Government reforms that will limit the ability of many savers to take full advantage of the pensions freedom regime have been shelved because of the general election. A cut in the money purchase annual allowance (MPAA), from £10,000 to £4,000, which was first announced last autumn, has not been included in the Finance Bill, the legislation that enacts the government’s budget announcements.
The MPAA is the maximum amount that savers may pay into a private-pension scheme each year once they’ve started drawing on pension benefits, which is allowed from age 55 onwards. While continuing to pay into a private pension, up to the limit, is entirely legal, the government is concerned that some savers are withdrawing funds from their pensions simply so that they can reinvest the money straight away to take advantage of the tax reliefs available on pension contributions, hence the proposed cuts.
Unfortunately, this thinking doesn’t take into account the situation of many people who choose to move to part-time work as they get older, using pension savings to supplement their income while continuing to save through an employer-sponsored pension scheme.
Due to the unpopular nature of this cut, the government has probably chosen wisely in putting this measure off until after the general election. However, savers should tread carefully. Although people may now get an unexpected window of opportunity in which to make extra pension contributions under the MPAA, Treasury ministers insist that they still intend to proceed with the reduction, pledging to legislate for a £4,000 limit “at the earliest opportunity”.
Unfortunately for those looking to plan their affairs over the duration of this tax year, it is not yet clear when that might be. It may be that the £4,000 allowance does not come into effect until as late as 6 April 2018, a year later than previously planned. Alternatively, although it would seem rather unjust, the government might choose to apply the £4,000 limit retrospectively for the current tax year, causing a headache for those that exceed the limit over the next few months.
Government kicks changes down the line
This year’s Finance Bill also omits several other expected measures, probably because the government is keen to get the legislation passed before the election. Most strikingly, the bill includes no provisions to reduce the annual dividend allowance, which currently enables people to receive up to £5,000 worth of dividend income over the course of a tax year before any tax is due. In March’s Budget, Chancellor Philip Hammond had announced a reduction in this allowance to £2,000, but this change has now been put aside.
However, while many people will welcome this reprieve – certain self-employed workers are especially vulnerable to the change – their relief is likely to be temporary. The chancellor will still have time to reintroduce the measure, which had not in any case been due to take effect until next April, assuming the Conservatives win a majority in the general election.
Wealthy international residents in the UK will also be affected by the slimmed-down Finance Bill, which does not include proposed reforms to the taxation of trusts set up by individuals who are non-UK domiciled for tax purposes (known as “non-doms”). Changes to the inheritance tax rules for non-doms who bequeath residential property to their heirs have also been put aside for now.
Finally, plans to offer pension savers the opportunity to withdraw up to £1,500 from their pension funds to pay for independent financial advisers have also been put on hold, though a crackdown on qualifying recognised overseas pension schemes (QROPS), aimed at expatriate savers, will go ahead as planned.
In the news this week…
• Tens of thousands of people may be facing unfair demands for up to £1,000 of tax due to “outdated software” being used by HMRC, says Laura Suter in The Daily Telegraph. The problem – which HMRC has insisted only affects a “very small percentage” of people – has arisen because HMRC’s online calculators (used by online taxpayers) “have not been updated to cope with recent changes to tax allowances”.
The calculators apply the allowances in a “rigid, preprogrammed order” and as a result groups of individuals with particular patterns of savings and income are losing tax breaks. Taxpayers who could be affected include those with total savings and non-savings income of more than £32,000, of which non-savings income accounts for £11,000-£16,000; and a wealthier group, likely to be people who own shares in their own businesses, with non-dividend income of £27,000-£32,000, alongside dividends that take their income to over £145,000.
If you’d rather not hire an accountant to find out if you’re affected, an alternative is to file a paper tax return, with a clear note stating that you wish to have your 2016-2017 tax liability calculated in such a way as to minimise the figure, taking into account the errors in HMRC’s tax-calculation software.
• That’s not the only glitch in HMRC’s operations. A “quirk” in the income-tax system means that HMRC is “wrongly overcharging people” who make use of the new pension rules, introduced in April 2015, to allow the over-55s to take “regular or ad-hoc sums” from their pensions, says Sam Brodbeck in The Daily Telegraph. If you make a large withdrawal one month, HMRC assumes this will be your monthly income and taxes you on an “emergency rate”.
“The overpayments can be reclaimed, but you need to fill out an onerous ‘mini tax return’ and there are concerns people cashing in small amounts may not even be aware they’ve lost out,” warns Brodbeck. HMRC says it will refund any overpaid tax within 30 days, provided the correct claim is submitted and that anyone who has lost out is entitled to a refund eventually, although a spokesman “could not say how long this would take”.