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This month we look at how to protect yourself against the Lifetime Allowance Charge, the forthcoming revisions to pension tax and the new debt recovery powers of HMRC.
Thursday, 1st January 2015
Pensions reminder: Protect against the Lifetime Allowance Charge
George Osborne has introduced protection against the Lifetime Allowance Charge for those with big pension pots, which was announced before the publication of the Taxation of Pensions Bill.
From 6 April 2014, people aged over 55 with pension posts exceeding £1.25m have been able to apply for Individual Protection 2014, which was established in 2013 to help savers caught in the transition from a drop in Lifetime Allowance from £1.5m.
Lifetime Allowance (LTA) is currently set at £1.25m, with any pension savings over this amount being subject to the Lifetime Allowance Charge (LTAC). This charge is effectively 55% for income or lump sum above the LTA limit.
This year, authorities began accepting applications for Individual Protection 2014 (IP4). This will give individuals a protected lifetime allowance subject to a maximum total pension of £1.5m.
Individuals are able to hold IP14 along with Fixed Protection 2012, Fixed Protection 2014 or Enhanced protection, but not Primary Protection.
Jackie Holmes, senior consultant with Towers Watson, said: “Unlike other types of protection, IP14 allows savers to continue to build up benefits without losing their protection.”
“But any pension savings in excess of the protected lifetime allowance will be subject to a lifetime allowance charge. This protection may be of benefit to those whom employers aren’t offering alternatives to pensions, such as cash supplements.”
Those with large pensions have until April 2017 to apply for IP14. Savers will still be able to save past the £1.5m threshold granted through IP14, but will be subject to the LTAC when benefits are taken.
For more information on Lifetime Allowance and Individual Protection 2014, including how much of the allowance you have used, please contact French and Associates on 01702 558 828.
Revision to pension tax in 2015 on the way
Chancellor George Osborne has announced the removal of the so-called ‘death tax’, which is the 55% pension tax that applies to the pension pots of those over 75 years of age.
The Chancellor announced the changes at the Conservative Party Conference in September, which is the last party address before the general election next year.
Initially, promises to reform pensions were announced in March of this year, with the first major revision granting pensioners the flexibility to withdraw their pension pot at retirement age, rather than seeking an annuity.
The reforms are hoped to make it easier to pass on savings to beneficiaries, and are set to bring tax benefits to around 320,000 people who retire each year with defined contribution pension savings.
“People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free,” the chancellor said. “The children and grandchildren and others who benefit will get the same tax treatment on this income as on any other, but only when they choose to draw it down.”
Currently, if you start to make pension withdrawals or are aged over 75, unused pension assets are taxed at 55% on every £1 passed on at death.
However, from April 2015, pension savers will be able to nominate a beneficiary to inherit their pension if they die. If the saver died before the age of 75, there will be no tax to pay on the inherited pension cash. Alternatively, if death occurs at 75 or over, the person inheriting the pension will pay only their own rate of income tax, if taken as income, or 45% if taken as a lump sum.
With the 55% tax rate abolished, putting surplus cash into a pension is likely to become more attractive as a way to reduce inheritance tax bills, particularly as rising house prices push the value of an increasing number of estates above the £325,000 threshold, at which IHT become payable at 40%
For more information on upcoming changes to pension regulation, as well as the best options for saving and organising inheritance, please contact us.
HMRC establishes safeguards to new debt recovery powers
The treasury has relented to pressure from campaign groups to impose safeguards on its new debt recovery powers.
In early December HMRC released a briefing to explain how the powers would be used with the safeguards in place, to ensure that debtors do not face unnecessary hardship.
The controversial debt collection powers were announced earlier this year, stipulating that HMRC would have the ability to recover debts from debtor’s bank accounts and ISAs if they owed £1,000 or more. Many have spoken out in concern over the use of the powers, and the potential hazardous effects they could have on vulnerable debtors.
Under the revised plans, safeguards will mean that HMRC has to meet all debtors face-to-face before taking action and provide extensions to the time allowed for appeals, from 14 days up to 30 days. Additionally, an untouched £5,000 will have to be left across the debtor’s accounts.
According to the briefing, HMRC expects to use the new powers on only a minority of cases, around 17,000, where firmer action is deemed necessary to ensure debts are recovered. It also noted that around half of their preliminary targets have more than £20,000 at their disposal.
The HMRC has suggested the safeguards will help them tackle only those guilty of avoidance, rather than simply endorsing punitive powers against those unable to pay off their debt.
David Gauke, financial secretary to the Treasury said: “We already set out robust safeguards to protect vulnerable debtors in our original DRD proposals, but feedback from the consultation process told us we could do more to make sure this only catches those who are playing the system.
“We’re strengthening the guarantees we can offer taxpayers that the powers will only be used when debtors have consistently refused to talk to HMRC and settle their debts, and their use will be subject to the toughest scrutiny and oversight possible.”
HMRC also said it will be setting up a specialist unit to deal with cases involving vulnerable members of society.
However, Anthony Thomas, president of the Low Incomes Tax Reform Group, said he will remain cautious about the new powers until safeguards are secured within legislation.
He said: “Our primary concern is that the vulnerable taxpayer or tax credit claimant on a lower income who gets in a muddle should not be caught up in a process designed to target those who have the funds to pay their tax on time but who resolutely refuse to do so.
“But importantly, these improved safeguards must be adequately set out in primary legislation.”
If you have questions or concerns relating to debt, or to enquire about how the new powers could affect you, please contact French and Associates today.
Auto-enrolment delayed by over 40% of businesses
More and more businesses are postponing their auto-enrolment state date, according to the law firm Hugh James.
They found that 4,590 businesses of the 10,817 that have had to auto-enrol their staff have so far opted to postpone.
Auto-enrolment is being introduced in incremental stages, or staging dates, depending on a company’s size. Companies larger than 250 members have already had to register, whilst companies with 50 to 249 members have until 1 April 2015 to complete enrolment.
This latter stage, referred to as the SME stage, is likely to show a greater proportion of businesses relying on delaying auto-enrolment. This is due to smaller businesses looking to offset the cost of enrolling their employees for as long as possible, or to coincide auto-enrolment starting dates with the payroll calendar to lighten the administrative burden.
Current rules allow businesses to postpone auto-enrolment for up to three months. According to Hugh James, the intention to postpone is due to SMEs finding themselves unprepared for the changes.
Louise Price, partner at Hugh James, said: “Auto-enrolment has been on the horizon for years, but it has still managed to catch even large businesses unprepared simply because there is so much to do to be ready.
“We anticipate much heavier reliance on postponement from the SMEs that are about to reach the deadline to start auto-enrolment. These businesses do not tend to have large teams of HR and payroll staff, so preparing for auto-enrolment tends to be taken on by an executive with lots of other responsibilities to juggle.
“A lot of the small businesses we have talked to are unaware of how demanding preparing for auto-enrolment can be. It can eat up valuable management time and there is a lot of administrative work involved.”
For more information on auto-enrolment, including how and when to register, please contact us.
Using pensions as a gateway to tax relief
More and more people are turning towards pensions as a method of staying beneath cumbersome tax thresholds.
Year-end pension planning is a practice adopted by many for this purpose – with pension input acting as a tax-free environment capable of mitigating tax liabilities.
Currently, taxpayers pay 80% of net contributions to personal pension plans, with the provider adding 20% tax relief but tax relief is available at your highest marginal rate. Tax-relief contributions in a single tax year cannot exceed the member’s relevant earnings or £3,600 if their earnings are lower than this. This allows non-taxpayers and starting rate tax payers to benefit from 20% tax relief on pension contributions despite paying income tax at a lower rate or not at all.
Pension contributions are deducted from salary before income tax, meaning that tax relief is directly available through moderating contributions.
It is particularly useful for those facing the top bracket of income tax, which is currently 45% in the UK. Higher rate taxpayers are advised to ensure that maximum contributions are made as long as they can be afforded. It means less income is subject to tax, particularly at the higher rate and the additional rate.
Those with earnings over £120,000 lose their personal allowance, and this could be reversed through making pension contributions.
Maximised pension contributions can also help those whose income narrowly prevents them from receiving types of Government support, such as Child Benefit.
Under current rules, Family Allowance is available to families whose combined household income is less than £60,000. However, through increasing pension contributions, families stand the chance of minimising their child benefit restrictions.
For more information on pension contributions and how they can help you mitigate tax liabilities, please contact us today.
Time to consider year-end tax planning
The time for year-end tax planning is fast approaching, with individuals and businesses alike poised to mitigate their tax liabilities by cross-examining their financial affairs.
It is important to take advantage of opportunities before they change with the next tax year, as well as taking a pre-emptive look at how your tax commitments will change from this year to the next, and adjusting your financial forecast accordingly.
There are four main areas to consider:
- Maximise pension contribution allowance to lower tax obligations and to minimise restrictions on child benefits
- Carrying forward unused allowances from earlier tax years
- Using pension contributions to offset corporation tax providing that they are wholly and exclusive for trade
- Making pension contributions on behalf of non-earning spouses or other family members.
- Bringing forward income to this tax year
- Deferring income to 2015/2016, whilst keeping an eye on future tax rates
- Dividing income producing investments between spouses
- Using charity and pension contributions to adjust net income and possibly recoup other benefits e.g. Child Benefit
- Investing in tax exempt investments such as ISAs
- Making full use of personal allowances.
Capital gains tax:
- Bringing forward disposals to 2014/2015
- Deferring disposals to 2015/2016, whilst keeping an eye on future tax rates
- Crystallising CGT gains and losses
- Making full use of the annual CGT annual exemption
- Ensuring any CGT planning is executed before the 2015 budget.
- Making gifts or executing an absolute trust before the 2015 Budget, to capitalise on current reliefs
- Discovering entitlement to current reliefs, both on inheritance tax and property
- Understanding the impact of the 2015 pension changes before they occur on April 5.
If you wish to know how to maximise the outcome of year-end tax planning, or for any queries relating to any upcoming tax changes, please contact us today.