rate threshold.

Tax threshold changes 2015/16 to 2017/18, projected to 2020/21
2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 Increase
Personal tax allowance £10,600 £10,800 £11,000 £11,500 £12,000 £12,500 £1,900
Higher rate threshold £42,385 £42,700 £43,300 £45,500 £47,700 £50,000 £7,615

The result will be that basic rate taxpayers with incomes between £12,500 and £42,385 will see a tax cut of £380 in 2020/21 compared with 2015/16. But higher rate taxpayers with incomes of £50,000 to £121,200 will enjoy a tax cut in 2020/21 over 2015/16 of £1903 - five times as big.

Past changes
These plans reverse the trend over the current Coalition government of squeezing higher rate taxpayers - either to deny them any of the tax gain given to basic rate payers or to limit the gain to the same cash amount. The higher rate threshold was cut or frozen for the three years 2011/12 to 2013/14. In 2010/11 the threshold was £43,875, which is higher than it will be in 2017/18.

Excluded
These calculations only look at income tax not at National Insurance. They exclude the new savings allowance and marriage allowance and do not include the extra personal allowance which some over 67s got in 2014/15 and some over 78s got in 2015/16. After 2016/17 these age allowances will finally disappear.

13 May 2015
vs 1.01

Monday, 16 March 2015

TAX BONANZA FROM PENSION 'FREEDOM'

UPDATED 16 JUNE 2015

The Chancellor is set to make £17 billion in extra tax over 16 years from Freedom and Choice in Pensions that began on 6 April 2015. From that date millions of people over 55 have the right to cash in their pension pot if they want to do so.

Usually cashing in a pension will not be a good idea. But where an individual does it they will face a big tax bill on the money taken from the pension fund. Three-quarters of the withdrawal will be added to their income and taxed. So the whole fund will normally have at least 15% taken off and paid to HMRC. If the total income in the year exceeds the level at which higher rate tax is paid - £42,385 in 2015/16 - then 40% tax will be paid on some of it. And if the total income is taken above £100,000 the tax rate will be more as the personal tax allowance is withdrawn - effectively a 60% tax on £21,200 of income - and then at £150,000 the top rate 45% tax will be due.

The deduction will normally range from 15% to 45% of the total withdrawn and settles down at 34% for the very highest combinations of income and pension withdrawals. Some with other income which is too low to pay tax could face deductions below 15%. Table 1 below shows the tax taken from the total pension withdrawals at various incomes. Table 2 shows the percentage of the total withdrawal that will be taken in tax.

Both tables use the total pension withdrawal including the tax-free part and give the tax taken on the taxable part. So £10,000 withdrawal has £1500 tax deducted which is 20% tax on three quarters of the total.








These tables give the tax due. In fact the amount taken off by the pension provider will be different. In many cases it will be more as HMRC insists that they assume the same withdrawal will be made every month for the rest of the tax year. That will result in much more tax being taken off in many cases. Any excess can be reclaimed using HMRC Form P53 or on the self-assessment form after the year end. In some circumstances the tax taken will be too little and further tax will be due.

This Fidelity calculator will work out the tax deduction if you enter your pension pot and income.

The tables assume that 25% of your pension fund can be taken tax-free. If you were a member of a scheme at work before 6 April 2006 it is possible that you can take a bigger percentage - conceivably up to 100%. That is called protected tax-free cash (sometimes called a pension commencement lumpsum). These arrangements are easily lost especially if you transfer your money from one scheme to another. Ask your scheme or adviser to tell you if this applies to you. If it does then the tax charge on the whole fund will of course be less. 

Warnings not given
Although pension providers will have to point out that some tax may be due on a pension withdrawal, they will generally not calculate the amount due or the amount that will be taken, though some have online calculators you may be able to use. The Government's Pension Wise service will not do the calculation either. So use the Fidelity calculator to work out your own approximate tax deduction.

Good independent financial advisers should be able to work out the tax you will have to pay - and the protected tax-free cash if you are entitled to it. The best independent financial advisers are chartered or certified financial planners. Find one through vouchedfor or unbiased. If you have a large fund the cost of consulting one may well be worthwhile. But if your fund is small they may not be interested in your business.

Remember that the money you take out will have to last fro the rest of your life. The Government has produced a life expectancy calculator to show what you can expect.  

Treasury savings
In the 2014 Budget when the pension 'freedom' was announced the Treasury estimated that the extra tax taken would be £320 million 2015/16 rising to £1220 million by 2018/19, a total of £3 billion in the first four years. The Treasury will continue to make money from the change until 2030/31 taking an extra £17 billion over those sixteen years. It will take another 56 years before that £17 billion is recouped from reduced tax receipts of around £300m a year on annual pensions that are not being paid. These estimates may well be too low as enthusiasm for withdrawal seems higher than anticipated. Updated figures published in the Budget on 18 March 2015 broadly confirmed the amounts estimated a year earlier.

Not annuity buy-back
These calculations are for pension withdrawals made from 6 April 2015. They do not apply to the proposal to sell annuities. Normally the tax due on a lump-sum payment for an annuity will be more than the figures show here as there will be no tax-free element in the amount. The details of how annuity buy-back might work are awaited and it will not happen until 6 April 2016 at the earliest.

16 June 2015
Vs 1.4

THE BUDGET LEAK THAT WASN'T

UPDATE 19 MARCH 2015
No increase in the personal allowance for 2015/16 was announced in the Budget on 18 March. So Nick Clegg's pressure and his hopes for one clearly didn't work.
                                                                                                             

"Nick Clegg announces increased Worker's Bonus for low and middle earners.

"Nick Clegg has said that next week's budget will include an extra £100 for low and middle earners on top of tax cuts already promised"

So began a statement on the Liberal Democrats website on Friday 13 March timed at 10:08. 

It seemed a clear preview of the Budget due in five days time. Not least because it was picked up by a press release service and circulated as a Lib Dem press release. 

There had already been suggestions in the press that another £200 or £400 on the personal tax allowance might be announced in the Budget. But this politically managed expectation is very different from a clear statement by the deputy Prime Minister that the Budget "will include an extra £100". To give people "an extra £100" means raising the personal tax allowance by £500 - even more than other papers had been speculating in the previous week. 

So the Liberal Democrat statement was big news, both for the amount of the rise and the fact it was a clear Budget leak - albeit by a member of the Government. 

When I rang the Lib Dems press office no-one had heard of the press release and a press officer denied it had been issued. I pointed out it was on the front page of their website and being circulated as a press release. After hasty consultations she continued to deny it and promised to call back.

She didn't. When I checked about an hour later the original link on the website www.libdems.org.uk/nick-clegg-announces-increased-workers-bonus failed to work and when I found one that did link to the story with a more acceptable url, three statements had been amended. 

  • The headline "Nick Clegg announces" was changed to "Nick Clegg pushes for". 
  • The phrase "next week's budget will include" had been watered down to "he would like to see next week's budget include" 
  • And "an extra £100" had been replaced by "as big a tax cut as possible". 
One thing that hadn't changed was the time on the story. It was still timed at 10:08 though this version had been published more than an hour later. 

I called the press office. They said it had been an error which was corrected. Then a top press spokesman in Nick Clegg's office called me to deny that anything had been issued as a press release. He blamed 'a junior member of our staff' who had 'misinterpreted' an interview Nick had done for the Mail and put it on the website. He went on to stress this "was not an announcement" the person "had no access to any government information whatsoever" and "no press release was issued at all". All my pressure had done was to get a very junior member of staff hauled over the coals.He added "I promise you Paul, it is not true".

So the Lib Dem defence is that just days before the Budget and two months before the General Election, a very junior member of staff was able to update the Liberal Democrat website on the basis of a misunderstanding of a newspaper story published the day before without anyone checking it until a journalist rang to confirm it.

PS if you click on the original link you get to an example of Lib Dem humour. Its 'page not found' page says 'Just like David Cameron's courage, this page does not exist' and invites you to comment on the PM's refusal to take part in a TV debate

16 March 2015
vs 1.00

Monday, 9 March 2015

SMART METERS - DO THEY THINK WE'RE DUMB?

Over the next five years every home and small business in the UK should have their electricity and gas meters replaced with new 'smart' meters. The plan is to put 53 million meters into 30 million homes and small businesses in England, Scotland, and Wales by 2020. Which would be 20,000 meter fittings every working day. That target will not be met as the programme is already behind schedule.

I put 'smart' in inverted commas because these meters are not in fact very clever. They simply report back to the supplier how much electricity and gas the customer uses each day and, with the customer's permission, every half hour. More frequent reporting will be available in future.

The meter also feeds some information about current use to what is called an 'In Home Display' or IHD. The Government now says there will be one IHD which will cover both electricity and gas if you have it. It will normally be mains-powered and fixed in position but there will be an option for a separate portable battery powered unit. The IHD can show how much fuel is currently being used and can display the cost in £.p. Some of them will have a traffic light system - glowing green when consumption is low through amber to red when it is high. They can also do calculations of past and future use.

Costs
The costs are certain, though the amount will rise. Between the 2012 and 2013 estimates they rose by £1.4 billion. The latest estimate is the Impact Assessment published in January 2014. Estimates show that manufacturing and installing 53 million meters, communication devices, and IHDs in 30 million premises will cost around £7bn. There is also the need for a new communications infrastructure network. That is due to be completed later in 2015. The 2013 Impact Assessment put the total costs of the programme over 20 years at £12.1 billion. We will all pay that through our energy bills which will cost more than £400 per household.

Savings
Estimates of savings are more speculative.

Customers will save money because they will use the information from the IHD to cut their energy consumption. That saving is put at £6.3bn over 20 years which is based on a 2.8% cut in electricity use and 2% in gas use. The estimated savings rose by almost 50% between the 2012 and 2013 estimates of the benefits.

Achieving those savings requires active engagement by customers. But many will not be engaged and will end up paying more. A recent report by DECC on some pilot smart meter installations found that initially 96% used their IHD but about four out of ten disconnected them during the research. None were able to identify any clear savings due to the IHD. The Public Accounts Committee estimated in 2014 that customers would save on average about £26 a year.

Energy suppliers will save an estimated £9.1 billion. More than a third of that will be from ending meter reading (£3.4bn) and having fewer customer complaints £1.3bn). Another big saving of £1.6bn comes from reducing the cost of customers switching supplier. And a further £2.6bn is savings made in managing debt and theft.

Networks and the generators will save £1.8bn between them from smoothing the peaks and troughs of demand and generating less power.

Finally, carbon related benefits and air quality improvements will add £1.6bn to bring total savings to £18.8bn.

These figures are estimates made in 2013 in the Government's revised Impact Assessment.

Who gains?
Only a third of the savings will be made directly by consumers. And only for those who engage with the energy saving opportunities. About 60% of the savings will go to the industry. The hope is, of course, that suppliers, generators, and transmitters of electricity and gas will pass some of those savings on. They may. But some of their savings - on debt management and prepayment meters for example - will come at a direct cost to the customers affected though they may be passed on to others. The savings from carbon reduction and air quality improvements will not be felt directly in the pocket by consumers.

So while the customers will pay for the £12.1 billion cost of the smart meter programme through their bills, the savings of £6.3 billion will be felt only by those who adjust their behaviour and and some of the remaining £12.5 billion only if the industry passes on its own savings to customers in lower prices.

The energy industry has a very poor record in passing on savings. In 2014 they took many months to pass any of the gains from the fall in the wholesale price of gas and none reduced electricity prices even though much of that is generated by burning gas.

Extra costs.
The impact assessment does not take account of one significant extra cost.

Bills will no longer be estimated as they will be based on actual usage over a month. That is promoted by the Government as good news for consumers. But it will be expensive. For many years energy suppliers have encouraged customers to agree to pay estimated bills monthly by direct debit rather than quarterly based on meter readings. The result is that the firms have kept hundreds of millions of pounds on their books belonging to customers. The value of that is shown by the fact that customers who pay a more accurate quarterly bill can be charged 7% extra or more more than monthly direct debit customers. Smart meters will end that system. So customers will pay a high price for the accuracy of their bills.

This money the suppliers routinely hang onto is separate from the £400m that Ofgem found they had wrongly kept when customers switched to another supplier. In February 2014 it ordered firms to refund this money. It does not bode well for hopes that the industry would voluntarily return to customers the savings it makes from smart meters.

Time of use
The report also makes no assessment of the costs or savings to be made from what are called Time of Use tariffs. Once the smart meter network is rolled out suppliers will start making customers manage the load, especially in electricity supply. In other words when demand is high the price goes up. When demand is low the price comes down. And with half hour reporting - and it may be more frequent in future - time of use tariffs could be very specific.

For example, energy could be more expensive between 7am and 9 am when most people are getting up, putting on the kettle, and making breakfast. Or between 5pm and 8pm when evening meals are being cooked. The result would be that poorer families could not afford to eat dinner at dinner time.

Ultimately the cost of power could rise during the adverts in soaps or interval in football matches when millions put the kettle on make a cup of tea.

With time of use tariffs the customer is drafted in to manage the national power load. By pricing people out of energy use at peak times the peaks and troughs of usage - so irksome to the engineers managing the grid - are smoothed out.

Debt and disconnection
Smart meters will also enable energy suppliers to manage debt and disconnection remotely. Customers can be switched from credit payment to prepayment by the supplier without changing the meter. It also means that if someone has not paid their bill then the supplier will be able to throw a switch and disconnect them.

Organisation
The delivery of this programme is in the hands of the six large and dozen smaller energy suppliers. They will each fit the meters for their own customers. Which could mean 18 different engineers visiting the same street or block of flats to do the same job in neighbouring homes.

The central Data & Communication Company (DCC) is Capita. It will be responsible for collecting the data sent back by smart meters and forwarding it to the right energy supplier, the networks and energy services companies. Others may also get access to it. In 2014 the Information Commissioner expressed concerns about the security and use of this data.

The data network will be run by two companies - Arqiva will cover northern England and Scotland using a long-range radio network and Telefonica UK will cover the rest of England and Wales using a cellular technology with what it calls 'mesh technology' to fill the gaps in the cellular network. The target is to cover 99.25% of dwellings - which will leave 225,000 premises unconnected. Apart from remote dwellings, tall buildings and multi-occupied premises proved problems that have not been solved.

Meanwhile Smart Energy GB will spend £25.4 million in 2015 to persuade us all that the smart meter programme is a good thing. What it calls building consumer awareness and understanding of smart meters and encouraging consumer engagement.

Select Committee
On 7 March 2015 the Energy and Climate Change Select Committee expressed concerns about delays and unresolved challenges in the smart meter programme. "Without significant and immediate changes to the present policy, the programme runs the risk of falling far short of expectations. At worst it could prove to be a costly failure."

In December 2014 the Ontario auditor general Bonnie Lysyk said that the state's smart meter programme had cost twice its estimate and made few if any savings for customers or suppliers and failed to reduce energy consumption.

15 January 2016 
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Sunday, 8 March 2015

THE GREAT TAX TAKE

Every year banks and building societies take nearly £2 billion straight out of the savings accounts of millions of their customers and pass it on to HM Revenue & Customs. They do this without asking or checking if those customers are taxpayers or not. Half the UK population does not pay income tax. The result is that more than £200 million is given to HMRC which should never have been taken at all. 

Don’t blame the banks and building societies. They are obliged to hand HMRC this annual windfall. And for ten years HMRC has made no little effort to give it back. The last campaign appealing to everyone was in 2004. It got very little response as did targeted messages to low income pensioners in 2008 and 2009. Thirty million people in the UK – young and old – do not pay income tax and many of them have savings. But HMRC happily taxes them unless they ill in the right form to ask it to stop. And doesn't repay tax it shouldn't have had until they fill in another form - one for each year the great tax take applied.

In 2014/15 you can have £10,000 income without paying a penny of income tax. If you were born before 6 April 1948 the amount is slightly higher – £10,500 for those born April 6, 1938 to April 5, 1948 and £10,660 for anyone born before 6 April 1938. These allowances are personal – so it does not matter what income your wife or husband may have. If your total income is at or below that level then you should pay no tax on it and every penny of interest your savings earn should be tax-free. But unless you fill in the correct form tax at 20p in the pound will be deducted from that interest automatically. 

A lot of the people affected are over 65. But there are also children, teenagers, low paid workers, full time mothers, non-working spouses, people with illnesses or disabilities, in fact anyone of any age with an income below the £10,000 personal allowance who has savings. HMRC gets some of their savings interest whether they should pay it or not. It gets at least £200 million a year it should not have and it may be a lot more.

To stop HMRC getting this annual bonus you need to fill in a form called Form R85. You can download it from the gov.uk website – just put ‘tax on savings interest’ in the search box of that site and scroll down to find it. Fill it in and give it to the bank or building society which holds your savings. You will need one for each. Some current accounts pay interest so they will need one too. That will stop this tax being wrongly taken in future.

Next you have to claim it back for previous years. You need another form called Form R40 from the same web page. You need one for each year back to 2010/11. In those years the amount of income you could before tax is due was lower – just £6475 for those under 65 in 2010/11. But if your income was low enough you could claim tax back from those years too. 

You will get back one quarter of the net interest your savings have earned in those years. It could be hundreds of pounds. Fill in the forms and send them to HMRC, Leicester & Northants (Claims), Saxon House, 1 Causeway Lane, Leicester LE1 4AA. In a few weeks you should get a cheque refunding the amount wrongly taken – plus a small amount of interest on it. 

Dolly is 61 and has not worked full time since she was made redundant at 55. She has a couple of part-time jobs locally but she is lucky if she earns £150 a week. Her £30,000 redundancy money is sitting in a fixed term savings account where it has been for some time and earns her around £1000 a year. But she is left with just £800 after HMRC snaffles £200 of this. She decides to claim the over paid tax back to 2010/11. She is owed even more for the earlier years when rates were higher and before she took out the fixed rate bond.  She even claims the bit of tax paid from April to June this tax year as well. And she registers with the bank to have the interest paid gross in future. So she gets nearly £1000 back from HMRC and is £200 a year better off in future.

Even more tax back
There is another tax refund that some people with savings could get even if their income is a couple of thousand pounds or so above the personal allowance. Savings income just above the personal allowance is taxed at a lower rate – 10p in the £ rather than 20p in the £. But it is still deducted by banks and building societies at the full 20p.

It works like this. Interest on savings is like cream – it floats on top of the rest of your income such as pensions or earnings. So if that other income takes up all your personal allowance or a bit more the savings interest that floats on top of that is taxed. But if it is within £2880 above your personal allowance the tax rate on it is only 10% (called the starting rate) instead of the basic rate of 20%. So half the tax taken automatically should be refunded.

Violet is 75. She has state and private pensions totalling £11,500 a year. And interest from her £50,000 which is £1000 this year. That is above her personal allowance of £10,500 so she pays some basic rate tax on £1000 of her pensions. But the £1000 interest takes her income only up to £12,500 and that is within the £10,500+£2880=£13,380 limit for the starting rate band. So the £1000 of interest is taxed at 10% not 20%. In other words she should pay £100 tax on it not the £200 that was automatically deducted. She can claim this back using form R40. She can also claim back for previous years as the £10,500 allowance has not changed for people of her age for some time. Altogether she should get several hundred pounds.

You claim it back using the same form Form R40. If you have some savings income and your taxable income is £12,880 or less then you can claim back half the tax taken on the savings. If you were born before April 6, 1938 it can be as high as £13,540 and £13,380 if you were born 6 April 1938 to 5 April 1948. Previous years allowances and bands are set out in the table.


















This story first appeared in Saga Magazine April 2014. 
Published here with updates and amendments 8 March 2015
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Saturday, 7 March 2015

TAX-FREE SAVINGS INTEREST

If your total taxable income is no more than £15,600 in 2015/16 any interest paid on your savings will be tax-free. But only if you fill in a form so that your bank or building society knows it should pay it gross. If you don't fill in the form R85 then 20% basic rate tax will be automatically deducted from your interest.

If your income before adding on your interest is less than £15,600 but your total income including interest is more than £15,600 then some of your interest will be tax-free. But the bank or building society will still deduct tax at 20p in the £. You will have to claim back the excess using another form called R40. 

BACKGROUND
The interest on savings is taxed before it is paid. Basic rate tax is taken off automatically. So at the end of the year savings interest of 1% a year on £1000 is credited not as £10 but as a post-basic-rate tax amount of £8. Almost £2bn tax is automatically deducted from interest every year. 

If your income is low enough not to pay tax (below £10,600 in 2015/16) then you can claim back the £2 using a form called R40. And can stop it being deducted in future by filling in another form called R85. But £200m a year is taken from non-taxpayers and never reclaimed because people do not bother to do so – or do not know they can. 

NEW RULES
From April 2015 on top of the £10,600 personal allowance another £5000 of savings interest will be tax-free (in fact taxed at 0%). But – and it is a big but – that only applies in full if the person has no other income on top of their personal allowance. 

Think of savings interest as floating on top of other income from earnings or pensions. Like the cream on the milk. The first £10,600 of total income – cream and milk – is free of tax. The next £5000 is taxed at 20% if it is milk (earnings or pension) but at 0% if it is cream (interest). So someone with £10,600 of earnings or pension can have £5000 of income from savings on top of it tax-free. But if they have £11,600 earnings or pension then only £4000 savings interest is tax-free. And if they have £15,600 of earnings and pension then they get no tax-free savings.




HOW MUCH
For those it helps it can be valuable. Someone with state and private pensions which come to £10,600 pays no tax on those as they use up the personal tax-free allowance. And if they have £500,000 in a savings account earning 1% a year then all the £5000 interest will also be tax-free from April. That would be a saving of £712 compared to the current regime for these half-millionaires. Or as the Chancellor said in March when relaunching the new scheme “Putting money in the pockets of those who need it most.”

The cost of this concession to the Exchequer is expected to be more than £200m a year – or more if married couples move funds between them to take advantage of it.

WHAT NEXT
To see if you can gain from the concession us the Government's free calculator. If you can then you should register to get your interest paid gross using Form R85. If you have paid tax on savings interest when you shouldn't, then claim it back to 2010/11 on Form R40. You will need one R40 for each tax year. To go back to 2010/11 you must claim before 6 April 2015. From that date the earliest you can go back is 2011/12. The rules in past years were different. If your total income was less than the personal allowance then you can reclaim all the tax deducted from your savings interest. And if your income was no more than around £2500 or so above the personal allowance you can claim back half the tax deducted. Full details in The Great Tax Take.

NB the new 65+ Guaranteed Growth Bond from National Savings & Investments always has basic rate tax deducted - you can't use Form R85 to stop it. But you can use Form R40 to get it back.

This blogpost is an expanded version of my Money Box newsletter for 6 March 2015. If you want future newsletters every Friday sign up here

10 March 2015
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Tuesday, 3 March 2015

BANKS TO REPAY MILLIONS

UPDATE: DEADLINE APPROACHING
You must make your claim by 18 March 2016

Two million people who were mis-sold card protection insurance can get compensation which may be more than £300 - but only if they claim it. 

You should make a claim if you have got a letter that begins like this:




Why am I due compensation?
The compensation is for insurance which was supposed to protect you from financial loss if your credit or debit card was stolen or misused. It promised to reimburse you for any money spent on the card after it was lost. But it was a waste of money.

The banks selling the insurance knew perfectly well that they would bear any loss incurred after you told them you had lost your card. And they also knew they would reimburse all but £50 of any money stolen before they were notified – and in practice they usually reimbursed the first £50 too. So this insurance was useless and should never have been sold. Selling it amounted to fraud - it was misleading you to make money. Don't expect any prosecutions. But you can expect compensation.

When will I get a letter?
Letters and claim forms are being sent out in August and September to the people who can claim. The four page letters are from AI Scheme Limited and include a four page form headed CARD SECURITY PRODUCT: COMPENSATION CLAIM FORM.

You must complete and return that form by a deadline in order to get the compensation. Don't worry if you cannot remember the dates or details of when you started or ended the product. AI Scheme will have that information.

Section B of the claim form has an empty box where you explain why are you are claiming compensation. 

The first page helpfully explains why the insurance was mis-sold. 
  • You did not need this cover as the bank or card issuer is responsible for transactions after you report the card lost or stolen. 
  • You are only liable for a maximum of £50 of losses before you informed the card issuer. In practice many card providers covered that amount too.

If you paraphrase that information into the box adding ‘these matters were not explained to me’ then your claim will almost certainly be accepted.

The original form (not a copy) must be completed with your name and signature and dated. It comes with a pre-paid envelope. The quicker you return it the sooner you will get paid. It must arrive by 18 March 2016. You should hear back from AI Scheme within eight weeks. It is just about certain that everyone making a claim will get compensation. You will be sent a cheque for the premiums you paid, less any money paid out on the product, plus simple interest at 8% a year on the amounts you paid from the time you paid them to September 2015. Basic rate tax will be deducted from the interest but not the premiums. The total could be more than £300 per card.

If you return the form the insurance you have will be cancelled. Some people like the product and may decide to keep it and not make a claim. You must choose between keeping the product and making a claim. My advice? Make the claim. If you want the protection offered you can always find a similar product on the market. But generally these products are very expensive and offer very poor value for money.

Lost or missing letters
If you have had the letter and thrown it away or lost it you can get another from AI Scheme. Do not use a copy or a downloaded version as it will not be accepted. 

Firms and brands
The insurance was marketed by a firm called Affinion International through almost all the major High Street banks. The firms in the scheme are 

  • Allied Irish Bank
  • Bank of Scotland
  • Barclays
  • Capital One (Europe)
  • Clydesdale
  • Cooperative Bank
  • Danske Bank
  • First Trust Bank
  • Halifax
  • HSBC
  • Lloyds
  • NatWest 
  • Northern Bank
  • Royal Bank of Scotland
  • Santander
  • Tesco Personal Finance
  • Yorkshire Bank

These firms have all agreed to reimburse customers for the premiums they should never have paid. The premiums cost around £25 per card per year and the mis-selling went on for more than eight years. With 8% simple interest on the premiums from the day they are paid to September 2015 the total compensation could be more than £300 per card.

The brands covered are 
  • Card Protection 
  • Sentinel 
  • Sentinel Gold 
  • Sentinel Protection 
  • Sentinel Excel 
  • Safe and Secure Plus.
If you bought or renewed this insurance from a bank, credit card provider, or Affinion International between 14 January 2005 and 31 August 2013 and have not received a claim form by the end of September contact the scheme helpline on 0800 678 1930 or 0208 475 3103.

A similar scheme for a similar mis-sold product by another insurer called CPP resulted in barely a third of the people involved ever being paid. So it is important you make sure you get your entitlement.

You can get more information from AI Scheme and from the Financial Conduct Authority.

If you have one of these products that was sold as part of a current account you paid a monthly fee for, then it is NOT covered by the scheme. You should complain about it to the bank you bought it from using the information about mis-selling above. If you are refused go to the Financial Ombudsman Service.

If you have one of these products sold to you by a bank or firm not in the list above you should complain about it to the firm you bought it from using the information about mis-selling above. If you are refused go to the Financial Ombudsman Service

13 September 2015
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