You have to give George Osborne his dues…we all knew there were failings in the assumptions from the Summer Budget. He didn’t duck the bullet. Rather than just guidelines and review of the Summer Budget (normally what seems to be the Autumn Budget), it was more an introduction to the Spring Budget 2013, giving details of some of the fiscal changes ahead.
A benefit of knowing about tax policy to be introduced from a future date is, it gives us a chance to plan now.
Registered Pension Schemes
George Osborne made proposals to cut back on the tax advantages of registered pensions.
The bad news :-
• Annual allowance to be reduced from £50,000 to £40,000 from tax year 2014/15.
• Lifetime allowance to be reduced from £1.5m to £1.25m from 2014/15
The good news :-
• Allowances to remain unchanged for 2012/13 and 2013/14 (at up to £50,000)
• Carry Forward remains unchanged for tax years 2010/11, 2011/12, 2012/13 and 2013/14 (at up to £50,000)
• Fixed protection available – enabling benefits to be taken up to the greater of the standard lifetime allowance and £1.5m without any lifetime allowance charge
1. Election by 5 April 2014
2. Protection lost where further accrual/contributions on or after
6 April 2014
• Personalised protection option – a possible additional transitional protection
1. Provides a lifetime allowance of the greater of the standard lifetime
allowance and £1.5 million, but without the need to cease
accrual/contributions on or after 6 April 2014.
2. Available to individuals with pension benefits with a value of at least
£1.25 million on 5 April 2014.
• Maximum capped drawdown income to be increased from 100% to 120% of the relevant annuity rate determined from the GAD tables – date to be confirmed.
The reduction in the annual allowance was expected and was only to £40,000 (it could have been worse). The reduction doesn’t apply until tax year 2014/15. Carry Forward of unused annual allowance of up to £50,000 for each of tax years 2010/11, 2011/12, 2012/13 and 2013/14, is available.
It gives a high earners the chance to maximise contributions before the reduction in the allowance bites. Also, for very high earners, if action is taken before the end of this tax year, they may be able to secure the 50% 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 includes :-
- Electing for fixed protection and/or, if available, 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.
- Consider how benefits are taken.
So, it seems fair to say, there is actually only a very small change in the potential tax bill payable. Personal allowance has increased and the basic rate band has shrunk. The unlucky few are worse off but in most cases the situation seems to either be neutral or possibly a slight improvement.
The personal allowance is to increase by £1,335 to £9,440 in 2013/14 – an improvement in the terms announced in the Summer Budget.
In 2013/14, the basic rate tax limit will reduce from £34,370 to £32,010. This is offset by the increased personal allowance.
The result of these changes is that all taxpayers who are fully entitled to a personal allowance (where 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.
From 6 April 2013, additional rate income tax will reduce from 50% to 45%. This rate applies for those who have taxable income of more than £150,000. For those affected, there is an incentive to make investments before 6 April 2013 and defer the resultant income until after that time.
In terms of planning for married couples/registered civil partners, this will mean that:
• There is scope to shelter 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
• There is an 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, 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 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, you should take appropriate planning i.e. reinvesting income-producing investments into tax-free investments (ISAs, VCTs, EISs, SEISs) or possibly 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% in April 2014 to 21% in April 2014.
The small profits rate of corporation tax for companies with profits of less than £300,000 will remain at 20%.
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 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 for 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.
• 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.
The inheritance Nil Rate Threshold is to increase, although by only 1% in 2015/2016 to £329,000. Currently, the Nil Rate Threshold is £325,000 and has been frozen since 2009 until 2015. This means, 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 in December. Hopefully this will incorporate some simplification to the current complex system.
Capital Gains Tax (CGT)
The CGT Annual Exemption (£10,600 in 2012/2013) will increase to £11,000 in 2014/2015 and £11,100 in 2015/2016. We do not know what it will be in 2013/14.
Gains that exceed the annual exempt amount in a tax year will continue to be subject to CGT at 18% and/or 28% depending on the taxpayer’s level of taxable income.
Trustees pay a flat rate of 28% on gains that exceed their annual exemption.
Individual Savings Account
The current maximum investment in an ISA is £11,280 in a tax year (maximum of £5,640 in cash). With effect from the tax year 2013/2014, the maximum will increase to £11,520 (with the cash content not to exceed £5,760). Use of the allowance should always 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 even more appealing as a tax shelter.
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS)
The rule changes, mostly approved months ago, revolved mainly around opening up more companies for investment from VCTs and EIS, and increasing how much can be invested.
The size of companies that the schemes can invest in has been increased from £7 million to £15 million and the number of employees from 50 to 250.
The limit on the amount an individual can invest in an EIS has increased from £500,000 to £1 million, while the amount an EIS or VCT can invest in an individual company has increased to £5 million.
Ian Sayers, director general of the Association of Investment Companies (AIC), commented, ‘The proposed rule changes allow VCTs to invest in a wider range of companies which is a welcome boost to the sector and businesses desperately seeking finance.
‘The Chancellor’s removal of the £1million limit on VCT investment in a single company will ensure more efficient support to smaller businesses in the UK.’
However, the Budget also finalised plans to subject VCTs and EIS to further scrutiny in relation to the investments that they make.
The government will introduce a ‘disqualifying purpose test’, designed to exclude VCTs or EIS that do not invest in qualifying companies and are set up solely for the purpose of giving investors tax relief.
Although the schemes escaped any changes to their individual tax benefits, the Budget introduced a cap on tax relief, in an effort to prevent high income taxpayers getting away with very low tax rates.
The new rules will set a cap of 25% of income on anyone seeking tax relief of over £50,000 but, while the proposals are not particularly clear, it appears EIS and VCTs will be exempt.
Paul Latham, managing director of Octopus Investments, explained, ‘The good news is that the government’s new cap only applies to tax reliefs which are currently classed as “unlimited”. This means that tax-efficient investments, such as EIS and VCTs, are unaffected by this legislation.’