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BENEFITS FOR WIDOWS AND CHILDREN SLASHED

New widows and their children will get thousands of pounds less benefit from April as the Government reorganises the way they are paid. ...

Thursday, 6 April 2017

MOTHERS MUST PROVE THEY WERE RAPED TO GET BENEFITS

From 6 April 2017 the Government will make mothers prove they were raped or sexually abused to get benefits for a third child. 

Rape will be the main exception from the UK's two child policy which now applies to low income families who claim tax credits, universal credit, or housing benefit. It will also apply in some areas for council tax support or reduction. In general there will be no extra money for a third or subsequent child born from 6 April 2017. That will apply to new claims and existing claimants. 

The standard maximum amount for each child in tax credits or universal credit in 2017/18 is £2780 a year. So parents with a child who is subject to the new rule will get nothing rather than £2780. There will be some exceptions. 

Rape
The most controversial exception to the two child rule is for a child born as a result of rape. The mother will be able to claim benefit for the third or subsequent child born from 6 April 2017 if she applies for the exception on grounds of rape and proves that the child was the result of rape or sexual abuse. 

To do that she will have to talk to a social worker, doctor, or nurse and describe what happened and when.

A policy document issued – slipped out some say – on the day of President Trump’s inauguration explained the procedure. A mother claiming this exception would have to “engage with a professional third party” who would provide “Evidence…demonstrating that the claimant’s circumstances are consistent with those of a person who has had intercourse without consenting to it (at a time when the conception of her third or subsequent child might have resulted).” 

The Department for Work and Pensions would then decide whether to grant the exception or not. 

The exception would also apply if there had been a conviction or a criminal injuries compensation payment for the rape.

The Government ignored what it admitted were many responses to the consultation which said "it was unacceptable for Government to ask women to re-live the ordeal of a rape just in order to make a claim for benefit.” It also dismissed “concerns around the mental health impact on victims and pre-conceived perceptions of what a victim should look like.”


The Government also decided that it would include in the rape exception children born as a result of "coercion and control" in a domestic setting. But only if the victim stopped living with the alleged father. “Rather than financial support through benefits for those who do remain with the perpetrator, we think other forms of victim support are more appropriate.”


Twins and multiple births
If someone has one child and then has twins they will get money for both the twins, even though one of them is a third child. But if they have two children already then twins born from 6 April 2017 will have to survive on the money given for their two older siblings. In other words, each child will have half the money it would get if the new additions had been born before 6 April. 

Care
Children adopted from local authority care are exempt from the two child policy as are children living long term with family or friends who would otherwise be in local authority care.

Universal Credit
Universal credit is only available to parents with children in a very few areas - called full service areas. Until November 2018 anyone with a third or subsequent child born from 6 April 2017 who claims universal credit will be directed to claim tax credits instead. Those already on universal credit who have a third or subsequent child from April 2017 will get no extra for it.

Child benefit
These intrusive questions and complex rules will not apply to better off parents who claim child benefit where the means test starts much higher – at £50,000. Those parents will continue to get money for every child including those born from 6 April 2017.

Family premium
Another separate cut in the money given to families also begins on 6 April 2017. Parents making a new claim from this date will not get the extra payment of £545 a year previously paid for the first child. Nor will it be paid for a first child born after 6 April 2017. Family premiums were abolished for housing benefit from 1 May 2016 and for council tax support and reduction schemes from April 2016 in some areas.

Austerity bites. Particularly on families with children.

Vs 1.00
6 April 2017

Saturday, 1 April 2017

UNIVERSAL CREDIT - 80% TAX RATE IN 2017

Some householders who get the new means-tested benefit Universal Credit will keep just 20p of every pound extra they earn – an effective tax rate of 80%. In some parts of England it could be more - losing up to 82.4p in every pound that is earned, leaving them with barely 17p for every extra pound they earn. Those losses could undermine the work incentives which the new system is designed to create. 

For graduates on incomes above £17,775 but low enough to get Universal Credit, the deductions would be more, adding about 2.5 percentage points to those figures. Worst case would be earn £1 keep 15.3p.

Universal credit
Universal Credit began to be rolled out from October 2013 to replace six means-tested benefits and tax credits. By 2020 it should apply to most new claims for help with income or rent. It is paid to people on low incomes who cannot work, are looking for work, or work on very low pay.

It is supposed to let people keep more of what they earn and thus boost incentives both to return to work and to earn more once in work. For every £1 extra earned the credit is reduced by 63p from April 2017 allowing the claimant to keep 37p. Before that it was 65p. This so called ‘withdrawal rate’ of 63p in the pound is said to be much lower than rates under the previous and allowing people to keep 37p of what they earn is seen as an incentive to work. However, that figure of 63p withdrawal rate is only accurate for people who earn less than £157 a week and are not householders.

Taxpayers
Universal Credit is worked out after tax and National Insurance have been deducted. In 2017/18 anyone earning more than £157 a week will pay National Insurance and once they earn more than £221 a week income tax begins. Someone paying National Insurance will lose 12p in the pound before their Universal Credit is worked out. The total loss from NI and reduction in Universal Credit is just over 67p from each £1 they earn. So they keep less than 33p. If they pay income tax as well they lose just over 75p of each pound and keep just over 25p. The calculation were originally confirmed by Pensions Minister Steve Webb in Parliament in 2012 when the details were different. (Hansard, House of Commons, 11 September 2012, col.196).

But that is only part of the picture.

Householders
Universal Credit, despite its name, does not replace all means-tested benefits. It does not include the means-tested reduction in council tax which used to be called Council Tax Benefit but since 1 April 2013 has been replaced by a very similar scheme called Council Tax Support which is operated by local councils. Like all means-tested benefits Council Tax Support is withdrawn as income rises. The standard taper is 20p for each £1 rise in net income (after tax, NI, and Universal Credit withdrawal). In other words for each extra pound of net income help with council tax is reduced by 20p. The result is that for each £1 earned a total of 80p disappears in tax, NI, reduced Universal Credit, and reduced Council Tax Support. The calculation is at the foot of this blogpost.

Localism
In some areas of England and Wales the reduction for every £1 of income earned may be even higher. As part of the transfer to local councils the Government has cut the money it currently pays towards help with council tax. From 1 April 2013 councils get 90% of the money they got to pay Council Tax Benefit. The Government has already said that out of that reduced budget they will have to pay exactly the same benefit to anyone over pension age. Nearly half of all Council Tax Benefit recipients are pensioners so the other half – working age people who can claim Universal Credit – will bear the whole of the funding cut. That will mean a reduction for them of between 19% and 33% according to the Institute for Fiscal Studies (www.ifs.org.uk/comms/comm123.pdf chapter 5). 

Councils have now published the details of their schemes for the fifth year of local council tax support. In 2017/18 the great majority are keeping the taper at 20%. But 18 have a higher taper. Seven have raised it to 30%; another 12 to 25%, and one to 23% . Only three have cut it to 15%. The analysis is done by the New Policy Institute.

In areas which raise the Council Tax Support taper to 25% householders on Universal Credit who pay tax will find that 81p of each pound earned disappears in deductions. In areas with a 30% taper they will lose 82p and keep less than 18p for each extra pound earned in income tax, National Insurance, reduced Universal Credit and reduced Council Tax Support. In the three areas where the taper is 15% people will lose 79p of each extra pound. 

Students
Students on plan 1 or plan 2 who pay in effect an extra 9% tax whose income is low enough to be entitled to Universal Credit lose typically 82.5p in the extra pound keeping just 17.5p. In areas where the council tax withdrawal rate is 30% they keep just 15p in every extra £1 they earn.

It is a tax
Some people object to the total deductions made from a means-tested benefit being called a 'tax'. They say that the reduction in a subsidy from taxpayers is not a tax. Tax, they say, mean a levy on your own money not a reduction in the money the state gives you. 

But it is a tax. And officially so. In his Spring Budget, 8 March 2017, Phillip Hammond confirmed that the tapered loss of this benefit was a tax. He confirmed the reduction in the taper rate by saying "the Universal Credit taper rate will be reduced in April from 65% to 63%, cutting tax for 3 million families on low incomes."

Conclusion
Losing 80% or more of each extra pound you earn is hardly an incentive to work or to work harder. It is almost twice the 42% tax and NI deductions for higher rate taxpayers with incomes over £45,000, three times the minimum wage.
CALCULATION OF TOTAL DEDUCTIONS FOR A TAXPAYER HOUSEHOLDER
FOR EACH £1 OF EXTRA INCOME WITH 20% COUNCIL TAX TAPER SHOWING EFFECT OF 63% UC TAPER FROM APRIL 2017

EARNS EXTRA
£1.00
Tax
20%
-£0.20
NI
12%
-£0.12
Net after tax
£0.68
UC reduction
63%
-£0.43
Net after UC
£0.25
CTS reduction
20%
-£0.05
NET GAIN
£0.20
Effective tax
80%

This blogpost replaces the one originally published 19 September 2012.

1 April 2017
Version 1.01


Friday, 31 March 2017

OXFORD UNIVERSITY TO ABOLISH STUDENT FEES

THIS BLOGPOST WAS PUBLISHED ON 1 APRIL 2017. DRAW YOUR OWN CONCLUSIONS FROM THAT.

One of Britain's top universities is to abolish student fees after the Supreme Court allowed it to charge a royalty on every use of English words online.

From 6 April 2017 Oxford University will use a monopoly granted by Henry VIII to demand money from the one billion people who write online in English. They will automatically be billed a ‘nanocharge’ of 0.0001p by Oxford University Press for every word they publish online if it is in the Oxford English Dictionary. Fees from the estimated fifty trillion English words written online each year will allow the university to make education free at all levels.

The Oxford English Dictionary itself only began in 1859 and rapidly became the definitive record of the language. 

But under Letters Patent of 1523 Henry VIII granted the University “our speciall lycence” to collect money “from thoos persons who prynt in the language of Englonde” and use such money “for the supporting and maynteynyng of the vnyuersite of Oxenford” and the order “shulde passe and be sealed vnder our greate Seale as by our said comaundement as ye haue more parfite knaulage of the language of Englonde than any other”.

Henry VIII Letters Patent of 1523 granting Oxford University rights to all English words ‘in perpetuity’. 

The royalty could have been charged at any time since 1523. But early attempts to levy printer’s type led to riots against the so-called “taxes on knowledge”. The situation changed this week when the Supreme Court held unanimously that the words of the Letters Patent could not be clearer” and gave Oxford the right “in perpetuyte” to the copyright on the words in its Dictionary. The court rejected a counter-claim by rival publisher Collins that the Letters Patent were repealed by the Monopolies Act 1624. “No such provision exists in the Statute” said the President of the Court and Oxford graduate Lord Justice Neuberger. Significantly, Justice Lady Hale, the Deputy President who went to Cambridge, did not dissent.

Professor Fiona Nomura, a Proctor of Oxford University Council, told me in an exclusive interview

“For nearly half a millennium Oxford has allowed England, Britain and the world to use the English language free of charge. However, the University is increasingly uncomfortable at Government demands to raise the fees charged to our undergraduates, this year to £9,250. So Congregation decided to use this ancient right to levy a charge on every online use of the words which are the University's copyright and make education at this world beating institution free again.”

She pointed out that Henry VIII himself was a great patron of education and founded several grammar schools and colleges.

Oxford claims the amount “will be too little for an individual to notice but will mean much to our students”.

All words published online will be compared with the online Dictionary and an automatic PayPal debit applied for each word in it. The nanocharge of 0.0001p levied on the estimated 500 trillion online uses of English words each year will raise £500m – more than enough to replace the £110m in fees paid by Oxford’s 12,000 undergraduates. The balance will be used for bursaries and to support its 11,000 postgraduates – who Congregation called “the entrepreneurs of tomorrow” in the so far secret meeting that made this historic decision.

However, Professor Angie Buff of Trinity College Cambridge said the move was a backward step. “It will lead to people misspelling and making up words to try to avoid the nanocharge. They may even start tweeting in foreign languages. It may help a few Oxford students but it will damage literacy and, ultimately, English itself.”

The levy will cover all websites and social media including blogs, Twitter, Facebook, LinkedIn, and even the subtitles on YouTube. Twitter alone publishes 3 trillion English words every year. Oxford is working with GCHQ to extend the nanocharge to encrypted services such as SnapChat.

Professor Nomura confirmed that the copyright only extends to the 600,000 words defined in the Oxford English Dictionary. “Neologisms such as ‘selfiecide’, ‘mansplaining’, and ‘nmh’ will still be free to use, should any ignoramus wish to do so.”

She warned however that the fee would be levied on one new word. At an emergency meeting of the Words Admission National Council English Register this week ‘Brexit’ was added to the Dictionary with immediate effect. Such speed is unusual for an organisation which took twenty-four years to admit the word ‘snozzle’. Professor Nomura denies the haste was to cash in on the word’s popularity. "It is simply because the definition is so clear" she said "Brexit means Brexit," Fi Nomura smiled, “end of."

UPDATE: I have learned that the nanocharge will be brought forward five days and will be applied from 0001 on Saturday 1 April.

Vs 1.0001
1 April 2017




Friday, 24 March 2017

BENEFITS FOR WIDOWS AND CHILDREN SLASHED

New widows and their children will get thousands of pounds less benefit from April as the Government reorganises the way they are paid.

Benefits for people whose spouse or civil partner dies on or after 6 April will be cut substantially. 

This major change in bereavement benefits will save the Government £100 million a year. 

A spouse (or civil partner) of someone who dies from 6 April 2017 will get a new benefit called Bereavement Support Payment. People without dependent children will get £2500 and then up to 18 monthly payments of £100. Those who are entitled to child benefit for dependent children will get £3500 plus up to 18 monthly payments of £350.

This payment will replace three existing benefits – a one off Bereavement Payment of £2000, a weekly Bereavement Allowance of up to £113.70 depending on their age for 52 weeks for those without children, and for those with children a weekly Widowed Parent’s Allowance of £113.70 a week until the youngest reaches 18. All rates are for 2017/18.

The arithmetic means that from April 6 new widows without children will get £4300 over 18 months instead of a maximum £7912 over 12 months. And widows with children will get £9800 over 18 months instead of a possible maximum if the old system had continued of more than £108,000 over 18 years.

The changes will not affect anyone already on bereavement benefits or who is widowed before 6 April 2017.

The Government estimates that three out of four bereaved parents with children will be worse off under the new system and that grows to nearly nine out of ten - 88% - among those who work. The Child Bereavement Network says a typical working widowed parent will be worse off by more than £12,000 compared with the old system. 

Other concerns were raised about the new payment during the consultation but the Government rejected them.

First, unlike the current weekly allowances the new Payment is not linked to inflation. Campaigners fear it will be treated like the old £2000 Bereavement Payment which has not been increased since its introduction in 2001. If it had risen with inflation it would have been around £3000 today. They fear the new Payment will also be frozen.

Second, the Government has not extended the Payment to long-term partners who are not married or civil partners. Campaigners say that penalises the children of unmarried partners.

Third, by limiting support to eighteen months it is estimated that 91% of parents will get help for a shorter time than in the present system. That could leave the children of widows in poverty and their parent relying on means-tested benefits. 

On the other hand it comes with a much simpler single National Insurance condition – the deceased must just have paid one year’s contributions in their lifetime. And it is paid to childless widows under 45 who at the moment only get the £2000 payment. Childless widows under the age of 47 will be better off under the new scheme.

None of the new or old benefits are paid to widowed people over state pension age. 

The Government insists the purpose is not to save money but to focus help where it is most needed. In other words those who are left in hardship can claim means-tested benefits. Unlike the old allowances the whole Bereavement Support Payment will be ignored when entitlement to those is worked out. 

Although the long-term savings will be £100m a year there will be extra costs in the first year will be £40m as the new Payment is paid over a shorter period than the weekly allowances. The Department for Work and Pensions tells me those figures, produced in 2014, are out of date and that it expects to spend £70m a year more on Universal Credit for widowed people. A revised impact assessment will be published in April after the change begins.

The last time benefits for the bereaved were changed the excuse of the Labour Government in 2001 was that it had to be done to equalise benefits for men and women. However, it also saved £500m a year. Over the following 12 months many newly widowed women complained to me that there had been no publicity about the cuts that were now affecting them. 

The DWP has told me there will be no paid advertising campaign for the new Bereavement Support Payment. It was relying on statements to Parliament and expected 'stakeholders' to inform people. Plus ├ža change!

Based on my weekly Money Box newsletter 24 March 2017. Subscribe here.

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25 March 2017

Saturday, 18 March 2017

INFLATION TO HIT 4.1% BY CHRISTMAS

The Chancellor expects to deliver an unwelcome Christmas present to us all. Inflation will hit 4.1% in the last three months of the year, the latest forecasts say.

I know Philip Hammond’s last Budget was a U-turn ago (and perhaps it's not called his last Budget for nothing! Boom, boom). But after the announcement a week after his Big Day that he would scrap plans to bring in £2bn over four years from raising National Insurance for self-employed people my wide eyes lighted on some small print I had missed.

Inflation. We’ll get the actual numbers for February on Tuesday 21st March. But when the Chancellor announced in his Budget on 8th March that he would “make no changes to previously planned upratings of duties on alcohol and tobacco” the plans he referred will raise the duty on alcohol by inflation and on tobacco by 2% above inflation.

So far so sneaky. But when I checked the actual alcohol duties they were rising by 3.9%. Duty on the alcohol in spirits and wine rose on 13 March by £27.66 per litre to £28.74. When he made that statement the latest CPI inflation was less than half that at 1.8%. Time to call the Treasury who, after a bit of toing and froing, explained. The inflation rate used for duties is not the CPI but the RPI. Hmmm. Four years ago the Office for National Statistics decided the RPI was such a poor measure of inflation they demoted its status and it is no longer a national statistic, though it is still published. The good thing for the Chancellor about the RPI is that the maths used to work it out makes it higher than CPI under almost all circumstances. So it's ideal for raising taxes.

Back to the figures. The January inflation figures - the ones the Chancellor had access to on Budget Day - show RPI at 2.6% not 3.9%. So back to the Treasury. More toing and froing. Aha. I'm told that the Chancellor doesn’t use past figures for raising duties he uses a forecast figure for RPI. The one he uses is the forecast for the third quarter (Q3) ie the months July to September 2017. And the forecast for RPI inflation for Q3 2017 is 3.9%. What! 3.9% inflation by the late summer?! Sure enough a bit more burrowing found the forecast tables from the Office for Budget Responsibility showing the Q3 forecast for RPI inflation is indeed 3.9%. Hence the hefty rise in your beer, wine, and spirits bill. And hence the 5.9% rise in tobacco duty, underpinned by a minimum pack price of £7.35 to put a lower limit on cheap brands.

Just to confuse things the actual January RPI figure is used for other things like Air Passenger Duty which will rise from 1 April for journeys over 2000 miles by £2 to £75 per flight or by £4 to £150 if you want to feel special by flying in anything other than economy. The cost of owning a car will also rise from April as Vehicle Excise Duty rises by £5 for anything but the least polluting vehicles and by £10 and £20 for the more and most polluting. At least petrol duty is frozen – as it has been for seven years the Treasury was keen to tell me. Without adding that the Chancellor has a bit of a windfall anyway from the rising price of petrol and diesel which has put up the VAT take by around 20% as the pump price rises from £1 to £1.20.

But back to inflation. By Christmas the OBR forecasts RPI inflation will be 4.1% before it starts falling. And the official measure of inflation, the CPI, will be 2.7% by Christmas. After that of course it is on a downward path to the 2% target which the Bank of England must – but almost never does – meet. Even the independent OBR never forecasts that the Bank will miss its target two years hence.

The February figures, published two weeks after the Budget, show inflation is indeed rising. CPI was up 0.5 to 2.3%. That is rather ahead of the 1.9% forecast by the OBR and close to the 2.4% it predicts for Q2 (April to June). RPI was up 0.6 to 3.2%, also slightly above the 3.0% predicted for Q1. So the latest figures do nothing to ease fears about inflation being back.

So the key takeaway from these figures is that Christmas 2017 is going to be much more expensive than last year.

Updated from my Money Box newsletter 17 March 2017. Sign up and get it every week with a full agenda for Saturday's programme. 

Vs. 1,10
22 March 2017

Saturday, 11 March 2017

NO TAX LOCK FOR POOREST SELF-EMPLOYED

Self-employed people who make profits of less than £6000 will still face a massive rise in their National Insurance contributions in 2018/19 despite the Chancellor's U-turn over National Insurance rises. They will pay more than £600 extra to ensure they get a full state pension.


People who earn less than the Small Profits Threshold - £6025 in 2017/18 - do not have to pay National Insurance Contributions at all. But if they choose to do so they can buy them for £148.20 a year. They might do that to fill a gap in their contribution record to make sure they have the 35 years needed to get a full New State Pension of £159.55 a week.

But from April 2018 the cost of these voluntary contributions will quintuple to around £750. That is because the contributions they can pay now - called Class 2 - are being abolished. So they will be left with no choice but to buy the much more expensive Class 3 contributions. They are £741 a year in 2017/18 and will rise by inflation to reach more than £750 from April 2018. So their bill for a year's National Insurance contributions will rise from £148.20 to £750 - a difference of more than £600.

The Government will not say how many choose to pay voluntary Class 2 contributions. But figures published in December 2016 indicate it is around 100,000.

They are not helped by the Chancellor's extraordinary U-turn a week after his Spring Budget to scrap his plans to raise the Class 4 contributions paid by more than three million self-employed to raise another £2 billion over the next four years. Those on very small profits do not pay National Insurance at all so would not have been affected by that rise.

The Chancellor announced his U-turn in a letter to Conservative MPs on the morning of Wednesday 15 March, almost exactly seven days after he made the proposals. He made it clear that he changed his mind so that "the tax lock...commitments we have made...should be honoured in full."

That tax lock was of course in the 2015 Conservative Manifesto which Philip Hammond and more than 300 of his colleagues were elected on. It said four times in almost identical terms that a Conservative government “will not raise VAT, National Insurance contributions or Income Tax”.

Although the law that implemented this tax lock only applied to the contributions paid by employee's and employers - called Class 1- the Chancellor's letter admitted that "it is clear that compliance with the 'legislative' test of the Manifesto commitment is not adequate."

But it seems the tax lock will not protect the million poorest self-employed who need to fill a gap in the NIC record. They face a £600 rise - at least 10% of their low profits.

Unless of course there is another U-turn.

Version 2.00
15 March 2017

NOTE:
The Government response to the Consultation on abolishing Class 2 says

  • "Analysis suggests that those expected to pay Class 3 NICs in any one year following the abolition of Class 2 would represent only 5% of those with profits below the SPL [now called the Small Profits Threshold] in 2018-19, and around 2% of all self-employed individuals who may have self-employment profits. This is based on HMRC forecasts showing that there will be over 5 million self-employed individuals who may be liable to NICs in 2018-19."


That implies 50,000 to 100,000 will be affected. However, researchers say that any estimates of self-employed by income band are "flaky". I am trying to get real figures from HMRC but so far a veil of secrecy has been drawn across them.



BOXED IN CHANCELLOR

You’ve got to feel sorry for Philip Hammond. No, really. The day after his Budget he admitted on the Today programme that he was “working within an extremely constrained environment…where most taxes cannot be raised and much of our spending is also ring-fenced and committed. We are navigating within those confines”.

And now he has had to U-turn on one of his flagship policies where he thought he had wriggle room - raising National Insurance Contributions for self-employed people. It would have brought in £2bn over four years to pay towards the growing bill for social care.

The truth is he was boxed in by the tax lock introduced by his predecessor. That was more than a Manifesto commitment – a Manifesto on which Philip Hammond and more than 300 other Conservative MPs were elected. It said “we will not raise VAT, National Insurance contributions or Income Tax”. After winning the election Chancellor George Osborne and Prime Minister David Cameron were so keen on this tax lock they passed a law to prevent themselves and future governments raising the taxes that bring in three quarters of all the Government’s income – VAT, income tax, and national insurance.

So a Chancellor who needs to raise extra money has to look to the other smaller taxes. Philip Hammond has already announced a rise in one of those – insurance premium tax. That will rise by a quarter in June from 8% to 10%. But after that his options for his first Budget on 8 March were severely limited.
  • Corporation tax brings in £44bn a year but the Government has already announced it will be cut to 19% from April and 17% from April 2020. 
  • Duty on petrol and diesel raised nearly £27bn in 2015/16 and the Chancellor had already ruled out a rise in that duty, perhaps comforting himself that the rise in pump prices will bring in more VAT. 
  • The Bank Levy collected £3.4bn but that really could not be raised at a time when banks are threatening – and some considering – leaving the UK when the UK leaves the EU. 
  • Air Passenger Duty raises just over £3bn and that may fall slightly after recent changes to exclude children. But with the Scottish Government planning to slash that by 50% when it introduces its own Air Departure Tax in April 2018 it was impossible to increase APD in the rest of the UK. Already Northern Ireland has its own lower rates. 
  • Stamp Duty Land Tax raises nearly £11 billion but another restructuring was impossible after the two recent ones. 
  • Inheritance Tax will probably raise less than last year’s £4.6bn as the partial exemption for the family home is phased in from April. Any increase there would not be possible for a Conservative government. 
  • Higher Landfill Tax might be popular except that rising costs have already caused a growth in illegal fly-tipping blighting many country areas.

So Hammond fell back on raising car tax and alcohol duty by inflation – using the higher Retail Prices Index even though it is no longer a national statistic – and tobacco by 2% above the RPI. In fact he got a slight windfall because the rate of RPI used by the Treasury for duty is the forecast rate for July to September 2017. And that is 3.89%, way above the latest RPI figure he had to hand for January 2017 which was 2.6%. And, of course, he announced the now infamous rise in self-employed Class 4 National Insurance contributions from its present level of 9% to 10% in April 2018 and 11% a year later. That would still be less than the 12% paid by employees. But he has now been forced to withdraw that as it became clear he could not get enough of his own MPs to support it

Despite the Manifesto promise, this increase was allowed by the Tax Lock law which was passed to implement it. The law only covered “the main primary percentage” which “shall not exceed 12%”, omitting the 9% rate paid by the self-employed. None of the MPs who have now scuppered the proposed rise in self-employed NICs seemed to notice that when they passed the National Insurance Contributions (Rate Ceilings) Act 2015 with little debate, on 3 November 2015. Perhaps he hoped they wouldn't notice again. But they did.

Amended from my Money Box newsletter 10 March 2017, Sign up for future editions here

Version 1.5
15 March 2017

SELF-EMPLOYED NATIONAL INSURANCE BENEFITS

UPDATED 15 MARCH 2017 AFTER HAMMOND U-TURN

Self-employed people pay two sorts of National Insurance contributions (NICs). They are called Class 2 and Class 4 contributions. Class 4 contributions are a percentage rate of tax on profit. It is 9% on profits between £8164 and £45,000 of 9%. A 2% rate applies above £45,000. The Government has now abandoned plans to raise the 9% rate to 10% from April 2018 and to 11% from April 2019 which would have brought Class 4 more in line with the 12% Class 1 paid by employees on the same band of income. So self-employed people get a considerable subsidy by paying less tax for almost identical benefits.

Class 2 is a flatrate £2.85 a week from April, 2017. Class 2 used to be paid weekly but from April 2015 has been paid after the end of the tax year either with self-assessment or as a one off payment of £148.20 which HMRC will ask for in October after the end of the tax year. . 

At the moment only Class 2 gives entitlement to the state pension and other benefits. Class 2 will be abolished from April 2018. The government is planning to use Class 4 contributions as the key to getting benefits. At the moment Class 2 has to be paid if profits are above £6025 a year. The Government plans to introduce a new 0% rate of Class 4 between £6025 and £8164 to ensure that entitlement to benefits does not change.

Class 2 contributions give entitlement to all the main National Insurance benefits paid out of the National Insurance Fund.
  • New State Pension - £159.55 a week with 35 years of contributions. Some people who have been employed will get less than that.
  • Contributory Employment & Support allowance of £73.10 a week. It can start seven days after you are incapable for work and lasts up to 12 months as long you are too sick to work.
  • Maternity Allowance of £140.98 - or 90% of your weekly earnings if that is less. It lasts for 39 weeks. Because it depends on Class 2 contributions it can be more difficult to qualify now that the payment is annual. If you haven't paid enough at the right time you must claim first and then HMRC will tell you how to pay the Class 2 you need to qualify. Crazy but true. Full details here. I am told that self-employed mothers on Maternity allowance have tougher restrictions on doing any work while claiming it than employed women.
  • Bereavement Support Payment if your spouse or civil partner dies. It is £2500 with 18 monthly payments of £100 if there are no children or £3500 with eighteen monthly payments of £350 if there are dependent children. This benefit applies for deaths from 6 April 2017. Benefits for earlier deaths are very different.

Class 2 contributions do not give entitlement to the following benefits which are paid out of the National Insurance Fund.
  • Contributory Jobseeker’s Allowance of £73.10 a week. It last for 26 weeks and involves strict conditions on looking for work. However, self-employed people who give up their self-employment and register with JobCentre Plus can claim means-tested Jobseeker's Allowance if they fulfil the conditions.
  • Redundancy payment. This is paid by an employer when an employee is made redundant. But if the employer goes bust or otherwise cannot pay it then the payment comes from National Insurance Fund. There is no equivalent for the self-employed who go out of business.

Class 2 contributions do not, of course, give entitlement to benefits which are paid purely by an employer not by the National Insurance Fund.
  • Statutory Sick Pay £88.45 for 28 weeks. Employers may pay much more than the statutory amount. Self-employed can get Employment & Support Allowance - see above. 
  • Statutory Maternity Pay. It is 90% of average weekly earnings (before tax) for six weeks then £140.98 (or 90% of weekly pay if that is less) for the next 33 weeks. However, self-employed people can get Maternity Allowance - see above.
  • Statutory Paternity Pay, Shared Parental Pay, or Adoption Pay. There is no equivalent benefit if the employer does not or cannot pay. So self-employed people cannot qualify for these benefits through paying Class 2.
  • Holiday pay and other paid leave - maternity, paternity, parental - is purely a matter for an employer, so self-employed people do not get it.
  • Employer pension contributions. Self-employed people must pay all the contributions into a pension scheme if they have one. Auto-enrolment does not apply to them but they can pay into the state sponsored pension scheme called NEST as employers do.
  • Salary sacrifice enables employees to avoid NICs on their pension contributions and to get a bicycle or childcare free of tax and National Insurance. Self-employed people may be able to claim the cost of a bicycle as an allowable expense against their tax if they use it for work travel.
  • Other perks paid by an employer
Self-employed people can claim means-tested benefits on the same terms as anyone else. But when their income is assessed the calculation may assume they earn the statutory minimum or living wage even if their profits are lower than that. At the moment that applies only to Universal Credit and to Council Tax Support in some parts of England. 

For the week (8-15 March 2017) that the Government's policy was to raise the rate of Class 4 contributions from 9% it said it would also consider extending the benefits they are paid. It still might.

The value of Jobseeker's Allowance and Redundancy Payments is very small and on my calculations means that a fair rate for the main Class 4 rate for the benefits they get is 11.98% compared to the 12% paid by employed people.

  • All the rates and rules described in the blogpost relate to the tax year 2017/18.
  • This blogpost gives only a very brief guide to the benefits mentioned. It is for information only and you should not rely on it to make financial decisions. Find out more about benefits at www.gov.uk and search for the benefit you want.


Version 1.5
15 March 2017

Sunday, 5 March 2017

TAXING A SELFIE

Self-employed people pay up to £1,000 a year less in National Insurance contributions (NICs) than employed people on the same pay. That is because employees pay 12 per cent of their earnings between £8,060 and £43,000 but the self-employed pay only 9 per cent on the same band. For someone on average pay the selfie saving is £568 a year — nearly £11 a week. A selfie earning more than £43,000 will save £1048 this tax year, a gain of £20 a week over their similarly paid employed colleague.

The present system began in 1978. Employees who paid the full rate of NICs were paying into the state earnings related pension scheme (SERPS) which would give them a higher state pension. The self-employed did not pay into SERPS so they paid lower national insurance contributions.

However, those reaching pension age from 6 April 2016 no longer get SERPS (or its successor State Second Pension). Everyone with at least 35 years of national insurance contributions will in future get a flat £155.65 weekly state pension – employees and self-employed alike. So there is no longer any justification for the 3% difference in the national insurance contributions they pay. This concession to the selfies costs nearly £1bn a year.

In fact the loss to the Treasury is even greater. An employee also generates NICs from their employer at the rate of 13.8% on every pound earned over £8060 a year. If selfies also paid employer’s contributions that would bring in another £4 billion a year.

The higher paid also get a big National Insurance concession. Most taxes go up as income rises. But not NICs. Once £43,000 a year is reached the rate of NICs plummets from 12% (or 9%) to just 2%. If everyone earning more than £43,000 paid the full rate of NICs estimates by HMRC indicate the Treasury would gain by more than £9 billion a year.

Because NICs are a tax on earnings they do not apply to unearned income such as interest from savings and dividends. In fact both of those have their own special income tax allowance as well. £1000 of savings interest is normally free of income tax (and it can be up to £6000 in some circumstances). Dividends are taxed at a lower rate than other income and now the first £5000 is tax-free. Those extra allowances are on top of the tax free personal allowance of £11,000. No NICs are due on rental income either. These concessions mean that every £1 of unearned income is worth far more net than a pound of income earned by work. Even pensions – which are often described as deferred pay – are exempt from National Insurance contributions. I have not been able to put a figure on the cost to the Treasury of these various concessions.

But I have found another £1 billion concession given to pensioners. Although more than a million over 65s work they do not pay NICs. Once state pension age is reached (65 for men and about 63y6m for women) NICs stop. That concession began nearly a century ago when almost everyone who reached pension age retired from paid work completely.

I have to declare an interest. I have been self-employed for 30 years. I have earned more than the higher rate threshold for much of that time. And I have now reached the age when I no longer pay NICs. So changing all these things would cost me a lot. But it should be considered.

All figures relate to 2016/17 tax year.

Based on my piece in FT Money 18 February 2017 and my Money Box newsletter of the same week.

vs 1.00
6 March 2017

Thursday, 9 February 2017

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 bonds announced on 8 February do not affect their value as a good place for your cash savings if you fulfil three conditions
  • You can buy the maximum £50,000 or close to it. 
  • You pay higher or additional rate income tax. 
  • You have used up your personal savings allowance with interest on other savings outside ISAs.

The changes are
  • the nominal interest rate is cut from 1.25% to 1.15%
  • the distribution of the prizes at the lowest end has been altered
The restructuring has been done so that the chances of winning the lowest £25 prize each month will be slightly higher from May while the chance of winning £50 or £100 will be slightly lower.

The effective interest rate earned if you discount all the other prizes apart from £25 is 0.98%. It is tax-free so is the equivalent of taxable interest is 1.22% for a basic rate taxpayer, 1.63% for a higher rate taxpayer, and 1.78% for a top rate taxpayer. This is fractionally better than the current effective rate for the £25 prizes. If you hold the maximum £50,000 you can expect to win just over nineteen £25 prizes in a typical year. At the moment the expectation is slightly fewer than nineteen £25 prizes in a year.

How do they work?
Each month the £62 billion of bonds earn interest, currently at an annual rate of 1.25%. That will fall to 1.15% from 1 May 2017. Each month the interest of £65 million or so is put into a prize fund. That total is then shared at random among the bondholders as prizes. Each bond has a 1 in 30,000 chance of winning a prize in each monthly draw. Prizes are paid tax-free so the return is better for higher rate (40%) taxpayers who have other savings to use up their £500 tax-free savings allowance or additional rate (45%) taxpayers, who get no tax-free savings allowance. 

At the moment the fund is divided so that 93% of the prizes are for £25 which uses up 75% of the money. Two million £25 prizes were paid in February 2017. Nearly 71,000 prizes each of £50 and £100 were also paid. Those three prizes use 90% of the prize money and accounted for 99.75% of the prizes.

From May those three prizes will still take the same proportion of the money and prizes. But the number of £50 and £100 prizes will fall to just over 20,000 each. The number of £25 prizes will rise to 2.2m, which will be 98% of the prizes, and take 85% of the prize money. 

Higher prizes range from £500 to £1 million. Although winning a million is a nice thought, forget it. You won’t ever win that prize. Even with the maximum £50,000 bonds you would have only an even chance of winning a million after 55,000 years. That was when humans stopped having sex with Neanderthals and 10,000 years before we started painting in caves. The odds of winning the second prizes of £100,000 are the same as the million pound prizes.

So forget about the higher prizes. Concentrate on the stream of £25 prizes. That will be slightly better from May than it was before. 

Interest rates
When considering the actual interest earned in any realistic timeframe it is those three lower prizes that should be counted. With £50,000 bonds you can expect to win a £50 or £100 prize once every five years in future - it was two years. That means the effective interest rate - the money used for the prizes you might win - is 1.04% from May compared with 1.13% before the changes. So if you can take a five or ten year view of your money that is equivalent to earning 1.29% taxable interest for a basic rate taxpayer, 1.73% for a higher rate taxpayer and 1.88% for a top rate taxpayer. 

Those are not bad rates for an instant access account. Money in Premium Bonds can be taken out without notice at any time.

With 50,000 bonds you will expect to win 20 of those lower prizes a year – the same as before May. The vast majority will be for £25. Of course chance will not produce an even return. But over time that should be the average. Here is the monthly 14 month prize record of one £50,000 holding I am familiar with 3,1,1,0,0,0,1,1,2,5,2,2,2,2. All were for £25. It is a rate of 0.9% a year tax free.

Prizes
Even with a maximum holding you can only expect to win £500 or £1000 once every 22 years (up from 20 years). The larger prizes of £5000 and more are far more sparse. If you had bought £50,000 premium bonds in 770 when King Ahlred was on the throne of Northumbria and sending missions to the continent you would expect to have won just one larger prize by now. You will wait another 1247 years until the year 3264 for the next.

With smaller amounts of bonds, prizes of course are much rarer. £100 gives you an even chance of winning a £25 prize every 25 years. With one bond bought when when Stonehenge was built you might have expected about two prizes by now.

So Premium Bonds are still good for people who can afford to buy the maximum who are higher and top rate taxpayers and who have used up their personal savings allowance with interest on other savings. That probably means £30,000 to £50,000 in other savings products on top of any cash in ISAs. Additional rate taxpayers do not get the personal savings allowance. More than half the bonds are held by people who have at least 30,000 of them.

Randomness
ERNIE (Electronic Random Number Indicator Equipment) who draws the winning bonds each month is not a computer. However hard they try computers cannot produce genuine truly random numbers. So ERNIE uses a process which was invented by a Bletchley Park codebreaker called transistor thermal noise to create truly random events which are then counted and combined in turn into bond numbers. Every month the Government Actuary checks the prize list for randomness before the prizes are paid.

Because every bond really does have an equal chance of of winning there is no point in cashing in 'unlucky' bonds and buying new ones. Doing that also means there is a month between selling and buying when the bonds are not in the draw. So it worsens the odds of winning.

Personal Savings Allowance
The personal savings allowance which began in April 2016 means the interest on savings is tax free up to £1000 for basic rate taxpayers and £500 for higher rate taxpayers. So the tax-free prizes are of most value to those who have other savings which have used up those allowances. Additional rate taxpayers do not get the personal savings allowance. So premium bonds are very good for them.

Buying
You can buy Premium Bonds online at www.nsandi.com where you can also check for prizes and trace lost bonds. You can also buy them by phone or post. You must be at least 16 years old. Parents, grandparents, and great-grandparents can buy them for children but only parents can do that online.

version 2.0 (earlier versions published in 2015 and 2016)
9 February 2017