The Chancellor’s Budget, March 2014

The Chancellor, George Osborne, has now presented his March 2014 Budget to Parliament. There was lots of talk about the economy, growth forecasts, supporting UK businesses and employment – as well as some obvious political spin bearing in mind the European and General Elections are just around the corner – however we thought we’d concentrate on the most important changes, mainly in relation to tax itself as that’s what is going to affect Taxfile customers and readers the most. So here is our snapshot:

For individuals:

  • The threshold before earnings are subject to income tax (the ‘tax-free personal allowance’) is set to rise to £10,500;
  • The higher rate of tax will kick in for earnings above £41,865 from April 2014, rising again to £42,285 in 2015;
  • The first part of the ‘Help to Buy’ equity loan scheme for those aspiring to buy a new home is to be extended until 2020 (previously 2016);
  • The Stamp Duty on homes worth over £500k is to increase to 15% for those which are bought by companies;
  • Inheritance tax will be scrapped for members of the emergency services who “give their lives protecting us”;
  • Cash and Shares ISAs will be merged into a single New ISA (“NISA”). The annual tax-free limit for the NISA will be £15k (£4k for junior equivalent) from 1 July 2014.
  • From April 2015, pensioners will no longer be forced to buy an annuity with their pension fund. They will now be able to cash in as much or as little as they want to from their pension pot.
  • From June 2014, the amount people will be able to invest into Premium Bonds will increase to £40k (from £30k). From 2015 this will rise again to Read more

(Time Sensitive): Tax Year End Changes for Pension Allowances

The start of the new Tax Year on 6 April 2014 – just 6½ weeks away at time of writing – will see two very important changes in relation to pensions allowances.

The first change will affect the ‘Annual Allowance’ (or ‘AA’) which is the annual limit on pension savings attracting tax relief. This limit will be reduced from £50k to £40k (having been as high as £255k back in 2010/11) and includes contributions made by anyone into your pension whether that’s you or your employer. Should your pension savings be greater than this amount then you will have to pay a tax charge and include such information on your Self Assessment tax return. A calculator is available to work out whether you have any unused annual allowance available, this being particularly useful because you are eligible to carry forwards any unused allowance if it exists from the 3 previous tax years. If present the unused allowance can be used to offset against any tax charge.

The second change will affect the ‘Lifetime Allowance‘ (or ‘LTA’) which is the amount payable from a private and/or work pension scheme (excludes State pension) before tax also becomes payable. Having already recently been cut from £1.8 million the LTA is currently set at £1.5 million but will be reduced to £1.25 million from 6 April 2014. The LTA is only applied to pension savings when you actually take your pension benefits, or at certain key events such as reaching the age of 75. Other examples of applicable key events are explained here. Read more

Pension Contributions and Tax Relief

Do I get tax relief on my pension contributions? This is something we hear a lot from our clients.
The answer is yes, you do get tax relief on pension contributions, being a good way to save for retirement.
The way you get tax relief on pension contributions depends on whether you pay into a company (known as Occupational scheme), public service or personal pension scheme.
•Company or public service pension schemes
Usually your employer takes the pension contributions from your pay before deducting tax (but not National Insurance contributions). You only pay tax on what’s left. So whether you pay tax at basic or higher rate you get the full relief straightaway.
•Personal Pensions
You pay Income Tax on your earnings before any pension contribution, but the pension payer claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot.
If you are a higher rate taxpayer, you can claim the difference through your Self-Assessment tax return.
•Retirement annuities
Unlike personal pension providers, most retirement annuity providers – personal pension schemes set up before July 1988 – don’t offer a ‘relief at source’ scheme whereby they claim back tax at the basic rate. Instead you’ll need to claim the tax relief you’re due through your tax return or by getting in touch with your local Tax Office.
If you receive an age-related Personal Allowance or Married Couple’s Allowance HMRC will subtract the amount you contribute plus the basic rate tax from your total income and use the reduced figure to work out the value of your allowances. This may have the effect of increasing these allowances if your income was above the relevant ‘income limit’ that applies.
If you don’t pay tax you can still pay into a personal pension scheme and benefit from basic rate tax relief (20 per cent) on the first £2,880 a year you put in. In practice this means that if you pay £2,880 the government will top up your contribution to make it £3,600.
There is no tax relief for contributions above this amount.
You can put money into someone else’s personal pension – like your husband, wife, civil partner, child or grandchild’s. They’ll get tax relief added to it at the basic rate, but this won’t affect your own tax bill. If they’ve got no income, you can pay in up to £2,880 a year – which becomes £3,600 with tax relief.
If the pension scheme rules allow it you may also be able to put money into someone else’s company scheme. You’ll not get tax relief on your contribution but the other person can get relief either through their tax return or by making a claim to HMRC by telephone or letter.
You can save as much as you like into any number and type of registered pension schemes and get tax relief on contributions of up to 100 per cent of your earnings (salary and other earned income) each year, provided you paid the contribution before age 75. But the amount you save each year toward a pension is subject to an ‘annual allowance’.
For the tax year 2008-09 the annual allowance is £235,000. You pay tax at 40 per cent on any contributions you make that are above the annual allowance
Also, when your pension matures you can take up to 25 per cent of it as a tax-free lump sum, provided your pension scheme rules allow it, you are under 75 and your total savings are within the ‘lifetime allowance’ for the year in which you take your benefit. For the tax year 2008-09 this is £1.65 million.
It is also important to know that you can usually only get your pension contributions refunded if you withdraw from a company scheme within two years of starting payments.
Certain events might shorten the time limit. Tax is deducted at 20 per cent for refunds of up to £10,800 and at 40 per cent on any excess above this. The scheme administrator deducts the tax before making the refund.
Tax experts argue that basic rate taxpayers are better off saving in an ISA rather than paying in a pension contribution scheme at least until they become 40% tax payers and they get a bigger tax relief.
In order to have a happy and care free retirement come to see Taxfile‘s tax agents in South London and Exeter to seek help if you are still unsure of the matter.