March 2012 Budget Statement The key announcements by the Chancellor are outlined below. Pensions Tax relief The Chancellor introduced major changes to pension tax reliefs in last year s Budget. Despite widespread rumours of a further cut to the annual allowance, attacks on higher rate tax relief or tax-free cash, the pessimists were disappointed; there were no major announcements around pension tax reliefs in March 2012 s Budget. The Chancellor did announce that the additional rate of income tax for those earning above 150,000 would be cut from 50% to 45% from April 2013. The 2012/2013 tax year will be the last year that 50% tax relief will be available. Use carry-forward in 2012/2013 to increase the maximum amount of tax-relieved pension saving above 50,000. Other Pension Changes HMRC has also signalled future technical improvements to the annual and lifetime allowance (Fixed protection) rules via Finance Bill 2013 and secondary legislation so they work as intended. Rules relating to bridging pensions under occupational pensions will also be amended in Finance Bill 2013 to reflect the increasing state pension age. State Benefits and Tax Credits Child benefit Previously the Chancellor had announced that, from January 2013, child benefit would be withdrawn completely for families with at least one higher rate taxpayer. In a modification to this plan, the Chancellor announced in the 2012 Budget that the reduction in child benefit wouldn t affect anyone with an income of less than 50,000. And, for every 100 of income above 50,000 child benefit will be clawed back gradually to avoid a cliff-edge loss of benefit.
In practice, the child benefit is clawed back via a tax charge of 1% of child benefit per 100 of income above 50,000. Those with income above 60,000 lose all their child benefit. It affects all those who claim child benefit who have income above 50,000, or whose partner has an income above 50,000. Individuals can choose to give up child benefit to avoid the tax charge but should be mindful of the potential loss of National Insurance credits towards state pension entitlements, where at least one child is still under 12. This will take effect from 7 January 2013. For the purposes of calculating the tax on child benefit, income means adjusted net income. (This is similar to the calculation used for assessing entitlement to the personal allowance when income exceeds 100,000). This means that pension contributions, salary exchange or charitable donations may help to preserve child benefit for those with incomes above 50,000 in 2012/2013. The effective tax relief to be obtained through recovering some or all child benefit via a pension contribution varies according to the number of children and the total amount of the benefit. State pension age (SPA) In future the SPA will rise in line with longevity statistics. More details are promised in the summer of 2012. We had prior warning of this at the last Budget when the Government announced they were considering proposals for future increases to the SPA to combat future increases in longevity, at the same time as bringing forward the increase in SPA to 67 from 2026. The current two tiers of state pension provision, Basic State Pension (BSP) and State Second Pension (S2P), will disappear. They ll be replaced by a single tier universal state pension at a level above the means tested Guarantee Credit. In current terms this is around 140 per week. More details will emerge later in Spring 2012 and the changes are planned for early in the next Parliament. Basic state pension (BSP) The BSP will be increased in line with the triple lock guarantee. It will be increased by 5.30 to 107.45 per week ( 5,587.40 per annum) for a single pensioner. It will
be increased by 8.50 to 171.85 per week ( 8,936.20 per annum) for pensioner couples. Pension credit The minimum income guarantee within pension credit will be increased by 3.9% to: 142.70 per week ( 7,420.40 per annum) for a single pensioner. 217.90 per week ( 11,330.80 per annum) for pensioner couples. Child tax credit (CTC) The child and disability elements of CTC will increase in line with CPI (5.2%) in 2012/2013. The planned 110 above inflation increase will no longer go ahead. Therefore, the child element will rise by 135. Working tax credit (WTC) The disability elements of WTC will also increase in line with CPI (5.2%) in 2012/2013. However, the couple and lone parent elements will be frozen. As previously announced, from April 2012 eligibility for WTC will be changed. Couples will need to work 24 hours between them, with at least one working 16 hours. If only one works, it must be for a minimum of 24 hours. Currently, just one individual in the couple must be working at least 16 hours. Other benefits Most working age and disability benefits will increase by CPI (5.2%) in 2012/2013. Income Tax and National Insurance The 50% rate of tax was temporary. The additional rate of Income Tax will reduce to 45% (37.5% for dividend income) with effect from April 2013. The trust rate of tax will fall at the same time. It s been confirmed that the personal allowance will increase to 8,105 from April 2012. The basic rate limit reduces to 34,370 for 2012/2013. Therefore, the higher rate threshold remains at 42,475.
As already announced, the age-related personal allowances increase to 10,500 for the over 65s and 10,660 for the over 75s from April 2012. Married couple s allowance will increase to 7,705 (minimum 2,960) with effect from April 2012. Relief on MCA is restricted to 10%. MCA is only available where one spouse/civil partner was born before 6 April 1935. In addition, it s been announced that the personal allowance will increase significantly by 1,100 to 9,205 from April 2013. However, the basic rate limit will reduce by 2,125 to 32,245. The higher rate threshold drops to 41,450. In addition, the higher age-related personal allowances will be frozen at 2012/2013 levels. The current over 65s allowance will be restricted to those born before 6 April 1948. The current over 75s allowance will be restricted to those born before 6 April 1938. The higher personal allowances will gradually disappear, as they are overtaken by increases in the standard personal allowance. Basic rate taxpayers who remain within the reduced basic rate band will be 126 better off in 2012/2013 in cash terms. From 2013/2014 the new measures will draw more taxpayers into the higher rate band after allowing for inflation. The eventual ending of the age related personal allowances will simplify tax for older age groups and make life easier for advisers by removing anomalies such as the age allowance trap. However, it is being labelled as a stealth tax on the elderly. Currently the personal allowance is the trigger for employers to auto-enrol employees into a workplace pension scheme from October 2012. So an increased personal allowance means fewer lower paid employees may be auto-enrolled than previously thought. Capital Gains Tax The capital gains tax exemption is frozen for 2012/2013 at 10,600. There are no changes to the CGT rates. These remain at 18% for taxable gains which fall within the basic rate band after allowing for other income and 28% for other gains. The trust rate of CGT remains 28%.
Tax efficient investments ISAs A reminder: the annual ISA subscription limit increases in line with CPI to 11,280 ( 5,640 for cash ISAs) for 2012/2013. Junior ISAs The Junior ISA subscription limit remains at 3,600 for 2012/2013. This amount can be spread between cash and stocks and shares in any proportion. The Child Trust Fund limit also remains at 3,600. The increases in the ISA allowances coupled with the Junior ISA limit mean that many families regular savings can be held in a tax efficient environment. Inheritance tax The Government announced an intention to increase the IHT-exempt amount that a UK-domiciled individual can transfer to a non-uk domiciled spouse or civil partner. It will also allow non-uk domiciled individuals who are married to a UK-domiciled spouse or civil partner to elect to be treated as domiciled in the UK for the purposes of IHT. These proposals will be subject to a technical consultation. The Government will consult on simplifying the calculation of IHT periodic and exit charges that apply to relevant property trusts. (That is, discretionary trusts and trusts that are treated as discretionary trusts for IHT purposes.) In addition: the nil-rate band remains frozen at 325,000 for tax years up to and including 2014/2015, after which the Consumer Prices Index (CPI) will be used as the default indexation assumption from 6 April the Government will introduce a reduced rate of IHT of 36% for estates leaving 10% or more to charity. The relief is designed so that the benefit of the tax saving is reflected in the gifts received by charities and not in payments to other beneficiaries
legislation to prevent UK-domiciled individuals acquiring an interest in excluded property will take effect from 21 March 2012. As asset values start to recover, a frozen nil-rate band will increase the number of estates paying IHT and renew interest in IHT planning. Simplification of the calculation of exit and periodic charges. Non-UK domiciled individuals who elect to be treated as UK-domiciled for IHT purposes by virtue of having a UK domiciled spouse may need estate planning advice. Stamp Duty Land Tax (SDLT) As predicted, the Chancellor announced a range of measures to close SDLTavoidance schemes and ensure purchasers of high value properties pay their fair share of tax. The measures, which will take effect from 22 March 2012, include the introduction of: a higher rate of SDLT of 7% for purchases of residential properties costing in excess of 2 million where both the contract is made and the purchase completed on or after 22 March 2012 ; and a top 15% rate of SDLT which will apply to residential property over 2 million purchased by non-natural persons, such as companies. The Government will also consult on the introduction of an annual charge on residential properties valued at over 2 million which are owned by companies with the intention of legislating in Finance Bill 2013 for commencement in April 2013. SDLT thresholds for 2012/2013 on properties up to 2 million remain otherwise unchanged from 2011/2012. Corporation Tax The Government surprised us with further cuts to Corporation Tax. A 2% cut to the main rate of Corporation Tax to 24% from 1 April 2012. This replaces the planned reduction to 25%. Successive reductions of 1% each year to a rate of 22% by 1 April 2014. The main rate was previously planned to reduce to a minimum of 23% by April 2014.
The small profit rate remains 20%. The outlook of reducing Corporation Tax rates for companies can make the ability to defer Corporation Tax until a future date even more attractive. Companies that adopt the historic cost method of accounting may find the option of retaining any offshore bonds particularly attractive with the planned reduction in Corporation Tax rates. Anit Avoidance and Life Insurance Maximum Investment Plans A change to the qualifying rules means it will only be possible to invest up to 3,600 in any one tax year into MIPS, with effect from 6 April 2013. Transitional rules mean contributions paid into new MIPs taken out with effect from 21 March 2012 will count towards this limit. As will any premiums paid into existing MIPs that are varied in certain ways from 21 March 2012 onwards. As gains on qualifying policies are not subject to personal tax, they d been seen as attractive alternatives to pensions for higher and additional rate taxpayers, particularly in light of the increasing restrictions on pension contributions. Chargeable event gains New legislation in Finance Bill 2012 aims to amend the rules for calculating chargeable event gains that may be liable to Income Tax. The changes will put beyond doubt that when calculating the amount of a chargeable event gain under a life insurance policy, a deduction for certain gains arising earlier in the life of the policy will only be allowed to the extent that the earlier gains are attributable to one of the persons chargeable to tax under the chargeable event gain regime. The legislation will also be amended to ensure interdependent policies (where the value of benefits payable from one policy is dependent on premiums paid into another policy) will be treated as a single policy for the purposes of the chargeable event gain regime.
The changes will apply to policies issued on or after 21 March 2012, and to policies issued before this date where certain events occur on or after this date. The Government will also consult on reform to rules in the chargeable event gains regime that reflect a policyholder s period of residence outside the UK. This would cover time apportionment relief. It s intended that this consultation will result in legislation for inclusion in Finance Bill 2013. - MIPs look significantly less attractive to pensions for higher and additional rate tax payers - The amendments to the chargeable event gains regime will make binds issued on what is sometimes called a golden segment basis less attractive. It s evidence that the Government will move to counter developments that are perceived to abuse the tax system This information has been obtained from Scottish Widows. Every care has been taken to ensure that this information is correct and in accordance with their and The Big Picture Wealth Managements Ltd s understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. This information is based on announcements made in the March 2012 Budget which may change before becoming law.