The most interesting points to (re-emerge) from Mr Osborne’s speech were:
- A rise of £1,335 in the personal allowance to £9,440 for 2013/14 and a further increase to £10,000 in 2014/15.
- A £1,025 reduction in the higher rate threshold for 2013/14, with increases of only 1% in each of the following two tax years.
- The freezing of the personal age allowances and their date of birth triggers – steps on the path to eventual abolition.
- The introduction on a phased basis, from autumn 2015, of a new tax-free childcare regime, eventually worth up to £1,200 per child per year.
- An increase to £10,900 for the capital gains tax annual exemption in 2013/14, followed by £100 increases in 2014/15 and 2015/16.
- A new employment allowance of £2,000 for all business and charities from April 2014 to offset employer national insurance contribution (NIC) costs.
- A package of measures to boost the housing market, including £130bn of government guarantees from 2014.
- The bringing forward of the start date for the single-tier state pension to April 2016.
- Reductions in the pension lifetime allowance to £1.25m and the annual allowance to £40,000 from 2014/15.
- The effective creation of a single unified 20% rate of corporation tax from April 2015.
- Yet another freezing of an impending fuel duty increase.
In this Bulletin we look at the impact of the main changes on different groups of taxpayers.
Investors and Savers
The Personal Allowance
One of the surprises in the Autumn Statement was a £235 increase to the 2013/14 personal allowance over and above what had been promised in the 2012 Budget. The Budget went one further by announcing that the 2014/15 personal allowance will be £10,000, a long-stated goal of the coalition government. However, many people do not even use the current personal allowance (£8,105 in 2012/13). And some have no personal allowance because their income means it has been tapered to nil.
If you or your partner does not use the personal allowance, you could be paying more tax than necessary. There are several ways to make sure you maximise use of your allowances:
- Choose the right investments: some investments do not allow you to reclaim tax paid while others are designed to give capital gain, not income.
- Couples should consider rebalancing investments so that each has enough income to cover the personal allowance.
- Make sure that in retirement you (and your partner) each have enough pension income. The basic state pension (£110.15 a week in 2013/14) alone is not enough.
Capital Gain Tax (CGT)
The assorted U-turns in the rules for capital gains tax have left gains currently being taxed as the top slice of income. Gains are taxable at 18% to the extent they fall in the shrinking basic rate band and 28% if they fall into the higher or additional rate bands. For 2012/13, the Chancellor left the capital gains tax annual exemption unaltered at £10,600, but it will rise by £300 in 2013/14. Thereafter, the annual exemption was meant to be inflation-linked, but the Autumn Statement fixed increases for 2014/15 and 2015/16 at just £100 a year – well below the likely inflation rate.
These tax rates and generous, if slowly rising, exemption (per person, not per couple) mean that if you can arrange for your investment returns to be delivered in the form of capital gains rather than income, you should generally pay less tax. Indeed, the annual capital gains exemption will often mean that there is no tax to pay. While investment decisions should never be made on tax considerations alone, favouring capital gains over income when setting your investment goals will normally be a sensible approach.
Individual Savings Accounts (ISAs)
The annual ISA investment limit for 2013/14 will rise by £240 to £11,520 (of which up to £5,760 may be in cash). The limit for the Junior ISA (JISA), which has so far attracted few investors, will rise at £3,720. JISAs may gain more funds soon as the Budget revealed a consultation on allowing transfers to be made to JISAs from the much more common Child Trust Funds.
ISAs remain one of the simplest ways to save tax, with nothing to report or claim on your tax return. The inflation-linked annual limit may be modest, but over time substantial sums can build up: if you had maximised your ISA investment since they first became available in April 1999, you would by now have placed £109,560 largely out of reach of UK taxes.
The tax advantages of ISAs are set to expand in the near future, as the Government has confirmed plans to include shares listed on the Alternative Investment Market (AIM) and similar markets in the list of qualifying investments for ISAs. The Treasury has also confirmed that inheritance tax business property relief will be available for such ISA-held shares, subject to the normal rules (eg a minimum of two years’ ownership). Draft regulations are due this summer. Another bonus is that from April 2014, stamp duty on AIM and similarly listed shares will be scrapped.
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs)
A raft of new rules for VCTs and EISs were introduced just under a year ago, most of which were beneficial for investors, eg a rise in the size of companies in which the schemes can invest and an increase in the EIS tax relievable investment limit to £1m per tax year.
The new Seed Enterprise Investment Scheme (SEIS) started in 2012/13, giving income tax relief of 50% and capital gains tax relief of up to 28% on investments of up to £100,000 per tax year. It sounded too good to be true, but so far anecdotal reports suggest take up has been limited. The issue seems to have been the small amount that any one company can raise – just £150,000 – which makes the economics open to question. This explains why the one change the Chancellor made was to continue the SEIS CGT reinvestment relief for another year, albeit in a reduced form with only 50% of gains being relieved rather than the current 100%.
Inheritance Tax Nil Rate Band
Last year’s Finance Act contained provisions to increase the inheritance tax (IHT) nil rate band in line with CPI inflation from 6 April 2015, six years after its last rise. In the Autumn Statement, this small piece of good news was watered down when the Chancellor announced a £4,000 increase for 2015/16. Two months later, even this £4,000 uplift disappeared as the government revealed its plan for long-term care would, in part, be financed by a further freeze in the nil rate band. The Budget confirmed this new freeze would last until 2017/18.
A frozen nil rate band drags more estates into the IHT net and, if you are already caught, adds to the amount of tax that will be levied. Were the nil rate band to have been index-linked to the RPI since it was frozen in April 2009, it would be about £365,000 from next month. Since April 2009, average house prices are up by about 7%, according to Nationwide and UK share prices have jumped by about two thirds.
Corporation Tax Rates
The mainstream rate of corporation tax falls to 23% from 1 April 2013, although the small profits rate (formerly smaller companies’ rate) will stay at 20%. The Autumn Statement revealed that in 2014 there will be a further 2% cut in the main rate to 21%: nothing was said about the small profits rate. The Budget continued the reduction process by setting the mainstream rate at 20% for 2015, thereby unifying the mainstream and small profits rates.
It remains the case now that incorporation will often be an attractive tax option for business people because of the possibility of drawing income as dividends, free of NICs, and sheltering profits from an immediate 40% or 45% income tax charge.
Several important pension changes for employers and employees took effect during 2012. The pace quietens in 2013, before more reform in 2014 and beyond:
- Auto-enrolment into pension arrangements began to be phased in last October. So far its impact has primarily been on the largest employers, but during 2013/14 the employer size threshold will shrink so that by 1 April 2014 virtually all existing employers with at least 250 employees on their payroll will be within auto-enrolment.
- The earnings threshold for auto-enrolment will rise in line with the personal allowance to £9,440 in 2013/14 and probably to £10,000 in 2014/15.
- The standard lifetime allowance will be reduced from £1.5m to £1.25m on 6 April 2014. Before that happens there will be the option for those potentially affected by the cut to claim new transitional reliefs. You need expert advice before considering such a claim because of the constraints the reliefs impose on future contributions;
- From 6 April 2014 the annual allowance will also be cut from £50,000 to £40,000;
- Changes to women’s state pension age (SPA) will continue to work through the system. By 6 April 2014 women’s SPA will be around 62, on its way to 65 in November 2018; and
- In the coming months the Pensions Bill 2013 will be working its way through Parliament. This will legislate for the introduction of a new single-tier state pension, from the start date of which the Chancellor announced will be April 2016, one year earlier than previously planned.
- There will be a consultation on allowing self-invested pensions to take advantage of the concessions for converting commercial property for residential use. In other words, SIPP buy-to-let investment might be back on the agenda after being effectively scrapped in 2006.
The company car benefit scales underwent a significant overhaul for 2012/13 and for 2013/14 there is a more straightforward twist of the tax screw, with adjustments to emission thresholds. However, Mr Osborne has already announced plans running to 2016/17:
- From 6 April 2013, there will be a 5g/km cut in the thresholds, meaning that the 10% scale benefit (13% for diesels) will apply only to cars with CO2 emissions of 94g/km or less. In theory a 5% scale charge applies for cars with emissions of 75g/km or less, but no such vehicle exists (electric cars currently have a zero benefit). In 2013/14 the maximum 35% charge will apply for petrol-engine cars with emissions of 215g/km and above for (200 g/km and above for diesels).
- The multiplier for calculating car fuel benefit in 2013/14 increased by £900 to £21,100.
- In 2014/15 another 5g/km reduction in the thresholds will apply.
- In 2015/16 all scale percentages will be increased by 2%, with the maximum figure rising to 37%. At the same time the nil scale charge for electric cars will be withdrawn, as will the 75g//km 5% scale charge.
- In 2016/17 the 3% diesel supplement will be scrapped, but there will also be another 2% added to all scale charges, although the ceiling will stay at 37%.
The cascade of increases means that if you are changing your car next year, it will pay you to think ahead in tax terms – or maybe even take cash instead, if you have the option.
The pension landscape has altered dramatically in recent years and will continue to change:
- If you are not a member of a pension scheme offered by your employer, then at some point within the next five years you are likely to find yourself automatically enrolled in a pension arrangement, with contributions deducted from your pay and added to by your employer. The larger your employer, the sooner this will happen. You will be able to opt out, but generally this will only make sense if you have elected with HMRC for enhanced, primary, fixed or the yet-to-be-detailed individual protection.
- A new single-tier state pension will start in April 2016, replacing both the basic state pension and the second state pension (S2P). As a result, contracting out of S2P will disappear completely; it was scrapped for personal pensions and money purchase occupational schemes in April 2012. In the long term this reform will create more losers than winners as well as a substantial increase in NICs income for the Exchequer.
- State pension ages (SPAs) are on the rise, with another increase – to 67 between April 2026 and March 2028 – now in the Pensions Bill going through parliament. The Bill also contains provisions for five yearly reviews of SPA.
The High Income Child Benefit Charge – the child benefit tax – came into effect on 7 January 2013, although no tax has yet been collected. In 2013/14 the full effects of the new tax will start to be felt. If you or your partner has income of £60,000 or more, there will be a tax charge equal to your total child benefit unless you take the decision to stop benefit payment. This is what HMRC would like to see happen, but as the tax liability and benefit payment may not both be for the same individual, the taxman’s wish will not always be met.
Between £50,000 and £60,000 of income, the tax charge is 1% of benefit for each £100 of income above £50,000. The result can be high marginal rates of tax in the £50,000-£60,000 income band. If you have three children eligible for child benefit, the marginal rate is 64.5%.
Tax-free childcare payment
A new payment for working parents was announced just before the Budget, but will only begin to be phased from autumn 2015. It will be worth 20% of childcare costs up to £1,200 per child per year under age 5 initially, but rising to under age 12. Over time it will replace the existing childcare vouchers system. For couples it will only be available if both partners are working. An income limit of £150,000 will apply – three times the level at which Child Benefit starts to be removed.
Junior ISAs (JISAs) were launched in November 2011 with an annual investment limit of £3,600, which will increase to £3,720 in 2013/14. JISAs can be invested in cash deposits and/or stocks and shares in any proportion and can usually be arranged for any child aged under 18 who was born before 1 September 2002 or after 2 January 2011. A child cannot have both a JISA and a Child Trust Fund (which will also have a £3,720 investment limit for 2013/14). However, there will be consultations on allowing Child Trust Funds to be transferred into JISAs, a move which has long been anticipated.