National Insurance for Self-Employed People

The Social Security Advisory Committee (SSAC) has published a summary of its study of Social Security Provision and the Self-Employed. This notes the disparity between the National Insurance contributions payable by a self-employed person and an employee on similar earnings (especially if the employer’s contributions are also taken into account), and questions whether it is proportionate. At present, the main advantages enjoyed by employees in return for their higher contributions are access to Statutory Maternity Pay, etc, and the ability to accrue an Additional Pension – and that second advantage will be lost when the Single Tier Pension is launched in April 2016.

Apart from the simple question of equity – that the scheme is after all a National Insurance scheme, so the contributions should be proportionate to the unemployment, sickness and pension benefits bought – the SSAC puts forward four reasons for recommending the Government to review the contribution rules. First, the proportion of self-employed people in the national workforce is increasing – from 12 per cent in 2000 to 15 per cent at the beginning of 2014.  Accordingly, any under-contribution is growing in significance.  

Second, the range of people now working on a self employed basis is far wider than the ‘small shopkeepers, crofters, fishermen, hawkers and outworkers’ envisaged by the Beveridge Report. One needs to consider, therefore, whether the original assumptions still hold true.

Third, the law which determines whether an individual is employed or self-employed is complex and confusing, leading to what the SSAC terms a ‘permeable boundary between employment and self-employment’, so that people may be genuinely unsure about their own employment status, or that of the people working for them. The Committee recommends that ‘the Government should consider the extent to which it is possible to rationalise the definitions of who is (and who is not) self-employed for the purposes of employment, National MinimumWage, taxation, and Social Security law.’

Fourth, and perhaps most importantly, the disparity in contributions and the ‘permeable boundary’ have both encouraged and facilitated a growth in ‘false self-employment’.  Although the motivation is usually to reduce the National Insurance contributions payable, ‘false self-employment’ has other adverse effects, such as denying access to much of the employment protection legislation.

Looking forward to Universal Credit

The document also expresses concern about the proposed treatment of self-employed people under Universal Credit. It highlights the onerous nature of the monthly income reporting requirement, the confusing differences between the Universal Credit and Self Assessment rules for calculating earnings, and the disallowance of vehicle purchase costs, even where (as in the case of a taxi) the vehicle is the business.

Childcare Grant Scheme Extended

The Childcare Business Grant Scheme (which is available only in England) has been extended to 31 December 2014. Under the scheme, grants of £250 or £500 are paid to people setting up a new childcare business (which can include childminding in the childminder’s own home). The grant can be used as a contribution towards costs such as training and registration, Disclosure and Barring Service (DBS) clearance, health checks and certificates, and public liability insurance, as well as purchasing equipment and adapting premises.

The grant for a new childminding business (one looking after a child or children, not related to the childminder, in the childminder’s own home) is £250, doubled to £500 if either there are four or more childminders working on the premises (including the proprietor) or the childminder has incurred additional expenditure in order to provide care for disabled children.

The grant for childcare businesses operating in non-domestic premises, such as nurseries and out-of-school clubs, is £500.  The scheme also includes access (free of charge) to a business mentor.

Two points to watch are that grants will not be paid to anyone already operating a childcare business of any kind, even if the money is needed to open a new nursery in new premises, and that schools may not claim a grant for breakfast clubs, after school clubs, and other childcare provided by the school on school premises.

Further information is posted at www.childcarebusinessgrants.dcms.gov.uk.

October 2014 Newsletter

Welcome to the October 2014 Newsletter from Easterbrook Eaton Limited

The referendum on Scottish independence may have resulted in a 'No' vote, but with all the major political parties promising legislation on greater devolution, a constitutional debate affecting all parts of the UK is only just beginning. Here's our round-up of the latest tax and business developments…

Business reacts to Scottish 'No' vote and promise of devolution

The immediate reaction of the British business community to last week's rejection of Scottish independence was 'a collective sigh of relief', according to CBI Director-General John Cridland, who claimed that 'business has always believed that the Union is best for creating jobs, raising growth and improving living standards.'

The CBI's president, meanwhile, went further, suggesting that the two-year national debate in Scotland had delayed investment and 'damaged the image' of British business abroad. Sir Mike Rake, who lobbied for a No vote during the referendum campaign, said: 'There's no doubt that whilst investment north of the border has continued, some has been slowed or delayed… But this is the first positive step towards sanity being restored, towards thinking that the UK is open for business once more'.

The immediate aftermath of the No result saw the pound sterling hit a two-year high against the Euro, after several weeks in which it had fallen amidst fears that Scotland would vote to exit the Union. The FTSE 100 share index also rose, while banking group RBS confirmed that the outcome meant that it would not be moving its registered head office to England.

Pro-independence group Business for Scotland said that it was 'disappointed that the opportunity to improve Scotland through independence has been lost' but that it would 'do what we can to improve things as much as possible'.

Attention now turns to the prospect of further devolution for Scotland and the implications for the rest of the UK, particularly in regards to the ability of the Scottish Parliament to set its own tax rates. Existing agreements between Holyrood and Westminster mean from next year the Scottish government will be able to borrow up to £2.2 billion for capital spending and will be given control over stamp duty land tax, while from April 2016 it will have more powers to set income tax.

Experts have warned that divergence between tax rates within different parts of the UK will lead to tax and jobs 'arbitrage', as businesses could move between regions depending on such factors as local rates of corporation tax or minimum wage levels. 

High net worth individuals would also be keeping a close eye on income tax rates. There are estimated to be some 18,000 higher rate taxpayers based in Scotland, compared with around 200,000 in London and the South East. Scottish high earners could easily move south of the border if taxes were significantly raised, while lowering taxes to be attractive to wealthy individuals could have the opposite effect.

Scott Corfe, head of macroeconomics at the Centre for Economics and Business Research, took a positive view of the possibility, saying:  'There would be competition to attract talent and entrepreneurs into the different regions. Some regions might want to copy what's been done in Ireland where you've got a low rate of corporation tax to attract companies. In the long term, there could be some real benefits from having that'.

RTI relaxation extended

HMRC has announced that it will exempt employers with fewer than 50 staff from Real Time Information (RTI) late filing penalties until 6 March 2015. Until that date, they will be allowed to submit PAYE information monthly.

RTI requires employers to provide information about tax and National Insurance deductions every time they pay an employee rather than annually. The original deadline for implementation by small firms was in 6 October this year.

The relaxation for small firms is the latest in a series of deadline moves since RTI was rolled out in October 2013.

HMRC's Ruth Owen said: 'We know that those who have had most difficulty adjusting to real-time reporting have been small businesses, so this staged approach means they have a little more time to comply with the new arrangements before facing a penalty'.

Employers with 50 staff or more will still be fined if they file PAYE returns late after the 6 October deadline.

Further information is available on our website.

Chancellor announces new tax regime for inherited pensions

In his speech at the Conservative Party Conference last month George Osborne, the Chancellor of the Exchequer, noted that, even following his reform of the tax regime for pensions announced in this year’s Budget, ‘there are still rules that say you can’t pass on to the next generation any of your pension pot when you die, without paying a punitive 55% of it in tax.’  He went on to say that: ‘I could choose to cut this tax rate. Instead, I choose to abolish it altogether. People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free. 

Effective from 29 September 2014. The children and grandchildren and others who benefit will get the same tax treatment on this income as on any other, but only when they choose to draw it down. Freedom for people’s pensions. A pension tax abolished. Passing on your pension tax free.’

Briefing notes were published by HM Treasury the same day. These stated that the new regime will apply ‘from April 2015.’ Possibly this can be reconciled with the Chancellor’s announcement by assuming that the new arrangements will apply where the individual dies on or after 29 September 2014 and the payment is made on or after 6 April 2015.

The Treasury notes indicate that, ‘from next year’, anyone in a drawdown arrangement or with uncrystallised pension funds will be able to nominate a beneficiary to inherit his pension savings.

If he then dies before attaining age 75, the beneficiary ‘will pay no tax on the money they withdraw from that pension, whether it is taken as a single lump sum, or accessed through drawdown.’

However, if he dies after attaining age 75, drawdown payments will be taxed as the beneficiary’s income. Lump sum payments will be taxed at 45% in 2015/16, but thereafter at the beneficiary’s marginal rate. This delay is to allow time for details of a tax deduction scheme to be worked out with pension providers.

Neither the Chancellor’s statement nor the Treasury briefing notes mention the Inheritance Tax position.

Your Home and Capital Gains Tax

The Government seems to have a policy of whittling away at the traditional capital gains tax exemption for a homeowner’s own ‘principal private residence’. In April 2014, the rule that the last three years of ownership qualified for exemption, even if the homeowner no longer lived in the property, was amended to halve the qualifying period to eighteen months. And from April next year, the homeowner’s right to elect which, of two (or more) properties he owns, shall be treated as his ‘principal private residence’ is to be abolished. Instead, there will be a factual test - which property really was his main home? - but quite how this will work is not yet clear.

A homeowner should therefore bear in mind that circumstances may arise in which there will be a chargeable gain on what he now considers to be his main, or indeed only, home. That gain may be minimised by ensuring that records are kept of all allowable expenditure. For example, the base cost for capital gains tax purposes includes not only the price paid for the house, etc, but also the stamp duty, legal costs and survey fee. If the house was bought in a dilapidated condition, the cost of putting it right will also qualify, as ‘improvement expenditure’. Building an extension or a conservatory would also be an ‘improvement’; refreshing a tired kitchen or bathroom can be a grey area, but it doesn’t cost anything to keep the invoices in case they come in useful later.

Expenditure which enhances the owner’s legal interest in his home also qualifies - the most common example is where a leaseholder pays a capital sum to extend his lease.

Finally, additional relief from capital gains tax may be due if the house, etc, was at any time let to a tenant, so a record should be kept of the dates of any letting(s). This relief may seem paradoxical, but was originally introduced to encourage homeowners to rent out their properties, rather than let them stand empty.

Pension Planning Update

On Budget Day, the Chancellor announced that, from April 2015, ‘pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, any-time they want. No caps. No draw-down limits. No one will have to buy an annuity.’ 

So far, so good, but in some cases pension savers will need to take care to protect their new-found right not to buy an annuity. For example, some pension plans provide that, if the plan holder does not give alternative instructions by a fixed date (usually the default retirement date specified in the pension plan documentation), his or her savings will automatically be used to buy an annuity. Cases have been reported of companies ignoring telephone conversations with plan holders and then, citing the lack of written instructions, using their money to buy unwanted annuities. There is a 30-day ‘cooling off’ period, but after that it can be difficult or impossible to unscramble the situation, so we would recommend all pension savers to check what their plans actually say.

Another point is that although pensioners will by statute be given ‘complete freedom to draw down as much or as little of their pension pot as they want, any-time they want’, individual pension plan providers will not be required to provide this facility (on the grounds that they may find it expensive and burdensome to set up the necessary systems to do so). So if your existing pension plan provider is unwilling to offer ‘flexible draw-down’, you will have to transfer your funds to one that will. No doubt a charge will be levied. And it appears that the transfer will have to be made before you reach the normal retirement age set by your existing scheme.

Final details of the new regime will not be available for another few months, but once they are, most people should probably be reviewing their pension planning arrangements.

Increasing your National Insurance Retirement Pension

It is possible to defer your State Pension, and in return receive a higher pension later. At present, the rule is that for every five weeks you defer your pension, it will increase by one per cent. After one year, the pension will have increased by ten per cent, and after five years, by just over 50 per cent.

The State Pension is index-linked, so if you defer now, in 2019 you will receive 152% of whatever the pension is for that year (including any entitlement you have under the State Second Pension, SERPS or Graduated Pension schemes), and so on in future years.

Especially considering the promise of index-linking, there is an argument for deferring if you can afford to do so, even if this means dipping into capital to pay living expenses in the meantime.

Last month some newspapers reported that the rate of increase is to be halved, with effect from April 2016. However, this was itself only half true. In fact, the rate of accrual is to be reduced from one per cent every five weeks, to one per cent every nine weeks, but only for those who reach State Pension age on or after 6 April 2016 - this means men born on or after 6 April 1951 and women born on or after 6 April 1953. Anyone born before those dates will continue to qualify for the ‘one per cent every five weeks’ rate of accrual, even after April 2016.

Tax free childcare

The Government has announced further details of the ‘Tax Free Childcare’ scheme, first announced in the March 2013 Budget and due to be launched in Autumn 2015. The current childcare tax reliefs - for workplace nurseries and for childcare vouchers - apply only to childcare provided, or partly paid for, by an employer. What is new about ‘Tax Free Childcare’ is that it will provide direct help with childcare costs, without involving the employer. Accordingly, it will be available without the co-operation of the employer, and to self-employed people on equal terms with employees.

How will Tax Free Childcare work?

Shortly put, the concept is that the parent(s) will open a special account with National Savings & Investments. If there is more than one qualifying child in the family, a separate account may be opened for each. Children will qualify until their twelfth birthday, or until their seventeenth, if they are disabled. It is possible that the scheme will be phased in - applying first to nurseries and playschools for very young children, and then being extended to after-school clubs, etc, for older children.

The parent(s) may pay up to £8,000 a year into each account, and for every £8 paid in, the Government will add another £2, so the overall effect is identical to giving tax relief at 20%. The parent(s) will then use the money in the account to pay their childcare provider. All payments into and out of the account will be made electronically.

There will be no additional relief for higher-rate taxpayers. Also, there will be no reduction in National Insurance contributions.

Will everyone be entitled to Tax Free Childcare?

Three groups will be excluded from the scheme:

• Tax Credit and Universal Credit claimants, who will continue to receive help with childcare costs as part of their Tax Credit claim. Universal Credit will cover 85% of childcare costs, compared with 70% for Tax Credit.
• Families which include a parent who is not earning (at least) an amount equal to eight hours a week at the National Minimum Wage (about £50 a week, at present).
• Families which include a parent with an annual income of £150,000 or more.

Once Tax Free Childcare is launched, parents already receiving childcare vouchers from their employer will be able to choose either to continue doing so, or to claim Tax Free Childcare. But the voucher scheme will close to new entrants.

However employers will be able, if they wish, to continue to operate a workplace nursery and their subsidy to the nursery will continue to be disregarded for both income tax and National Insurance purposes.