COVID-19 and Financial Planning

Please see below some useful information on the COVID-19 and financial planning.

  1. Furloughed Employees
  2. Owner Managers/Director Clients and the Job Retention Scheme
  3. FCA Guidance on Pensions Advice: Covid-19
  4. Gifting wealth
  5. Funding ISAs

Please find below a summary of the latest thinking on pension contributions and revised patterns of income. Many of your clients and/or their family members/friends will be impacted by the recent government announcements and their pension provision is an important part of their employment package. Below is a brief summary of the key pension points and some additional clarification on individuals that have been furloughed.

Furloughed Employees

 

For employers that are furloughing their employees

  • They can claim up to £2,500 per month in salary for each furloughed employee.
  • There is a ceiling of 80% of the employees' salary as at February 2020.
  • The government grant will also include the employer's National Insurance Contributions AND minimum auto-enrolment contributions.
  • If the employer is paying more than the minimum or decides to pay their employees at their FULL income then no extra can be claimed.
  • The government has confirmed that the furlough scheme does not alter any existing contracts of employment.

Relevant UK Earnings

 

  • The grants that are paid by the government to the employer which then continues to pay their employees using PAYE. Income Tax and NICS are payable in the normal way. This means these earnings are still deemed to be UK relevant earnings.
  • The same principle will apply to self-employed earnings. It is thought the grants will be treated as self-employed "profits" with tax paid via self-assessment. This would mean that they would be deemed UK relevant earnings.

Furloughed Employees: Further guidance: Source: http://www.commissioninghr.co.uk/

  • Employees can start a new job when on "furlough" (meaning they might have up have 80% of old salary and 100% of a new one). Revised guidance confirms that their existing contract of employment needs to allow for this.
  • Clients on commission: An employer can reclaim 80% of compulsory (contractual) commission back from HMRC. This can only be referring back to past sales and commissions and not on any new sales.
  • Clients can be furloughed multiple times. Each furlough must be at least three weeks.
  • Employers must notify their employees of their furlough status in writing and keep this record for at least five years

Sources:

 

  • Technical Connection
  • ttps://www.thepensionsregulator.gov.uk/en/covid-19-coronavirus-what-you-need-to-consider

 

Owner Managers/Director Clients and the Job Retention Scheme

The position your clients who are owner managers and the Job Retention Scheme (JRS) announced by the government remains unclear. The note below gives a high-level summary of where we are currently and some thoughts as to how these clients should act in the light of the schemes' rules.

The issue is can owner managers access the JRS and if so how and on what terms?

  • It is clear that owner manager clients cannot qualify under the scheme designed for the self-employed. They are not in relation to their status in their company
  • The terms of the JRS refer to the employer paying a furloughed employee in relation to their salary.
  • In addition the furloughed employee cannot do any productive work for the company.
  • The Financial Times (02/04/2020) reported that owner managers/directors may able to furlough 80% of the PAYE element of their salary (https://www.ft.com/content/e8413fcc-d548-4a4c-835a-88039563be3e) via the JRS and continue with their statutory obligations on the basis that this was they were doing.
  • Treasury Guidance confirms that “Where furloughed directors need to carry out particular duties to fulfil the statutory obligations they owe to their company, they may do so provided they do no more than would reasonably be judged necessary for that purpose, for instance, they should not do work of a kind they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company.” (https://www.gov.uk/guidance/claim-for-wage-costs-through-the-coronavirus-job-retention-scheme)

What are an owner manager/directors statutory obligations?

 

Based on information from Companies House there are 7 duties of a company director:

1.To act within powers (i.e. to act in accordance with the company's constitution, and only exercise powers for the purposes for which they are conferred.)

2.To promote the success of the company for the benefit of its members (shareholders) as a whole. 

3.To exercise independent judgment.

4.To exercise reasonable care, skill and diligence.

5.To avoid conflicts of interest.

6.Not to accept benefits from third parties.

7.To declare interests in transactions or arrangements with the company.

https://companieshouse.blog.gov.uk/2019/02/21/7-duties-of-a-company-director/

It is the duty/obligation that seems to be causing employment lawyers and HR experts a headache:

Quoting from the Companies House website:

"The duty states a director must act in a way that they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members (shareholders) as a whole. When making decisions, directors must also consider the likely consequences for various stakeholders, including employees, suppliers, customers and communities. They should also consider the impact on the environment, the reputation of the company, company success in the longer term and all of the shareholders (including minority shareholders).

 

A duty to promote the success of the company may seem like an obvious task for a director. However, it brings with it a number of implications.

 

Board decisions can only be justified by the best interests of the company, not on the basis of what works best for anyone else, such as particular executives, shareholders or other business entities. But directors should be broad minded in the way that they evaluate those interests – paying regard to other stakeholders rather than adopting a narrow financial perspective"

The big question is whether the duty to "promote the success of the company" means that there is an obligation on  your client to do all they can to keep their business working despite being furloughed. Does this mean doing work for a client which then brings in revenue and seems to therefore cut across the requirement NOT to do any "productive work". Definitely one for the lawyers as s172(1) of the Companies Act confirms that a duty of a director  "to promote the success of the company".  A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole" (http://www.legislation.gov.uk/ukpga/2006/46/section/172).

 

Why are dividends not covered by the scheme?

  • The simple answer is that the JRS only covers salary which is not a great outcome  for those clients who have deliberately planned a low or very low level of salary. The problem is compounded by the requirement that it needs to be salary as at the 28th February 2020 so it is impossible to change the pattern of remuneration retrospectively.
  • There is an additional legal complication. The client is a shareholder. The obligation of the director is "to promote the success of the company for the benefit of its members (shareholders) as a whole."
  • Also it is worth bearing in mind that the self-employed can receive the grant and (subject to various conditions) continue working.

 

A HR source confirmed that the latest thinking for clients who are owner managers/directors "is to furlough for 3 weeks, take off furlough for 1 week and perform all your work in that week then furlough again for another 3.  There seems nothing wrong in being able to do this and I think is the consensus at the moment." (http://www.commissioninghr.co.uk/)

Of course, each client must take its own legal and HR advice but I hope you found this note to be helpful in providing some background to this particular area.

 

FCA Guidance on Pensions Advice: Covid-19

The FCA published on the 7th April a document outlining their approach  to pensions advice in a number of areas that may directly or indirectly impact your firm's advice to pension clients. The FCA in this document are not only addressing the advice sector but also very much in focus are the pension providers.

The document can be accessed from the FCA website: https://www.fca.org.uk/firms/pensions-and-retirement-income-our-guidance-firms

Key points

Deferral of the following until 01/02/2021

  • Final suite of Retirement Outcome Review Remedies
  • Investment Pathways
  • Cash investments
  • Actual charge disclosure rules

The second part of the FCA document provides further guidance on DB transfers. The FCA specifically address a number of  potential "misconceptions" clients may have  and confirm that:

 

Addressing customer misconceptions 

 

Firms should not assume that changes in circumstances due to the coronavirus make a transfer more likely to be suitable for individual clients. Firms should also address any misconceptions clients may have as a result of the crisis. For example, clients may think:

  • ‘Cash equivalent transfers (CETVs) are at an all-time high’. Firms should not assume that increases in CETVs automatically improve client outcomes if a transfer proceeds. They should consider the client’s circumstances and attitude to transfer risk if DB schemes offer larger CETVs.
  • ‘Death benefits will be better in a DC scheme’. Firms must adequately consider how death benefits are provided by the DB scheme and the proposed DC arrangement throughout retirement. They should also consider alternative options, such as term life insurance, and any tax implications, especially if a client has a life expectancy of under 2 years.
  • ‘My employer is going under, so my pension scheme will too’. Firms are generally not experts in employer covenant assessments. So where clients have concerns about the sponsoring employer continuing in business, they must provide a fair assessment of the benefits of the Pension Protection Fund."

 

 

Gifting Wealth

 

  • This could be a good time for advisers/clients to consider passing wealth on.
  • The best time to trigger CGT is perhaps when the asset value of a portfolio is at its lowest for some time which means that the amount that has been gifted for IHT purposes will also be lower.

 

Funding ISAs

A couple of BDs last week had IFAs asking for material on the advantages of funding an ISA at the beginning of the tax year as opposed to the end. I sent over some H-L material last week but I have also found this quote from Interactive Investor

Rebecca O'Keeffe, Head of Investment, interactive investor:

"Most investors are aware of the long-term advantages of investing in a Stocks and Shares ISA, but many may not be aware that it can make a significant difference to your wealth if you invest early in the tax year rather than late."

"Although there only appears to be one day in it, if you start the clock on the 6th April and one set of investors chooses the early-bird route and invests £20,000 at the start of each tax year, they will end up with a portfolio worth £264,136 after 10 years assuming a 5% return after charges – which is £12,578 more than those investors who choose to invest the same £20,000 at the end of each tax year and effectively only have 9 years' worth of growth, where their portfolio would have grown to £251,558.

"Over 20 years the impact is even more stark, with the difference between early-bird and last-minute investors resulting in a portfolio worth over £33,000 more by investing early - £694,385 compared to £661,319 if you generated a 5% return after charges."

Source: https://www.ii.co.uk/blog/early-bird-isa-investors-catch-extra-ps33000-ii508067

Small business Coronavirus Help.

Hi Everyone

Here is the link to the government website for help to small business.

https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses

Few points to mention

  • There should be a major announcement in the next 48 hrs for help with self-employed income.
  • In regards to staff, normal contracts apply so if you are considering making people redundant check staff contracts e.g do they need to be paid for a full month/ redundancy pay.
  • In relation to the point above look at the employee retention scheme that runs from the 1st April avoiding those issues.
  • For those limited companies corporation tax bills are due 9 months and 1 day after the end of their business year. These can be negotiated with HMRC into some kind of payment plan
  • Make sure you apply for the rates relief with your local council
  • Commercial mortgages can also be requested for a 3 month repayment holiday however from personal experience the process seems more complicated as they have asked for my business accounts like a ‘normal’ commercial loan process. Residential mortgages are a case of contacting your lender directly usually through an online form.
  • Self-employed and other people in the Self Assessment System will not have to pay their July payment on account but this will be due 31 January 2021 - this is automatic
  • VAT payments this quarter may be deferred over the remainder of the year but VAT returns still need to be prepared and submitted on time - this is automatic
  • Under the Coronavirus Job Retention Scheme, all UK employers will be able to access support to continue paying part of their employees’ salary for those employees that would otherwise have been laid off during this crisis - the application process is being devised - my reading is that you need to pay the employee and then claim back the 80% that has been widely publicised so people considering stopping wages should think carefully - rules around sole director companies are unclear.  My understanding is that the grant will be based on February's PAYE submissions.

Things you may already know:

  • a statutory sick pay relief package for SMEs - this will not be claimed via the PAYE process and the refund process is still unknown
  • a 12-month business rates holiday for all retail, hospitality and leisure businesses in England - this will be automatic
  • small business grant funding of £10,000 for all business in receipt of small business rate relief or rural rate relief - as it stands this would not be available to people who run businesses at home or those who do not pay business rates.  This will be automatic
  • grant funding of £25,000 for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000 - the process will be via the local authority
  • the Coronavirus Business Interruption Loan Scheme to support long-term viable businesses who may need to respond to cash-flow pressures by seeking additional finance - this is accessed via the British Bank website
  • the HMRC Time To Pay Scheme - If you are concerned about being able to pay your tax due to COVID-19, call HMRC’s dedicated helpline on 0800 0159 559
  • Mortgage holidays for 3 months - I'm already hearing positive comments about banks providing this relief and if you are in difficulty you should contact your bank
  • IR35 for contractors has been placed on hold until April 2021
  • Companies House filings can be delayed due to Coronavirus

Why should I use a mortgage broker?

The main reason most people use a mortgage broker is that they take out most of the leg work of looking for a mortgage. They will search the market and compare the different deals that are available to you. A mortgage broker will not only look at interest rates, but also other charges such as valuation fees, which could affect the overall cost of your mortgage.

Read more ...

Marriage tax allowance

 If you’re a low-earner and your spouse (through Marriage or Civil partnership) is a basic rate tax payer, you can apply to transfer your unused personal tax allowance to them.

The higher earning person will receive a tax credit equivalent to the amount of personal allowance that has been transferred to them. The amount is deducted from the amount of tax they would usually have to pay.
The full amount that can be transferred is £1,185 and if you decide to transfer any allowance, you must use the full amount.

The low earning partner’s pay before tax must be less than the personal allowance - which in 2018/2019 is £11,850.

The threshold for basic rate taxpayers in 2018-19 for most of the UK is £11,850-£46,350, so the higher earning partner’s salary must fall between these boundaries.

In Scotland, the thresholds for basic tax rates are different, so the higher earning partner’s salary would have to be less than £43,430. Those claiming marriage allowance in Scotland can continue to do so at the current rate of 20%.

To apply for this tax for the allowance, the lower earner needs to apply to the HMRC to request the personal allowance to be transferred to their spouse.

To ‘Buy to Let’ or not to ‘Buy to Let’ that is the question!

As an IFA I have often discussed with my clients the possible financial returns and also the responsibilities of considering investing in the ‘Buy to Let’ property market as opposed to

Unit linked investments such as ISA’s or a Pension. Recently, the Chancellor has decided to financially hit ‘Buy to Let’ investors quite hard which may tip the balance against this option, encouraging many to invest in other areas. Thus, from April anyone buying a property for investment will be required to pay a ‘special ‘ stamp duty of 3% with a starting rate of zero and this will be in addition to the residential tax duty rates which apply for properties above £125,000.

Also, from April 2017 Mortgage Interest Relief is also being overhauled. The changes are being

phased in, but by 2020 all mortgage interest on ‘Buy to Let’ mortgages will no longer be able to be

deducted from the rental income received, for tax purposes. This is especially significant for Higher Rate Tax payers with tax relief set at a maximum of 20 per cent.

Whilst many clients will still perceive property as a safer investment than that of an investment

ISA or pension, for example, it is important, however, to consider these new tax changes when

you are planning retirement and discussing your tax issues with your Independent Financial

Advisor.

Maximising State Pension

Maximising state pension benefits.

A key part of financial planning often overlooked is making sure that you receive the maximum state pension in retirement. To get a state pension forecast simply use the tool on the website https://www.gov.uk/check-state-pension.

If there is a shortfall, there are 2 options:

-          If there are likely to be tax years in the future where the client will not achieve a qualifying year because of insufficient earnings or Credits, then in those years, it is possible to pay Voluntary or Class 3 NICs.

Read more ...

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