There was some welcome news in the Budget for pension funding. Tax relief remains unaffected and many high earners will no longer be subject to the pension tapered annual allowance, although those earning more than £300,000 could see their funding further limited.
- A £90,000 increase to the tapered annual allowance (AA) thresholds could remove funding restrictions for many high earners
- Those with income over £300,000 could see their tapered annual allowance reduced to £4,000
- Clarity on the calculation of the top slicing relief for investment bonds
- Income tax rates bands and allowances remain unchanged
- Tapered annual allowance thresholds raised by £90,000: The ‘adjusted income’ and ‘threshold income’ levels have been increased to £240,000 and £200,000 respectively from the start of next tax year. This is to help reduce the number of high earners affected by the tapered annual allowance, with doctors and GPs particularly in mind.For those still caught, taper will take affect by reducing the annual allowance by £1 for every £2 of adjusted income over £240,000.
However, the minimum level the annual allowance can be tapered down to is reducing from £10,000 to £4,000. So those with income above £312,000 will only be entitled to a £4,000 annual allowance from next year.
There are no changes to the standard AA, which remains at £40,000, or the money purchase AA which stays at £4,000 (with no carry forward).
- Lifetime allowance increased to £1,073,100: As expected, the lifetime allowance for 2020/21 goes up by CPI
- Boosting tax relief for lower earners: To address a discrepancy in the level of tax relief that those earning under the personal allowance are entitled to, the Government will be launching a ‘call for evidence’.The Government is reviewing options to ensure that low earners who are members of pension schemes which give tax relief under the ‘net pay arrangement’ are treated fairly. Under these schemes, the employer deducts an employee’s contribution from gross pay. This means that those with net pay under the personal allowance (after deducting their contribution) currently lose out on tax relief. The aim is to put these individuals on a level playing field with similar employees who are members of a ‘relief at source’ scheme and get basic rate relief on all of their contributions.
Inheriting a State Pension from an opposite sex civil partner
- The Civil Partnerships (Opposite-sex Couples) Regulations 2019 gave opposite-sex couples the choice of entering into a marriage or a civil partnership.The Budget provides funding to ensure that opposite-sex individuals who enter into a civil partnership can derive, or inherit, a State Pension from their (opposite-sex) civil partner.
Top slicing relief clarification following ‘Silver’ case
The Government has acted to provide additional clarity on the calculation of top slicing relief on investment bonds. HMRC recently updated their guidance on the calculation of this relief and legislation will now be introduced to formally clarify how an individual’s allowances are applied in determining the amount of relief available.
This change comes on the back of the recent Marina Silver V HMRC case. In this first tier tribunal case, the taxpayer successfully argued that when calculating top slicing relief, they were entitled to a full personal allowance because their income plus the average gain was below £100,000 (whereas including the full gain meant their personal allowance would have been tapered to nil).
This position has now been confirmed in legislation and will mean in future the rules are applied fairly and prevent excessive relief from being claimed.
The draft legislation also confirms that, for the purpose of calculating top slicing relief, allowances must be used against all other income before it can be applied to the bond gains.
- UK – no change: There are no changes to income tax rates, bands or allowances, with the personal allowance and higher rate threshold remaining at £12,500 and £50,000 respectively for the 2020/21 tax year.
- Scotland – basic and intermediate thresholds going up: As announced in the Scottish Budget on 6 February, to help reduce the tax burden on lower earners the basic and intermediate rate thresholds have been increased in line with inflation to £14,586 and £25,159 respectively for the 2020/21 tax year. There are no other changes to income tax rates, bands or allowances for Scottish taxpayers.
- Wales – no change: Income tax rates, bands and allowances for Welsh taxpayers remain fully aligned with UK.
Capital Gains Tax
- CGT allowance: The annual capital gains tax allowance will increase to £12,300 for individuals (and personal representatives) and to £6,150 for trustees of settlements, for disposals in the 2020/21 tax year.
- NRB stays frozen: As expected, the IHT nil rate band will remain frozen at £325,000 until April 2021.
- RNRB going up: The residence nil rate band will increase from £150,000 to £175,000 from April 2020, delivering on the Government’s commitment to allow some couples to leave an IHT-free inheritance of up to £1,000,000 to future generations.
Good news for family saving: JISA limit increases to £9,000
As expected, the Individual Savings Account (ISA) annual subscription limit remains unchanged at £20,000. However, in a positive move for young savers, the annual subscription limit for Junior ISAs and Child Trust Funds will be increased from £4,368 to £9,000.
The range of ISAs available remains unchanged, with the exception of the Help to Buy ISA, which closed to new investors in November 2019.
National Insurance thresholds increased
Employees and the self-employed will not have to start paying NI contributions until their earnings reach £9,500 (the primary threshold). This change was expected and is in line with the Government’s aim to increase these thresholds to £12,500, the point at which individuals start to pay income tax.
There are no changes to the upper earnings limit of £50,000 (the level at which the rate drops to 2%) or to the contribution rates.
Entrepreneur’s relief limit cut
Entrepreneurs who sell their business could face an increase to the amount of Capital Gains Tax (CGT) they may have to pay. Entrepreneurs relief means that CGT is payable at 10% on gains up to a lifetime limit. This limit is reducing from £10,000,000 to £1,000,000 with immediate effect.
Any capital gains on the sale of businesses which exceed the limit will be taxed at 20% for higher and additional rate taxpayers.
IR35 changes to go ahead
Changes to off payroll working, often referred to as IR35, will be included in the Finance Bill. This will see large and medium sized private companies becoming responsible for making the decision as to whether contractors working for them should be included on their payroll and deduct PAYE and NIC.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.