Budget – March 21st 2012

Budget 2012: Osborne cuts 50p tax rate to 45p

The 50p income tax rate has been cut in today’s budget.  Top earners will be taxed at 45p in every pound from April 2013.

It is expected the top rate of income tax will be cut back to the 40p rate by 2015.

Income tax threshold increased to £9,205

The Chancellor raised the level at which employees must start paying income tax to £9,205 – a move which will come into force from April 2013.  This follows the government’s decision to increase the minimum threshold to £8,105, which comes into force next month.

George Osborne said that the personal allowance increase would leave taxpayers £170 better off after inflation and would benefit 20 million of the population with earnings under £100,000 per year.

Higher rate tax will be paid once income reaches £42,475. However, from April 2013, the reduction in the basic rate limit to £32,245 is greater than the increase in personal allowance, and the higher rate tax will start once income reaches £41,450.

£60,000 earners to lose child benefit

Child benefit will begin to be reduced when someone in a household earns £50,000 until they reach £60,000, at which point it will be withdrawn.

If one parent earns more than £50,000, even if the total household income is less than other couples where both are basic rate taxpayers, the amount of child benefit the family receives will be reduced. The tax charge will equal all of the child benefit payment where they or their partner earn more than £60,000. These changes will be introduced from 7 January 2013. As the measure of income used is ‘adjusted net income’ it will be possible to either make a pension contribution or a gift aid donation to reduce the level of income.

Child benefit is currently worth £20.30 a week for the first child and £13.40 each for any others, regardless of parents’ income.

Company-owned property faces 15% stamp duty

Residential properties owned by companies face a 15% stamp duty charge when they change hands, in plans announced by the chancellor in today’s Budget.

This goes some way to close a loophole in the stamp duty regime which allowed properties registered as assets of foreign owned companies to change hands without paying the tax when shares in the company were sold.

The stamp duty paid on properties sold for more than £2 million has also been raised from 5% to 7% as expected.

Corporation tax cut to 24%

Corporation tax will be reduced by 1% to 24%. This will be implemented immediately.

Further reductions are planned with the aim of bringing the corporation rate down to 22% by 2014.

Pensions tax relief unaffected

Despite speculation to the contrary no measures have been announced affecting the tax treatment of registered pension schemes.  The maximum annual contribution allowance qualifying for tax relief remains at £50,000.  The provision for carrying forward unused allowance from up to three previous years also remains.  Therefore pensions remain the most effective means of saving for retirement.

There is a window of opportunity for high earners to benefit from 50% tax relief on their pension contributions before the reduction of the upper rate of income tax to 45%. Also, by manipulation of Pension Input Periods it may be possible to accelerate funding for 2013/2014 and still obtain 50% relief

Pensioners tax allowance freeze to raise £1.2 billion

Age related tax allowances will be frozen.

From 6 April 2013 existing age related allowances will be frozen at their 2012/13 levels (£10,500 for those born between 6 April 1938 and 5 April 1948, and £10,660 for those born before 6 April 1938) until they align with the personal allowance.

From April 2013, age related allowances will no longer be available, except to those born on or before 5 April 1948. The higher age related allowance will only be available to those born before 6 April 1938.

£3600 cap on MIPS

The Government will limit the premiums that can be paid into qualifying policies to £3600 per annum.  A qualifying policy is a life assurance policy that satisfies certain rules relating to policy term, regularity, premiums paid and minimum sum assured.  Maximum investment plans (MIPS) are qualifying policies that are often marketed as an alternative to pensions saving for those who have already exhausted the £50,000 contribution allowance. The change will be effective from 6th April 2013.

EIS relief allowance doubled

The relief allowance on enterprise investment schemes (EIS) is to be doubled to £200,000. The aim is to boost investment into small businesses.

 

State pension reform

Details of the next step towards a flat-rate £140 a week state pension will be released in the spring. In summer, proposals will be put forward for automatic reviews of state pension age to reflect increasing longevity. Ultimately, this could mean younger people waiting until they are 75 or more before they can draw their state pension

Door closed on ‘spouse’s pension’ funding loophole

HMRC will close the door on a loophole that allowed highly paid employees to sacrifice salary or bonus to fund a pension for their (often non-working) spouse or other family members. Changes will be made in next year’s Finance Act to stop companies, or employees, from making tax or NI savings on such payments to pensions for non-employees.

No movement on income drawdown limits

The Chancellor made no concessions towards considering a review of income drawdown limits to address income poverty resulting from the drastic fall in gilt yields.  The pensions industry will continue to press for change in this area.

Final details of new QROPS regime confirmed

There will be a tighter regime for transferring UK pension rights overseas from 6 April 2012 to clamp down on some of the more exploitative arrangements currently used. QROPS will have stricter qualifying rules, broadly mirroring the core requirements for UK registered pension schemes, and there will be new reporting obligations on both the transferring and receiving pension schemes. Further fine tuning is expected in next year’s Finance Act.

More Inheritance tax (IHT) savings for non-UK domiciled spouses.

The amount that a UK domiciled spouse can transfer free of IHT to their spouse domiciled in another country is to be increased. It means that these married couples and civil partners will pay less IHT on their combined estate. In recent years we have seen IHT reliefs and exemptions for agricultural property and charities extended to the European Economic area so it’s good news to see this now being extended to the £55,000 spouse exemption. There are also plans to allow a non-UK domiciled spouse to elect to be treated as UK domiciled for IHT purposes giving an unlimited IHT spouse exemption. Both these changes make IHT planning for mobile clients easier and clearer and will be welcomed by those advising them. The changes will be included in the 2013 Finance Bill after consultation in 2012.

Trust Inheritance Tax (IHT) charges to be made easier

There will be a consultation on the IHT charges paid by flexible and discretionary trusts. The aim is to simplify the calculation of the 10 yearly anniversary and exit charges.

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