There has been much publicity over the latest HM Revenue & Customs “blunder” in relation to income tax under PAYE.
On the face of it, the matter of tax administration would not seem to be a subject that should be top of a financial adviser’s to do list and I would agree with that. However, tax and tax planning is an increasingly important part of the financial planning process. This is especially so given the tax increases that we are having to deal with now and are likely to have to continue to deal with for the foreseeable future.
Tax has a role to play in most aspects of financial planning. In investment planning, net returns can be seriously affected by tax – negatively with no planning and positively with planning. With the momentous changes to pension tax relief, taxation is a critically important consideration in planning for retirement. Even simple protection planning can be seriously affected by tax. What if a policy with a decent-sized sum assured is not held on trust? An inheritance tax liability could be created or increased.
So, OK, tax is an important part of the financial planning process, with the potential to significantly affect effectiveness and benefits. How does the reported (so-called) HMRC blunder over PAYE affect the financial planning process and the financial wellbeing of an adviser’s clients?
Well, first, it is important to say that it would seem likely that a fair number of individuals could be affected and so the potential “client segment” could be meaningful.
Tax has a role to play in most aspects of planning. In investment planning, net returns can be seriously affected by tax – negatively with no planning and positively with planning
Now, there might not be much planning to be done as a direct result of potentially being caught but there will be a need for an adviser to be at least informed in relation to what could be an issue of great importance to their affected clients. So in this respect, having the know-ledge to speak coherently and intelligently on the subject is akin to having an understand-ing of a wide (ish) range of tax planning strategies , even if the adviser is not in a position to implement them. How big is the segment of clients potentially affected by this blunder?
Depending on the source of information that you believe, it would seem that between 5.6 million and six million people have paid the wrong amount of tax through the PAYE system. In anyone’s book, that seems like a sizeable market segment. It would not be difficult to conclude that all these people would be, at the very least, mildly interested in having a clear understanding of how they may be affected and, even more important, what they could do about it .
Around 4.3 million of these have paid too much and are due a refund but 1.4 million have underpaid and will have to hand over an average of £1,428 each.
Dave Hartnett, the HMRC permanent secretary resp-onsible for tax, initially denied there had been any errors and said that there was “no need to apologise”, a statement which was met with what some papers described as fury among politicians and so it was swiftly followed by another saying he was, in fact, “deeply sorry”.
What about the people being asked for the extra tax?
HMRC has sent out the first 45,000 letters to people who are affected, around 30,000 of whom are due a rebate, while 15,000 have underpaid tax (it is understood that, in some cases, individuals may face both under and overpayments, which could cancel each other out). The remaining people affected will be contacted between now and Christmas.
People who have underpaid and owe less than £2,000 will be able to have the money deducted via PAYE, that is, from their salary on a monthly basis during the 2011/12 tax year.
But those who owe more than £2,000 will have to pay it to HMRC in a lump sum.
This does not seem particularly reasonable but HMRC’s excuse is that such sums would generally be only demanded from higher-earners who “can afford” it. It has been reported that HMRC has told MPs that people who owe more than £2,000 and have difficulty paying will not face interest charges.
What should people being asked for the extra tax do before paying it? I will look at this next week.