Much of the commentary has centred on the attack on higher-rate tax relief for pension contributions. This Government has been no friend to the private pension industry. Gordon Brown’s removal of the ability of pension funds to reclaim the notional tax credit applicable to dividends is still being heavily criticised more than 10 years after the decision was taken, then there was all the upheaval regarding pension simplification and, although the actual change to the tax relief position was not as dramatic as many commentators were predicting, it may well further undermine public confidence in pensions as a long-term savings vehicle.
New transitional measures, which were effective from April 22 are designed to prevent high-earners maximising their contributions before the new rules take effect in April 2011.
These so-called forestalling provisions are very complex and would seem to catch employer contributions and salary-sacrifice arrangements. As we work through the detail all will, hopefully, become clearer. What was I saying about pension simplification?
The additional complexity will mean there is a greater need than ever for advice, particularly when one also considers the potential impact of the accelerated income tax measures that start to bite for those earning more than £100,000 from tax year 2010/11.
Personal allowances will be lost in full for those earning around £114,000, with an effective marginal income tax rate of 60 per cent on the income between £100,000 and £114,000.
Planning to reduce a 60 per cent tax liability will focus clients’ minds, as will mitigation of the 50 per cent rate of income tax for those with income of £150,000 or more.
There was some good news for business clients. For loss-making businesses, the ability to reclaim tax paid in the last three years has been extended for another year.
For business clients looking to invest in the future, the introduction of an enhanced 40 per cent first-year capital allowance is also good news, particularly in light of the continued availability of the annual investment allowance on the first £50,000 spent on plant and machinery.
Advisers are strongly placed to help business clients make the most of these allowances and can perhaps also incorporate some imaginative pension planning to stretch the client benefits even further.
There were very few changes with regard to inheritance tax or capital gains tax but a big surprise was the increased Isa allowance, which may present opportunities for advisers to refine retirement funding advice.
Aside from the pension contribution forestalling rules, which take effect immediately, most of the new provisions have been announced in advance.
We all have time, therefore, to look carefully at the impact for clients and consider potential responses. In particular, increased tax rates, extended Isa allowances and the beginning of a reduction of tax breaks on registered pensions mean the choice of investment wrapper becomes an even more important part of the financial planning process.
The complexity of the new rules certainly means there is plenty for advisers to get their teeth into and demonstrate their value to their clients.
Brian Murphy is financial planning manager at Axa Life