HMRC hikes tax late payment charge to 7%
HMRC issued 540,000 late payment penalties in 2022 according to data from Thomson Reuters.
The total value of fines issued by the Government tax collector hit £187 million in the same year.
This comes as the Bank of England base rate continues to increase, sending late payment charges up with it. HMRC now charges 7% to those who fail to file their tax returns on time as it raises charges in lockstep with the central bank.
In 2022 interest charges were just 3.25%, less than half the current level. The changes came into effect from May for both quarterly and non-quarterly late payments.
Anyone in the UK who earns money being self-employed, is a partner in a business partnership, earns over £100,000 a year, or earns income from savings, pensions, investments, dividends or property rentals, is liable to fill out a self-assessment tax return for each year they earn in.
There are exceptions to these if the level of income is below the threshold for paying tax, or if money is sheltered in tax-efficient accounts such as ISAs.
Tax deadlines
Tax self-assessment is a foundational part of managing earnings. While minimising tax liabilities in the first place is key, just making sure those liabilities are met each year is essential too.
The tax return is relevant to the past tax year, so the current assessment deadlines pertain to the tax year 2022-23 which finished on 5 April 2023.
The current deadlines are as follows:
- 5 October 2023: register for self-assessment
- Midnight 31 October 2023: paper tax return deadline
- Midnight 31 January 2024: online tax return deadline
- Midnight 31 January 2024: pay the tax you owe
There are some caveats to this though. For example:
- There’s a second payment deadline on 31 July if you make advance payments, known as “payments on account.”
- You’ll need to submit an online tax return by 30 December if you want HMRC to collect tax from wages or pension automatically.
- If you have a company as a partner, with an accounting date between 1 February and 5 April, the online return deadline is 12 months from the accounting date while paper return is nine months.
Time to Pay
Those who find themselves behind on tax returns and facing penalties should get in touch with HMRC to discuss a ‘time to pay’ deal as quickly as possible to prevent further charges, or even prosecution, from arising.
Time to Pay plans soared during the pandemic years, with 21,000 taxpayers making the arrangement in 2021-22. These plans allow taxpayers to set up 12-month payment schedules for their tax liabilities. Taxpayers were given extra time to file during the pandemic, thanks to administrative delays.
With rigorous wealth management and support in place from financial advisers, this shouldn’t happen. However, it is essential to be aware of the deadlines, your potential liabilities, and how to prepare your wealth to meet those liabilities smoothly.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 14th June 2023.
How to prepare for an active retirement
Retirement is no longer the sudden process it once was. Making sure you’re financially prepared for your golden years is essential to get the most of out of this time of life.
A few big trends have emerged among older workers in the past thirty years. According to Government data, the number of over 50s in work has increased significantly, from 57.2% in the mid-1990s to 72.5% in 2019.
The average age at which someone exits the labour market has also changed, rising to 65.3 years for men from 63.1 and 64.3 years for women, up from 60.6.
However, the statistics don’t illustrate how much the nature of retirement has changed in recent times. That is to say, people are now less likely to just down tools one day and decide “ok, finished, now what?”
Instead, it is becoming increasingly common for older workers to reduce hours, try new ideas or projects. Put simply, retirement isn’t quite what it used to be!
This has come from two directions, partly from pressure caused by State Pension age uplift, but also from those who have been able to plan effectively giving them more options in later years.
This flexibility allows people to pursue more options later in life and live a more active retirement.
So, what are the key things to consider when you’re looking to work less and enjoy life more? Here are some key considerations.
Income needs
The first point to begin with is looking at your current income, between yourself and your partner if you have one.
The ‘rule of thumb’ is you’ll need one third less income during retirement than working years. However, this is mostly predicated upon not needing to pay a mortgage any more so may or may not be the case depending on your situation.
You’ll also want to consider what kind of retirement you want to have. Do you want to travel the world? Or are you happy tending to your garden and taking care of grandchildren? Either choices are perfectly laudable but come with potentially different cost implications.
Debt reduction
Have you got any debts? While short-term debt such as credit cards should generally be avoided, personal loans for big purchases such as cars, or mortgages, are not uncommon. It is worth considering if you want to prioritise clearing some of these so as to remove them as an obstacle to beginning an assured retirement.
Cashflow planning
Cashflow planning is a critical aspect of looking at when and how you can retire comfortably. Wealth is often structured through key assets such as investments, but these are often distributed in pensions, ISAs, property, and other vehicles.
You might have a good amount in all three, but planning for accessing that cash takes some consideration, particularly when it comes to looking at how far it will go in the long term.
Cashflow modelling can help you to understand how much you’ll be left with depending on what age you stop earning a work income, and how much you can expect from your various funds. It will also incorporate other key income sources such as State Pension, which can prove valuable later in life.
Wealth structure
The structure of wealth is really important here too and will dictate how that cashflow is able to be managed. Pensions typically form the bedrock of a portfolio and come with certain tax implications that need careful attention.
The 25% tax-free lump sum can be an extraordinarily useful tool for example, but deciding if you should draw down on an ISA or pension first, or even continue to contribute more for longer, is difficult to get right.
The structure of your wealth will also have a big implication on future tax liabilities and needs to be carefully considered.
Investment glidepath
Finally, within that structure you’ll need to consider how much of your wealth is invested. Typically, when you’re in working years, you’ll be invested in assets that bring better long-term returns such as equities.
However, as you near retirement you’ll want to consider what is called a “glidepath”, whereby your asset mix moves to a more conservative footing in order to minimise portfolio volatility. This is to prevent a situation where you’re ready to retire, but owing to macroeconomic factors, your portfolio isn’t!
Ultimately, the best preparation for an active retirement is to plan well ahead and have a clear idea of what your goals are. However, it is also fine if you’re not 100% sure. We spend the best part of our adult lives in work, so leaving it can be a daunting prospect.
To make sure you’re on the right path, don’t hesitate to get in touch with us to discuss your options.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 14th June 2023.
The importance of generational financial planning
Families in the UK are set to transfer around £5.5 trillion worth of assets over the next 30 years, according to data from the Kings Court Trust.
Not only is this an extraordinary shift in the wealth of the nation, but it throws up a myriad of issues that can only be solved through careful financial planning.
There are many things to consider when it comes to your own generational financial planning. Not only is it about passing wealth on in the most efficient way, but it also matters that your children and even grandchildren are given the best head start possible.
Generational financial planning is an essential aspect of overall financial planning. You need to think about passing on money, and what questions to consider before you set a plan in motion.
Understanding how much of your wealth you’ll need while you’re alive is a critical starting point. Then thinking about which aspects you’d like to give away at death, and which you could begin to give earlier will help you to define your ultimate goals.
Gifting unpacked
Gifting is the biggest variable possibility when it comes to generational financial planning. There is a myriad of rules and allowances when it comes to gifting, pertaining exclusively to the mitigation of inheritance tax (IHT).
At a basic level, you’re allowed to gift money, household, and personal goods such as furniture or jewellery, property, stocks and shares or even unlisted shares. However, how much and when you gift them makes a significant difference to your potential IHT liability.
For cash gifts you can make £3,000-worth of gifts a year tax-free, known as the ‘annual exemption.’ You can give it all to one person or divide it between several. It is also possible to carry the allowance forward for one tax year.
The £3,000 annual allowance can be used to pay into a pension for your child or a junior ISA (JISA). While classed as a ‘potentially exempt transfer’ you’ll need to live for seven years (covered more below) to avoid liability if you go over this limit of contributions – not impossible when the annual JISA limit is £9,000.
Paying into these kinds of accounts has the benefit of extra long-term planning for your children’s future financial health and can mitigate your worries in older age as they grow, have careers and families of their own.
You can also make gifts of up to £250 per person each year with no overall limit, as long as that person hasn’t been included in the above £3,000 of gifting. This is called the ‘small gifts allowance.’
If your child is getting married, a £5,000 gift is permissible, or £2,500 for a grandchild. You can give up to £1,000 tax free to anyone else you know getting married.
Regular payments to others are also permissible with no limit. However, the caveat here is that you must be able to meet your regular living costs while making such payments and it must come from your regular monthly income. These are known as “normal expenditure out of income.”
You can give such regular payments to help a child pay their rent, pay into a savings account for a child under 18 or even give financial support to an elderly relative. These can be made over and above the £3,000 annual allowance. Trusts are also possible but can be subject to income tax on withdrawal.
Seven-year rule
Beyond this is a really important rule, known as the ‘seven-year rule.’ Essentially you can give away any part of your estate and not face IHT on the assets, but you have to live for seven years after making the transfer.
As the seven-year deadline approaches, the tax liability also reduces. Between three and four years it’s 32%, four to five years it’s 24%, five to six years it’s 16% and six to seven years it’s 8%.
What is really important with the seven-year rule is taking into consideration your health and life expectancy. If you’d like to give something major to a loved one, such as property or even a share portfolio, then the sooner you do it the better.
This might of course not be the right route to go down as a portion of your wealth can be inherited tax-free anyway. A financial adviser can help you make a decision around this on the best way forward.
Ultimately, when planning for intergenerational wealth there is much to consider. While the challenges that come with this might seem daunting, with planning it is possible to set yourself and your loved ones up for the most successful outcome possible.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 14th June 2023.
Why does the Bank of England hike rates to tame inflation?
Households have faced fierce price rises in the past 18 months, with the current rate of inflation (for April 2023) at 8.7% on the CPI measure by the Office for National Statistics (ONS).
However, with inflation so high, why does the Bank of England (BoE) respond with repeated rate hikes? Since inflation began to run away the BoE has been in a process of increasing interest rates. The Bank’s Monetary Policy Committee (MPC) meets most months to decide where it would like rates to be.
Since December 2021 the MPC has hiked the base rate 12 times, the largest hike by 0.75% in November 2022. The current base rate is now 4.5%, having risen from just 0.1% in December 2021.
Inflation game
In order to understand why interest rates are rising, first we have to understand inflation, its causes, and effects.
The government and national statistical authorities measure inflation in order to understand what is happening in the economy. A general goal of the Government is to help grow the economy as measured by gross domestic product (GDP). Although a fairly blunt measure, GDP is the best approximation economists have to tell whether, as a nation, we’re getting wealthier.
When an economy grows prices generally rise with it as people earn more money and spend more on goods and services. Inflation is not a ‘bad’ thing if controlled as it encourages spending, saving (when the interest rates are attractive) and investing. Inflation encourages saving and investing because doing this with your wealth is a good way to maintain or grow its value ahead of inflation.
However, problems can arise when inflation gets too high. This can be caused by an economy growing too quickly – people find themselves with more money and spend it quickly which leads to prices rising faster in response to the increasing demand.
It can also be caused by supply issues. If a company has less of something available to sell, but the same level of demand, it will typically hike the cost as a result – this is the kind of inflation we are largely suffering from now in the wake of the pandemic.
Where interest rates come in
This is where interest rates come into the picture. The UK economy during the 2010s generally lived with very low, stable levels of inflation. In the wake of the financial crisis the BoE cut interest rates to rock bottom in order to make borrowing cheap and encourage the financial system to function correctly. As inflation was so low, it saw little need to hike rates back up to historic levels. However, the inflation which started to rise in 2021 changed this thinking.
Hiking interest rates does two things to an economy.
Firstly, it makes debt more expensive. All debt-related products such as mortgages, loans and credit cards set a level of interest that is ultimately based upon calculations by financial providers who look to the BoE for guidance on a basic level of interest to set. When the BoE hikes its rates, so do these providers, such as banks and other financial institutions. For households, this means more expensive monthly payments on mortgages – if they have a tracker mortgage, more expensive debt servicing on credit cards, and more expensive loans. By doing this, the BoE effectively takes away households’ disposable income, forcing them to spend less on goods and services in the economy, and reining in demand and therefore ultimately, inflation.
The second effect of interest rate hikes is sort of the opposite – it makes saving more attractive. By increasing the base rate, the BoE encourages banks and savings providers to offer better savings rates to customers. By doing this, anyone with money saved up is encouraged not to spend it by better returns offered for leaving the money untouched. While easy-access savings accounts offer a good rate when this happens, the best rates are found in four- or five-year fixed savings accounts or ISAs.
However, this is only theoretical and there is a big issue at the moment which makes this situation look less attractive. With inflation at 8.7%, and the Bank of England base rate at 4.5% – savers, even on the best deals, still won’t find a rate of interest that beats inflation. This means ultimately that even if your money is locked away and earning interest, it is still losing value relative to inflation. As such, it still pays to look at different ways of using your hard-earned money, particularly by investing through the stock market, bonds, and other assets such as gold, property, and others.
In order to make the best decision it is important to consult with a financial adviser to ensure the best outcome and structure possible for your wealth.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 14th June 2023.