Nunn Hayward Newsletter – August

Welcome to the August 2014 Newsletter from Nunn Hayward

Glorious sunshine and the start of the Commonwealth Games have created a feelgood factor in recent weeks, and there has also been a lot of very positive economic news. However, one potential result of economic growth is the phenomenon of ‘fiscal drag’, whereby more and more income creeps into the higher rate tax bands.

Here’s our August round-up of the latest tax and business developments…

Could one in three workers eventually be paying higher rate income tax?

Official forecasts suggest that if current trends continue some 10 million people will have been pulled into the higher rate income tax threshold by 2033, according to an analysis by The Telegraph..

The newspaper claims that ‘one in three workers will be a higher rate taxpayer within two decades as the 40p band becomes the “norm” for millions of the middle class’, following the publication of a report by the Office for Budget Responsibility forecasting the medium-term effects of ‘fiscal drag’.

Fiscal drag as defined here by the OBR is the process by which the average tax rate rises if allowances and thresholds are indexed to prices rather than earnings, resulting in more taxpayers’ income falling into higher tax bands. Current Government policy is to uprate tax thresholds and allowances in line with inflation, but because earnings are expected to rise more quickly than prices in the long term, more and more income moves into higher tax bands and the average tax rate rises steadily.

The OBR forecasts estimates the number of people who will pay the higher rates of income tax if the current £41,865 threshold rises in line with inflation. Currently, 4.6m people pay the 40p higher rate and 300,000 pay the 45p additional rate for those earning more than £150,000. By 2033 the OBR forecasts 9.2 million people will pay the higher rate and 1.7m the additional rate – more than twice as many as at present.

Furthermore, The Telegraph argues that the OBR forecast is likely to be an underestimate, since the Chancellor has restricted rises in the 40p threshold to below the level of inflation. From this year it will go up by a flat 1% until 2016, well below the current CPI inflation measure.

Chancellor George Osborne has resisted Conservative calls to increase the 40p threshold to take into account the rising incomes of ‘middle class’ workers such as teachers, senior nurses and other professionals not normally regarded as high earners, preferring instead to concentrate on raising the tax-free personal allowance in his Budget statements.

However, this analysis of fiscal drag is likely to give more ammunition to those in the party who want to see the higher rate threshold raised. Former chancellor Lord Lamont said: ‘For the next parliament, raising the higher rate threshold should be a top objective for a Conservative government. It makes no sense that a rate that Nigel Lawson intended to be for the richest people in the country is now being paid by secretaries and middle management.’

When Lord Lawson introduced the 40p band twenty-five years ago, only one person in 20 was caught by it, while today it is just over one in six.

The OBR forecast does offer an alternative path. It calculates that if the higher rate threshold were to rise in line with earnings instead of inflation, 4.6 million fewer people would be dragged into it, in its own words ‘effectively switching off fiscal drag.’

Energy in the UK: cost, complaints and competition

According to a forecast by the National Grid, the price of electricity for businesses and homes could double in 20 years. With the current wholesale price of electricity below £50 per megawatt hour, one ‘high case’ scenario sees the price going over £100 per megawatt hour by 2035.

Reports indicate that the cost of energy in real terms has already increased by 20% since 2009, with the National Grid citing the closure of numerous coal power plants as the reason.

This is being reflected in purchasing choices and complaints raised by consumers to the independent ombudsmen. Figures show that 22,671 official complaints were made in the first six months of 2014 – 84% of those were concerning energy bills.

Lewis Shand Smith, chief energy ombudsman, said: ‘The spike in complaints is in part a result of the rising cost of living, but also as a result of consumers becoming more aware of their rights and feeling more empowered to act and fight for a fair deal. Addressing these concerns is crucial to restoring consumer confidence in this sector’.

In addition, ‘Big six’ energy supplier SSE has lost more than 110,000 customers since pledging a price freeze just a few months ago. Their domestic gas and electricity customers were reported down from 9.1 million to 8.99 million.

SSE group managing director, Will Morris, said: ‘We operate in a very competitive market and, as you would expect, different supply companies take different approaches and have different propositions’.

Watchdog Ofgem proposed a full inquiry into the way the industry is run earlier this year, due to increasing prices – an issue SSE tried to sidestep with their price freeze promise until 2016.

The ongoing battle between the big six energy suppliers looks set to continue well into the future, which could mean eventual better value for their customers but Mark Todd, director of energyhelpline.com, said: ‘Households are struggling with sky high energy prices and research shows that millions are now fearful of turning on the heating even when very cold’.

ESSENTIAL TAX DATES FOR AUGUST

2 August
Submission date of P46 (Car) for quarter to 5 July.

31 August
Annual adjustment for VAT partial exemption calculations (May VAT year end).

QUOTE OF THE MONTH

‘[Athletes] Allen Wells and Liz McColgan showed us the enormous pay-offs for hard work, dedication and perseverance. Winning the economic marathon will take similar determination.’

Governor of the Bank of England Mark Carney

WEBSITE OF THE MONTH

www.entrepreneur.com

Business ideas and trends on everything from start-ups and finance to marketing and franchising.

ON OUR WEBSITE

Tax Strategies
We’ve assembled the best tips and advice to help you plan for the future. Visit the Tax Strategies section of our website today.

Your Money
For comprehensive guides to personal finance visit our Your Money page.

New mortgage numbers rise as deposits fall

31 Jul 2014

The Mortgage Advisory Bureau (MAB) has said the average deposit made by first-time buyers through the Government’s Help to Buy scheme has fallen to £8,527.

This is down from an average of £11,438 in April this year. Deposits made without Help to Buy have increased for the fourth consecutive month to £71,474.

Head of lending at the MAB, Brian Murphy, said: ‘Saving for a deposit has become quite difficult, especially if people are renting. With the right checks and balances in place, this kind of activity is an important part of a healthy mortgage market that can satisfy consumer needs without compromising on standards’.

This news came as the Bank of England revealed that mortgage approvals in general were up this year. The number of new approvals this year to June was 108,857 – an increase of 4% on the same period last year, which saw 104,678 approvals.

LSL Property services have also recently released figures showing that the number of first-time buyers is up 27% year-on-year in the first six months of 2014.

The MAB warns that lower deposits mean more interest will be paid over time, which could put buyers in a difficult position should house prices fall.

‘Contractor loan scheme’ settlement announced

30 Jul 2014

HM Revenue and Customs (HMRC) has announced it is offering a settlement opportunity for the 16,000 individuals who attempted to avoid income tax using the ‘contractor loan scheme’.

The settlement opportunity is open until 9 January 2015, and offers users of the tax avoidance scheme the possibility of paying the tax they owe in order to avoid even bigger tax bills and legal costs.

According to an HMRC report, ‘The schemes, used by a small minority of contractors to avoid paying their fair share, involve complex arrangements with individuals signing a contract of employment with an offshore employer. The contractor then receives their pay through the offshore company or trust as what is claimed to be a non-taxable loan, rather than income’.

The average figure owed by each participant is estimated to be £11,000 per year.

Jennie Granger, Director General for Enforcement and Compliance at HMRC, said: ‘Many people regret ever getting involved with complex aggressive tax avoidance schemes and HMRC is providing an opportunity for contractors to come forward and straighten their tax affairs’.

The full settlement opportunity can be viewed on the HMRC website here.

Pound overvalued, warns IMF

29 Jul 2014

Concerns have been raised by the International Monetary Fund (IMF) that sterling may be ‘overvalued’, which could pose a significant risk to the UK economy.

Chancellor George Osborne received warnings from the IMF that the pound has been valued between 5% and 10% more than it should. The Bank of England’s current monetary policy was said to be the correct method for the time being, but it is likely that interest rates will need to rise if inflation does.

Philip Gerson, deputy director of the IMF’s European department, said: ‘Overall we are much more optimistic than we were a year ago, both about short-term growth and about the prospects for growth to continue in the medium term.

‘Wages are growing very slowly and although output is beginning to pick up, the recovery is still at an early stage and there is still a lot of slack in the economy’.

A press release from the IMF shows the same generally positive but cautious outlook. It said: ‘Further demand rebalancing is needed: net trade has made only a modest contribution to the recovery, and the real exchange rate is moderately overvalued’.

£100 billion paid in VAT

28 Jul 2014

Statistics published by HM Revenue and Customs (HMRC) show that VAT now generates over £104.7 billion per year, a record figure.

VAT was raised from 17.5% to a high of 20% in 2011. Figures released show that the total tax collected in 2013/14 was £488.5 billion.

Jonathan Isaby, chief executive of campaign group Taxpayers’ Alliance, said: ‘The VAT hike was designed as an emergency measure but it’s looking more permanent by the day, with the Treasury enjoying the record benefits.

‘VAT impacts the poor twice as hard as the rich, pushing up the price of everyday items and making life harder for millions of people’.

This news comes along with proposals by local councils to tax big businesses more for operating in their areas. 20 councils, led by Derby City Council, put forward the idea of a ‘Tesco Tax’ – with the hope of raising up to £400 million per year.

Those submitting the proposal have said that the cost to businesses would be only a fraction of the costs that supermarkets were encumbered with when VAT was raised in 2011.

With VAT and other outgoings, many consumers are concerned that the economic environment could put pressure on retailers to raise their prices, which would have even more impact on consumers.

Forecasts suggest that one in three workers could eventually pay higher rate income tax

25 Jul 2014

Forecasts suggest that one in three workers could eventually pay higher rate income tax

Official forecasts suggest that if current trends continue some 10 million people will have been pulled into the higher rate income tax threshold by 2033, according to an analysis by The Telegraph.

The newspaper claims that ‘one in three workers will be a higher rate taxpayer within two decades as the 40p band becomes the “norm” for millions of the middle class’, following the publication of a report by the Office for Budget Responsibility forecasting the medium-term effects of ‘fiscal drag’.

Fiscal drag is the process by which the average tax rate rises if allowances and thresholds are indexed to prices rather than earnings, resulting in more taxpayers’ income falling into higher tax bands. Current Government policy is to uprate tax thresholds and allowances in line with inflation, but because earnings are expected to rise more quickly than prices in the long term, more and more income moves into higher tax bands and the average tax rate rises steadily.

The OBR forecasts estimates the number of people who will pay the higher rates of income tax if the current £41,865 threshold rises in line with inflation. Currently 4.6m people pay the 40p higher rate and 300,000 pay the 45p additional rate for those earning more than £150,000. By 2033 the OBR forecasts 9.2 million people will pay the higher rate and 1.7m the additional rate – more than twice as many as at present.

Furthermore, The Telegraph argues that the OBR forecast is likely to be an underestimate, since the Chancellor has restricted rises in the 40p threshold to below the level of inflation. From this year it will go up by a flat 1% until 2016, well below the current CPI inflation measure.

Chancellor George Osborne has resisted Conservative calls to increase the 40p threshold to take into account the rising incomes of ‘middle class’ workers such as teachers, senior nurses and other professionals not normally regarded as high earners, preferring instead to concentrate on raising the tax-free personal allowance in his Budget statements. This analysis of fiscal drag is likely to give more ammunition to those in the party who want to see the higher rate threshold raised.

Former chancellor Lord Lamont said: ‘For the next parliament, raising the higher rate threshold should be a top objective for a Conservative government. It makes no sense that a rate that Nigel Lawson intended to be for the richest people in the country is now being paid by secretaries and middle management.’

The OBR forecast does offer an alternative path. It calculates that if the higher rate threshold were to rise in line with earnings instead of inflation, 4.6 million fewer people would be dragged into it, in its own words ‘effectively switching off fiscal drag.’

Rates must rise soon, says Bank of England

Rates must rise soon, says Bank of England
24 Jul 2014

Governor of the Bank of England (BoE), Mark Carney, has warned that if rates remain at their current historic low it could contribute to a housing bubble and ‘other risks’.

Speaking at a conference in Glasgow, ahead of the Commonwealth Games, Mr Carney made no definite plans but made it clear that interest rates must rise soon. He said: ‘The clearest indication of when rates will rise is when they rise’.

Rates have been at their 0.5% low since the financial crisis in 2009. Mr Carney added: ‘The Bank is well aware that a prolonged period of historically low interest rates could encourage other risks to develop. In the UK, the biggest risks are associated with the housing market. Echoing comments made in recent weeks, he repeated that household indebtedness was his main concern.

Finishing his speech Mr Carney referenced the ‘enormous pay-offs for hard work, dedication and perseverance’ of competitive runners, saying: ‘Winning the economic marathon will take similar determination’.