Featured post

HOLD THOSE PREMIUM BONDS

Premium Bonds will give a poorer return from the May 2017 draw. So are they still a good place for your savings? The changes to premium b...

Sunday, 24 May 2015

WHO WILL PAY FOR CARERS' PENSIONS?

A hundred thousand severely disabled people are being told they must set up a pension scheme for their carer. And no-one knows how the cost of doing so will be met. 

The people affected take what are called direct payments from their local authority to arrange their own care. The system was introduced in 2012 in England, Scotland, and Wales as a way of giving disabled people more independence and control over their care needs and how they were met. 

The local authority gives them the money - a direct payment - to pay for a carer or carers depending what they need. That payment is enough to include all the costs of employment - including national insurance, sick pay, holiday pay and so on. 

In general it has been seen as a great success - better for the disabled person and cheaper for the local authority. But it does mean that the disabled person becomes an employer. And from 1 June 2015 even the smallest employers will begin to be brought into the auto-enrolment of workplace pensions. They will have to provide a pension for their employee and pay into it. 

Who is auto-enrolled?
The people affected will have a carer who is 

  • their employee, 
  • aged 22 to state pension age (65 for a man and around 62.5 for a woman), and 
  • paid more than £10,000 a year - which is £192.30 a week or £833.33 a month. 

Someone on minimum wage of £6.50 an hour would reach those levels at 30 hours a week. And carers paid more than that - as many are - will be well above them. All figures are for gross pay.

People who are outside those ages or earn less than £10,000 will not have to be automatically enrolled. But may request to join a pension and if they do one will have to be provided. In some cases the employer will have to pay contributions too.

Employees can opt out of the auto-enrolment pension. But the employer must then re-auto-enrol them every three years. 

What will it cost?
The cost at first is likely to be modest. The contributions into the pension are 1% from employee and 1% from employer of the gross pay above £5824 (up to a maximum of £42,385).  So a carer working 35 hours a week on £9 an hour will earn £16,380 a year. The cost of 1% of the band of earnings which will be £8.80 a month which the disabled person will have to pay into a pension scheme. The carer will also get less. Another £8.80 will be taken off their gross income and paid in. However, they will get tax relief on that amount so the net cost will be £7.33 off their net pay.

But from October 2017 the contributions double to 2% each and then from October 2018 they rise to 3% from the employer and 5% from the employee. So the costs will by then be more significant, costing the disabled person £26.26 a month and the employee £36.67 on gross pay of £1365 a month.

Commercial employers can get tax relief on the payments they make - they count as a cost of employment and reduce the corporation tax they pay. But this tax relief is not of course available for an employer who is not a company and makes no profit. 

When will it happen?
Small employers with fewer than 30 employees will have to start auto-enrolment on what is called their staging date. That is the first of the month from 1 June 2015 to 1 April 2017. The date depends on the employer's PAYE reference number. A year before that date the employer will be written to by the Pensions Regulator, and again at six months and one month. Failure to comply with the new auto-enrolment duties can result in a fine of up to £400. Some disabled people have found the fairly small print letters and the tone of them intimidating.

The Pensions Regulator estimates that 100,000 disabled people will have to enrol their carer. That implies about 5000 a month will enter the system over the final 21 months of staging. 

The Pensions Regulator has more information online. But a recent survey by the Office for National Statistics found that 27% of disabled adults had never used the internet. 

Who will pay?
There seems little doubt that the local authority making the direct payment should meet the extra costs of auto-enrolment pensions. They are obliged to meet all the costs of employing the carer. Guidance issued by the Department for health says 

"The local authority should have regard to whether there will be costs such as recruitment costs, Employers’ National Insurance Contributions, and any other costs by reason of the way in which the adult’s needs will be met with the direct payment" (Care and Support Statutory Guidance Issued under the Care Act 2014 para 12.27

and footnote 170 on that page adds 

"Employers (including direct payment holders) will be required to comply with the duty to automatically enrol eligible workers into a qualifying workplace pension scheme and to meet the minimum contributions required by law."

But the local authorities seem completely unprepared. Will they review and revise the direct payments? How quickly will they do that? And how will they estimate the extra costs?

No-one seems to know. The Association of Directors of Adult Social Services told me it did not know but would start collecting some data in the future. And the Local Government Association told Money Box it did not know.

The Department for Work and Pensions - which is responsible for direct payments - told me 

"The local authority should consider these employment costs, including automatic enrolment pension contributions, when making the direct payment award."

But the Department would not say if that meant the local authority had to meet the costs nor how they would do so.

It will be hard for a local authority to work out the cost of auto-enrolment. The staging date system means that disabled people will be brought into the scheme depending on their PAYE reference number which bears no relation to the area where they live. And the cost of contributions will depend on the exact amounts carers are paid. There seems to be no mechanism for the disabled person to convey this information back to the local authority. And it is not clear how or when the care package that includes these costs can be revised.

More information
You can listen to the Money Box item on auto-enrolment and disabled people on Money Box 23 May 2015 

24 May 2015
Vs. 1.01


Wednesday, 13 May 2015

INCOME TAX CUTS AHEAD

The 2015 Conservative Manifesto promises that the personal tax allowance will rise from its current £10,600 to £12,500 by 2020/21. And the higher rate tax threshold will increase from £42,385 to £50,000 over the same period. That is a rise equivalent to 3.4% a year every year, way above the forecast levels of CPI inflation which rises from 0.2% in 2015 to 2% in 2019 (Economic and Fiscal Outlook, Office for Budget Responsibility, March 2015 Table 1.1).

If the two levels are raised from their 2015/16 level to the promised amounts in even steps of 3.4% they will rise as shown in the table below.

 Current                   rising in equal steps  Manifesto
   2015/16   2016/17   2017/18   2018/19   2019/20    2020/21
Personal tax allowance £10,600 £10,955 £11,325 £11,700 £12,095 £12,500







Higher rate threshold £42,385 £43,810 £45,280 £46,800 £48,375 £50,000







NB allowances and threshold rounded to nearest £5. For the value of these cuts to taxpayers see Tax Cuts for the Better Off. Broadly they are worth £380 by 2020 to basic rate taxpayers and £1903 to higher rate taxpayers.

These rises are higher for the next two years than those already promised in the March 2015 Budget which put the allowance and the threshold up to £10,800 and £42,700 in 2016/17 and then to £11,000 and £43,300 in 2017/18. So expect a 'I'm being much more generous now I'm freed of the Lib Dem lead weight' in Budget II 2015. The Chancellor may even use it as an excuse to re-affirm that the idea of raising personal allowances was always his and not Danny Alexander's.

Of course the allowance and threshold do not have to change in equal steps. And it is possible that the generosity will be saved until closer to the next election. But the personal allowance is constrained by another promise - it is now linked to the National Minimum Wage.

The Conservative Manifesto promises that will be more than £8 by the end of the decade. So it must be at least £8.01 by no later than October 2020. It also promises that anyone working 30 hours a week on the minimum wage will pay no income tax - in other words will earn no more than the personal tax allowance. So the personal tax allowance and the minimum wage must rise in step.

At the moment someone on National Minimum Wage will earn £10,296 in 2015/16 so the policy is already fulfilled. Under the rises in the table above that would remain true for the whole of this Parliament until 2020/21. If the minimum wage rises in equal steps it would rise by 3.6% a year to reach £8.01 by October 2020 - via £6.94, £7.20, £7.46, and £7.73. Every tax year 30 hours a week on that pay - which changes in October - would be comfortably below a personal tax allowance which rose in steps of 3.4%.

But it does mean that the Chancellor must watch the Low Pay Commission decisions on what the level of minimum wage will be each October. And that may influence his decision on the personal tax allowance which is linked to his decision on the higher rate threshold.

So he may not be a lame duck Chancellor, but he is certainly boxed in by election promises.

13 May 2015
Version 1.01

Monday, 11 May 2015

LAME DUCK CHANCELLOR?

George Osborne told me he would not be a lame duck Chancellor after the Prime Minister ruled out rises in Income Tax, National Insurance, or VAT for the whole of the next Parliament. In a Tax Pledge on 29 April David Cameron restated and clarified the Manifesto.

  • No increases in income tax rates
  • No increases in VAT - nor an extension of its scope
  • No increases in National Insurance - nor an increase in its ceiling above the higher rate threshold

Those three raise three out of every four tax pounds. So what might he do to bring the deficit down to zero by 2019 as also promised?

Income tax
On income tax his hands are tied further. Not only will it not increase, but £7 billion will be spent raising the personal allowance from £10,600 this year to £12,500 by 2020/21 and raising the threshold where higher rate 40% tax starts from £42,385 this year to £50,000 in 2020/21.

Two other pledges on income tax also constrain him.

  • The rise in the higher rate threshold will never be lower than inflation (expected to mean CPI). 
  • The personal allowance will always be sufficient to ensure that no-one working 30 hours on the minimum wage will pay income tax.   

As I explain in Income Tax Cuts Ahead the personal allowance and higher rate threshold will have to rise significantly over the next five years. And there is little wriggle room for any extra take from income tax.

VAT
The Manifesto promise of no VAT increase was extended by the tax pledge to mean no extension in its scope either. So £41 billion of tax saved by zero rating food, new dwellings, domestic passenger transport, books (on paper), newspapers, and magazines, children's clothing, water and sewerage services etc are all safe. As is the 5% rate on domestic energy. And the exemption of domestic rents (cost £4.35bn), private education (£3.8bn), private health services (£2.95bn), finance and insurance (cost £4.5bn), and others is safe.

Oh, and there won't be another pasty tax - charging VAT on  pies sold above ambient room temperature proposed and then all but withdraw in Budget 2012. That would definitely be an extension of its scope. A move the chancellor told me on Money Box on 2 May was 'a mistake' which he had admitted.

National Insurance
At the moment there are two rates for employees. 12% of earnings from £155 to £817 a week (equivalent to £8060 to £42,484) and 2% on income above that. In other words, just as the rate of income tax rises from 20% to 40% the rate of NI falls from 12% to 2%. The tax pledge made it clear that link would continue as the income tax higher rate threshold rises to £50,000.

A lower rate of NI for employees in some pension schemes ends from April 2016. And the self-employed pay in a different way. They pay Class 2 - a flat rate £2.80 a week Class 2 which gives entitlement to state pension. On top of that they pay Class 4 contributions of 9% of earnings between £8060 and £42,385. This 9% rate is lower than the employee rate because self-employed people cannot pay into SERPS or state second pension. But from April 2016 state second pension will be ended and the basic state pension will be around £35 higher than it is now.

From April 2016 Class 2 contributions will be abolished and rolled up into Class 4. So that rate of 9% will have to rise slightly which in any event will stretch the no rises in NI pledge. So could it be stretched further to raise the 9% rate a bit further towards 12%?

Other taxes
The taxes that are left are a long list of things which generally bring in relatively little and some of which are highly unlikely to be increased. So how might the Chancellor raise other tax income?
  • Corporation tax? Brings in £42.3bn (2014/15) but is falling to 20% from April. Irreversible politically.
  • Bank Levy? Collected £2.7bn but HSBC already using it as a reason to threaten to quit the UK.
  • Inheritance tax? Nope. Its £3.7bn take will fall under plans to introduce a special exemption for the family home.
  • Petrol and diesel tax? £27.2bn a year but would be seen as anti-business, anti-rural, and anti-consumer. The above inflation escalator has already been scrapped and inflation rises cancelled. Unlikely.
  • Vehicle Excise Duty (£6bn) is very out of kilter as emissions fall and new vehicles pay less. Time for a rebanding or restructuring.
  • Capital Gains Tax (£5.8bn) one of George Osborne's first reforms in 2010. Could be due another look. But the £13.3bn exemption for gains on the main home unlikely to be changed. 
  • Stamp Duty Land Tax (£10.7bn)? Unlikely as it has only just been reformed.
  • Stamp duty on shares (£3bn) unlikely to change
  • Tobacco duties? They brought in £9.5bn in 2015/16 and could be extended to e-cigarettes
  • Alcohol duties brought in slightly more £10.5bn but tax on spirits, beer, and cider have recently been cut and wine duty frozen. 
  • Air passenger duty (£3.2bn) has recently been restructured and cut.
  • Insurance premium tax (£3bn) is a possibility
  • Landfill tax, climate change levy, and aggregates levy (£3bn) could be sold as a green measure but anti business
  • Betting and Gaming duty £2.1bn - popular but would need further action to prevent offshore avoidance.  
  • Customs duties raise £3bn but scope for significant rises limited.
Even large rises in most of the above could not be used to produce anything approaching the easy £4.4bn from a 1p rise in basic rate income tax in 2016/17, the £5.4bn from a 1% rise in VAT, or the £9.6bn from a 1% rise in employee and employer VAT. All of which have been ruled out for five years.

Negative taxes
Tax credits - paying money to low income households - cost £29.7bn in 2014/15, slightly more than the year before. Despite five years of cuts the Government spent £2bn more on tax credits in 2014/15 than in 2009/10. Further cuts would have to be very tough to save money.

Child benefit - where promises not to change have been made but are slightly vague - cost £11.5bn. Possibly some scope for cuts there.

Version 1.02
13 April 2015