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By its very nature, a Budget tends to create winners and losers and so far the newspaper headlines have focused on the “granny tax”, the “pasty tax” and funding tax cuts for the rich. But, as with every Budget, it’s only when you dig a little deeper that the true impact of the Chancellor’s measures for each individual comes to light.
So having looked through the fine print of the Budget notes, we have done the hard work for you. Below we outline some pension and tax efficient investment ideas that you should be considering now we have passed into a new tax year.
Despite widespread speculation, there were no changes to pension tax breaks. The annual allowance — the maximum amount you can contribute to a pension plan in a year — remains at £50,000, the tax-free lump sum you can receive from your pension fund when you draw benefits remains at 25% and tax relief on contributions still applies up to 50%.
However, by announcing a reduction in the upper rate of income tax to 45% from April 2013, the Chancellor has provided a one-year window of opportunity for high earners to benefit from 50% tax relief on their pension contributions. So those who have not made any recent pension provision could make contributions of up to £200,000 before April 2013 by using the carry forward rules, which, subject to eligibility, allow you to carry forward unused annual allowance from any of the previous three tax years. For 50% taxpayers, this equates to only a £100,000 net investment. It may also be possible to accelerate the funding for 2013/14 by juggling pension input periods and still obtain the full 50% relief.
Similarly, employers looking to fund pension shortfalls might want to set this pension funding against the current rate of corporation tax (24% as at 1 April 2012), before it drops to 23% in 2013 and 22% in 2014. The small company rate will remain at 20%.
HMRC has also closed 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. Profit or cash extraction ideas from a business are an increasingly complex area and professional advice is recommended before any action is taken.
Action points: High earners should maximise pension contributions before April 2013. Employers should fund pension shortfalls at the higher rate of corporate tax now. Care should be taken on profit and cash extraction as opportunities are reduced.
Get to know the acronyms!
In order to put into action the government’s stated overall aim to reward work and support growth, the Budget confirmed that from 6 April 2012 rules applying to Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) will be relaxed, giving greater scope for schemes to invest in small, early stage companies.
The maximum annual amount that an individual can invest in an EIS has also increased to £1 million (up from £500,000) and, due to the 30% income tax relief an EIS investor gets, up to £300,000 of relief is now available.
A new tax advantaged scheme has also been established. Called the Seed Enterprise Investment Scheme (SEIS), it provides individuals prepared to invest in start up companies with 50% income tax relief and capital gains tax exemptions. Exactly how the new scheme will operate in practice is yet to be seen, but the key will be ensuring your investment qualifies for the relief.
Action points: Doubling of annual investment limit and 30% tax relief means EIS schemes are now a strong consideration. Further tax relief available from, as yet, untested SEIS schemes means you shouldn’t proceed without taking advice!
Currently individuals can offset their entire income against income tax reliefs and as a result pay no income tax at all. But the Budget has seen the first step towards the introduction of a minimum rate of tax. From 6 April 2013, there will be limits to the amount of income tax relief individuals can claim. A cap will apply to reliefs which are currently unlimited and will be set at 25% of income (or £50,000, whichever is greater). The government may, however, offer concessions on donations made to charities.
This cap will not apply to VCTs, EIS or pensions, however, it seems likely it will apply to Business Premises Renovation Allowance (BPRA) schemes. These schemes take advantage of government incentives to bring derelict or unused properties in disadvantaged areas back into use. An investor is entitled to 100% tax relief on the proportion of their investment that is used for expenditure that qualifies as being used for renovating or converting the property. Qualifying expenditure is typically calculated at between 70-95% of the gross investment and investors can then elect to offset this against their marginal rate of income tax, so up to 50% income tax relief is possible. Generally, a BPRA scheme purchases a property, develops or refurbishes it and then either lets the property to a third party or operates a trade (often a hotel business) in the property following refurbishment.
Again, the Chancellor has given us some forewarning and the cap won’t come in until 2013, so a “buy now while stocks last” opportunity exists for anyone wishing to get maximum income tax relief from a BPRA scheme.
Action Points: Likely that the cap on income tax reliefs will apply to BPRA schemes. Opportunity exists to take advantage of current 100% relief on BPRA schemes up until April 2013.
Mark Brownridge is a Research and Development Analyst, Mazars Financial Planning
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