View more on these topics

Advice in blunderland

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.


7IM cuts costs on AAP range

7IM is reducing the costs of its AAP passive multi-manager funds by replacing some of the exchanged-traded funds and tracker fund holdings with direct exposure to the underlying shares. The firm feels it is important to keep costs down in the current climate of low growth to prevent charges eating into investors’ capital. It says […]

Foresight Solar VCT gets FIT

The Foresight solar VCT is a venture capital trust that invests mainly in unquoted companies that generate electricity from solar power systems and qualify for Government feed-in tariffs.

Canada Life launches group CI policy

Canada Life has introduced a group critical illness policy offering scheme members a range of support services such as Red Arc and Best Doctors. Both services come as part of the policy. Red Arc provides practical and emotional support to scheme members and their family at the point of claim. A personal nurse adviser will […]

Seeking quality in uncertain markets

By Ewan McAlpine, Senior Client Portfolio Manager In uncertain times, investors naturally seek safety. But in fixed income markets, what does that really mean? Ewan McAlpine outlines the approach RLAM’s Fixed Income Team will be adopting across its credit funds in response to potentially volatile markets this year. Click here for full article


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm