Once upon a time, the Government’s Autumn Statement only dealt with the country’s economic position and strategies to improve it. Now it has become an introduction to the Spring Budget which gives the Government a chance to unveil some of its forthcoming fiscal changes.
Whilst there will always be new proposals made in the Spring, the Autumn Statement contains information on many of the important tax rules that underpin the revenue input to the Treasury. And with the Government still under constant pressure to deal with the deficit, it gives them a chance to demonstrate what they are doing about it.
One of the benefits of knowing about tax policy that will be introduced from a future date is that it gives the client and financial advisers a chance to plan now.
This is true of this Autumn Statement – particularly in the important area of pensions. This article deals briefly with some of the announcements that may be of interest to financial planners and their clients.
1. Registered Pension Schemes
As ever a number of possible changes had been flagged up in advance and this was the case with the tax treatment of registered pensions schemes. As something of a trade off for not introducing a tax on properties (a mansion tax), George Osborne made proposals to cut back on the tax advantages of registered pensions.
The main proposals are:
- Annual allowance to be reduced from £50,000 to £40,000 from tax year 2014/15. Allowances to remain at £50,000 for tax years 2010/11, 2011/12, 2012/13 and 2013/14 for contribution and for carry forward purposes.
- Lifetime allowance to be reduced from £1.5m to £1.25m from 2014/15
Fixed protection to be available enabling benefits to be taken up to the greater of the standard lifetime allowance and £1.5m without any lifetime allowance charge.
- Election by 5 April 2014
- Protection lost where further accrual/contributions on or after 6 April 2014
Personalised protection option to be considered as a possible additional transitional protection.
- This would provide a lifetime allowance of the greater of the standard lifetime allowance and £1.5 million, but unlike fixed protection without the need to cease accrual/contributions on or after 6 April 2014.
- This would only be available to individuals with pension benefits with a value of at least £1.25 million as at 5 April 2014.
Maximum capped drawdown income to be increased from 100 per cent to 120 per cent of the relevant annuity rate determined from the GAD tables.
The reduction in the annual allowance was expected and could have been worse. To begin with the reduction is only to £40,000 – £35,000 or £30,000 had been discussed in the press. Secondly, the reduction doesn’t apply until tax year 2014/15 and thirdly it is somewhat softened by the ability to carry forward unused annual allowance of up to £50,000 for each of tax years 2010/11, 2011/12, 2012/13 and 2013/14.
Once introduced the new limit is likely to be particularly onerous on members of DB schemes with long past service. For example, it will only need a CPI inflation adjusted increase of more than £2,500 to trigger an annual allowance charge (assuming the member had no carry forward entitlement).
On the other hand it gives a high earner the chance to maximise contributions before the reduction in the allowance bites. And, of course, for the very high earners, if action is taken before the end of this tax year, they might be able to secure 50 per cent tax relief.
The changes to the lifetime allowance will mean that any one likely to be affected by the reduction and looking to retire in the near future will need to consider all means to reduce/avoid any lifetime allowance charge. This could include:
- Electing for fixed protection and/or, if available, the personalised protection.
- Considering drawing some or all of their benefits in 2012/13 or 2013/14 when these will be set against the current £1.5 million lifetime allowance.
- Considering how the benefits are taken. For example, an individual with money purchase benefits may well find that using his fund to purchase a scheme pension rather than a lifetime annuity may reduce the percentage of the lifetime allowance he has used up.
The increase in the maximum capped drawdown income is to be welcomed although it is unclear from when it will take effect. It is understood that HMRC will be consulting with providers as to how soon the change can be accommodated, and whether providers would require the necessary amending legislation to be passed before they allow the new rules to be adopted or whether they are happy to work with draft legislation. It seems that 6 April 2013 is a possible commencement date for this.
Personal allowance and tax bands
Following the 2012 Budget, the personal allowance was due to increase by £1,105 to £9,210 in 2013/14. In his Autumn Statement the Chancellor went a stage further by confirming that this will in fact increase to £9,440 – an overall increase of £1,335 to the current level.
In 2013/14, the basic rate tax limit will reduce from £34,370 to £32,010.
Although the basic rate limit is reduced, higher rate taxpayers will benefit from the increased personal allowance.
The result of these changes is that all taxpayers who are fully entitled to a personal allowance (ie because their adjusted net income is less than £100,000) will be better off. At the lower end, the extra increase in the personal allowance will lift a quarter of a million people out of tax altogether.
The chancellor also confirmed that, from 6 April 2013, additional rate income tax will reduce from 50 per cent to 45 per cent. This rate applies for those who have taxable income of more than £150,000. For those affected, there is therefore an incentive to make investments before 6 April 2013 and to defer the resultant income until after that time.
In terms of planning for married couples/registered civil partners, this will mean that:
- – there will be scope to shelter even more income from tax if a higher/additional rate taxpayer is prepared to transfer income-generating investments (including possibly shares in a private limited company) into a non-taxpaying spouse’s name; and
- – there is more incentive for lower rate taxpayers to make increased contributions to registered pension plans with a view to ensuring that any resulting pension income falls within the personal allowance.
As the personal allowance increases, it is clear that the age allowance is gradually being phased out. The amounts of age allowance are frozen at £10,500 for those born between 6 April 1938 and 5 April 1948 and £10,660 for those born before 6 April 1938.
For those who satisfy the age conditions, the age allowance is still currently therefore worth more than the personal allowance. However, the allowance is cut back by £1 for each £2 of income that exceeds the income limit. The income limit will increase from £25,400 to £26,100 in 2013/14.
For those who are caught in this income trap, they should consider appropriate planning by reinvesting income-producing investments into tax free investments (Isas) or tax-deferred investments (single premium bonds) or by implementing independent taxation strategies.
The Government will reduce the main rate of corporation tax by an additional 1 per cent in April 2014. This rate is scheduled to be 23 per cent from April 2013 and was due to reduce to 22 per cent in April 2014. It will now reduce to 21 per cent in April 2014.
The small profits rate of corporation tax for companies with profits of less than £300,000 will remain at 20 per cent.
The capital allowance known as the Annual Investment Allowance will increase from £25,000 to £250,000 for qualifying investments in plant and machinery for two years from 1 January 2013. This is designed to encourage and incentivise business investment in plant and machinery, particularly among SMEs.
A simpler income tax scheme for small unincorporated businesses will be introduced for the tax year 2013/14 to allow:
Eligible self-employed individuals and partnerships to calculate their profits on the basis of the cash that passes through their business. Businesses with receipts of up to £77,000 will be eligible and will be able to use the cash basis until receipts reach £154,000. They will generally not have to distinguish between revenue and capital expenditure.
All unincorporated businesses will be able choose to deduct certain expenses on a flat rate basis
Tax Avoidance and Evasion
As expected the Government unveiled a bundle of measures aimed at countering tax avoidance and tax evasion.
Areas of particular interest are:-
- The introduction of the General Anti-Abuse Rule. This will provide a significant new deterrent to people establishing abusive avoidance schemes and strengthen HMRC’s means of tackling them. Guidance and draft legislation on the GAAR will be published later in December 2012;
- Increasing the resources of HMRC with a view to:
- – Dealing more effectively with avoidance schemes
- – Expanding HMRC’s Affluent Unit to deal more effectively with taxpayers with a net worth of more than £1 million
- – Increasing specialist resources to tackle offshore evasion and avoidance of inheritance tax using offshore trusts, bank accounts and other entities, and
- – Improving technology to help counter tax avoidance/evasion
- Closing down with immediate effect four loopholes associated with tax avoidance schemes.
- Conducting a review of offshore employment intermediaries being used to avoid tax and NICs. An update on this work will be provided in the Budget 2013.
- As announced in the Budget 2012, with effect from 6 April 2013 the Government will cap all previously unlimited personal income tax reliefs at the greater of £50,000 and 25 per cent of an individual’s income. Charitable reliefs will be exempt from this cap as will tax-relievable investments that are already subject to a cap.
It is encouraging that the inheritance nil rate band is to increase – even if it is only by 1 per cent in 2015/16 to £329,000. Currently, the nil rate band is £325,000 and has been frozen since 2009. This will mean that, with effect from 6 April 2015, if the first of a married couple to die does not use any of his/her nil rate band, then the survivor will have a total nil rate band (including the transferable nil rate band) of £658,000.
We await the outcome of the consultation on the taxation of discretionary trusts which is due to be released on 11 December. Hopefully this will incorporate some simplification to the current complex system.
Capital Gains Tax
The CGT annual exemption (£10,600 in 2012/13) will increase to £11,000 in 2014/15 and £11,100 in 2015/16. We do not yet know what it will be in 2013/14.
This is good news for those who invest in collectives with the intention of, at a later date, encashing shares/units with a view to receiving a stream of tax free cash payments. It is important to bear in mind that this exemption
- is available to both of a married couple/registered civil partners
- can be used in respect of a minor child/grandchild by use of a bare trust/designated account and
- if not used in a particular tax year cannot be carried forward to a later year
Gains that exceed the annual exempt amount in a tax year will continue to be subject to CGT at 18 per cent and/or 28 per cent depending on the taxpayer’s level of taxable income.
Trustees pay a flat rate of 28 per cent on gains that exceed their annual exemption (which is normally 50 per cent of the individual rate).
Individual Savings Account
Given that the ability to invest in tax-efficient pensions is being restricted from 6 April 2014 and may be restricted still further in the future, other tax-efficient investments, such as Isas, become more important.
The current maximum investment in an Isa is £11,280 in a tax year, of which not more than £5,640 can be in cash. With effect from 2013/14, the maximum will increase to £11,520 (with the cash content not to exceed £5,760). If possible use of the allowance should be maximised as any unused allowance cannot be carried forward.
The Junior Isa and Child Trust Fund maximum annual contribution limit will move from £3,600 to £3,720 from 6 April 2013.
The Government will consult on expanding the list of Qualifying Investments for stocks and shares Isas to include shares traded on small and medium enterprises (SMEs) equity markets such as the Alternative Investment Market and comparable markets. This could lead to Isas becoming a lot more appealing as a tax shelter.
John Woolley is joint managing director of Technical Connection