Chancellor Cuts Pension Tax Relief

Tuesday, April 28th, 2009 | Financial Digest | No Comments

The Chancellor has announced that, starting in 2011-12, tax relief on pension contributions will be restricted to basic rate for individuals with an annual income of £150,000 or higher.

In anticipation of this change, there will be special rules which will apply from Budget Day (22 April 2009) to prevent people from making large additional contributions to their pensions before then in order to benefit from higher rates of tax relief while it is still available.

These changes do not affect the vast majority of individuals. They affect only those who have a total annual income of £150,000 or higher in the current tax year or in either of the preceding two tax years. More information is in Budget Note 47 and in the guidance notes, so I’ll reproduce the essence of BN47 here:

Budget Note 47 – Overview

the Government intends from 6 April 2011 to restrict tax relief for individuals with an annual income of £150,000 or more. Relief will be tapered away so that for those earning over £180,000 relief will be worth 20 per cent, the same as to a basic rate taxpayer, and the Government is introducing new rules to apply from 22 April 2009 to restrict higher rate tax relief on pension contributions for individuals. The restrictions will apply to people

• whose income is £150,000 or higher
• who change their normal ongoing regular pension savings, and
• whose total pension savings exceed £20,000.

This will remove the advantage to those individuals of increasing their pension contributions in excess of their normal pattern.

The special annual allowance, which is set at £20,000, sets an upper limit on the amount of additional pension savings for which full tax relief at the higher rates of tax can be given. Tax relief on additional pension savings above the amount of this allowance will be at the basic rate of tax only. The special annual allowance tax charge which restricts relief on additional contributions to basic rate is a charge on the individual, collected via their Self Assessment tax return. The rate of charge is the difference between the highest rate of income tax and basic rate (20% for 2009-10).

Who do the changes affect?

The vast majority of people will not be affected by these changes.

The changes will not apply to anyone whose total annual income is less than £150,000 and was less than £150,000 in the previous two tax years.

The changes will not apply even if their total annual income was £150,000 or more if they continue as normal with their existing regular pension contributions and accrual of pension benefits (including any employer contributions) and do not increase these pension savings on or after 22 April 2009.

The changes will not apply if their total annual income was £150,000 or more and they increase their pension savings or accrual of pension benefits, provided their overall annual pension savings or benefit accruals are less than £20,000.

The following examples show how the income limit will apply:

A has income of £55,000 in 2007/08, £58,000 in 2008/09, £59,000 in 2009/10 and £60,000 in 2010/11. Since his income is less than £150,000 in all years, he is not affected by the new special annual allowance charge.

B has income of £158,000 in 2009/10 and has total individual and employer pension contributions to a money purchase scheme of £15,000 in the year. Although her income exceeds the £150,000 threshold, her total contributions are less than the £20,000 special annual allowance so she is not subject to the special annual allowance tax charge.

C has income of £158,000 in 2010/11 and makes contributions to her personal pension scheme of £24,000 during the year of £2,000 per month, something she has done for the previous 2 years. Her income exceeds the £150,000 income threshold. Although her pension contributions are more than the £20,000 special annual allowance, they will not be subject to the special annual allowance tax charge because they only reflect her normal regular contributions.

D has income of £170,000 in 2010/11 and makes total pension contributions of £50,000 to his personal pension scheme. The contributions reflect a regular monthly contribution of £2,000 (as for previous years) and a single payment of £26,000. D’s income exceeds the £150,000 income threshold and his pension contributions are more than the £20,000 special annual allowance. However, his normal regular contributions of £24,000 are not subject to the special annual allowance charge. The additional single contribution of £26,000 will be subject to the special annual allowance tax charge.

E has total income of £120,000 in 2009/10 and contributes a total of £30,000 to a personal pension scheme that year. Although his income is less than £150,000 for 2009/10, because his contributions are greater than £20,000 he needs to check his income for the previous 2 tax years. His income was £110,000 in 2007/08 and £125,000 in 2008/09. E will not be affected as his relevant income is less than £150,000 even though his contributions are greater than £20,000.

In 2010/11 E’s total income has risen to £170,000 and he contributes a total of £15,000 to his personal pension scheme in that year. E will not be affected as although his relevant income for 2010/11 is greater than £150,000, his contributions for that year are less than £20,000.

Income

The special annual allowance charge affects only people with ‘relevant’ income of £150,000 or more. Broadly, for the purposes of the special annual allowance this is

• your total income before pension contributions, personal allowances and other reliefs and deductions,
• less any normal deductions for reliefs (such as trading losses) including deductions for pensions contributions but up to a maximum of £20,000,
• less any gift aid deductions as per normal

But in calculating your ‘relevant’ income you must add in any amount of employment income foregone by salary sacrifice in return for pension contributions or additional pension benefits if the agreement was put in place on or after 22 April 2009.

Individuals will be affected only if their relevant income is £150,000 or more in the tax year, or in either of the previous two tax years.

If you, or clients of yours need any further explanation or clarification of the issues raised in this article, then call us on 0845 30 50 222

Tags: Add new tag, Budget, Higher Rate, Pensions, Tax Relief

2009 Budget Overview

Tuesday, April 28th, 2009 | Financial Digest | No Comments

2009’s Budget was never likely to provide much in the way of good cheer. As the Treasury struggles to cope with the cost of the recent bank bailouts and the rising cost of social security and falling tax revenue, public borrowing is set to soar to record levels. In an attempt to help the UK balance its books, Chancellor of the Exchequer Alistair Darling intends to cut growth in spending on public services by almost half from 2011 and, in a surprising move, he announced that that those earning more than £150,000 per year will be taxed at a new high rate of 50% from April 2010.

The Budget also included a reduction in tax relief on pension contributions paid by high earners. Tax relief for those earning more than £150,000 per year will be tapered off, disappearing completely for those earning £180,000 or more. Meanwhile, those earning more than £100,000 per year will see the withdrawal of their personal allowances from April 2010.

Fuel duty will rise by 2p per litre in September, while duty on alcohol and tobacco rose by 2%. Darling announced £2 billion-worth of help for the unemployed, and measures intended to boost the housing market and the motor industry. The Budget included some help for businesses, although the Confederation of British Industry criticised the Budget, commenting that it did not set out a “credible and rigorous path for restoring the public finances to health.”

Pensioners will see the basic state pension increase by at least 2.5%, regardless of inflation, and current winter fuel allowances will be maintained for another year despite the recent fall in energy prices. The limit on savings that pensioners can possess before their Pension Credits are reduced will rise to £10,000 in order to help those negatively affected by low interest rates. Meanwhile, the annual limit for ISA contributions will rise this year to £10,200 per year for those aged over 50, and for everybody from next year.

Darling expects Britain’s economy to shrink by 3.5% during 2009, and return to growth the following year. However, the International Monetary Fund expects the UK to contract by a rather more drastic 4.1% in 2009, and does not expect Britain to return to growth during 2010. Darling appears to be gambling on a relatively swift economic recovery for the UK; only time will tell whether this gamble will pay off. Here’s some more detail:

INCOME

Income Tax Increase

From the 2010/2011 tax year earnings over £150,000 will be subject to a new income tax rate of 50%. Pension contributors currently enjoying higher rate relief and earning in excess of £150,000 will continue to enjoy higher rate relief providing

a). pension contributions do not exceed £20,000, or
b). contributions in excess of £20,000 have been “regular” for the past two tax years.

Further information can be found in BN47 on the HMRC website.

Income Tax (dividends)

From the 2010/2011 tax year the highest rate of tax on UK dividend income will rise from 32.5% to 42.5%. This will affect investors with income in excess of £150,000.

Personal Tax Allowance

This will be reduced by £1 for every £2 earned above £100,000 from April 2010. Consider increasing pension contributions or “salary sacrifice” to reduce or avoid this additional charge.

Trust Taxation

As from 2010/2011 tax year the income tax applicable to most trusts will rise to 50% and at the same time trustee dividends will be taxed at 42.5%. The careful use of trusts may avoid both of these tax charges.

PROPERTY

Stamp Duty

The Stamp Duty holiday has been extended to the year end. Homes up to £175,000 will remain free of Stamp Duty providing the purchase completes by 31 December 2009.

Shared Equity Scheme

The Chancellor has made a further £80m available to help first time buyers onto the property ladder with the Shared Equity Mortgage Scheme.

Energy Eficient Housing

An extra £100m has been made available to build energy efficient homes.

PENSIONS

State Pensions

The Chancellor has commited to increasing the State Pension in 2010/2011 by a minimum of 2.5% even if we remain in a period of deflation.

Pension Credit

Individuals will be able to hold savings up to £10,000 before being means tested for Pension Credit. This replaces the existing £6,000 limit.

INVESTMENT

ISA Limits Increased

The Chancellor has increased the ISA limit to £10,200 from October this year for over 50’s. This will be extended to everyone else in April 2010. Up to 50% of the ISA investment can be in cash.

Enterprise Investment Schemes

Under previous rules investors could carry back 50% of the investment made up to 5th October subject to an overriding limit of £50,000. This restriction has been removed, allowing the full EIS limit of £500,000 to be carried back.

OTHER CHANGES

Winter Fuel Allowance

Last tax year’s special allowance of £250 for the over 60’s and £400 for over 80’s has been continued for this tax year.

Tax Planning Schemes

HMRC is to publish details of ineffective tax planning arrangements to increase consumer protection.

Offshore Disclosure Arrangement

HMRC will introduce a third opportunity to disclose assets held offshore, giving another chance for those with undisclosed assets to settle with HMRC, thereby normalising their affairs.

Inheritance Tax

As expected the Inheritance Tax (IHT) Allowance has moved to £325,000, giving an effective tax limit on second death of £650,000, providing the couple concerned are either married or in a Registered Civil Partnership. The rate of tax applicable remains at 40%. 

For further information and help with your understanding of this budget and its implications, contact us on 0845 30 50 222.

Tags: Budget, Financial News, IHT, Inheritance Tax, Investments, Savings, stock markets

Global Markets Update April 2009

Thursday, April 9th, 2009 | Market Updates | No Comments

Global equity markets staged a recovery during March. Share prices rallied from the middle of the month following the news that the US Federal Reserve (Fed) intends to buy back over US$1 trillion-worth of debt, fuelling hopes of an earlier-than-expected end to the global recession. Concerns about deflation rapidly evolved into worries about the possible return of inflation, leading to renewed interest in gold and other commodities as a means of protection against inflationary pressures.

Central banks are trying increasingly radical methods of stimulating their economies. The Bank of England announced a programme of quantitative easing intended to encourage commercial banks to revive lending activity. The measures involve the purchase of £75 billion-worth of commercial banks’ assets, which will be financed with newly created money. Meanwhile, the Fed announced plans to inject almost US$1.2 trillion of newly created money into the US economy in order to help kick-start bank lending, revive the housing market and lead to economic recovery. Nevertheless, export growth is still on the wane in the UK, US, China and Germany, reflecting the decline in worldwide demand, and the World Bank expects the global economy to decline for the first time since the Second World War during 2009.

After reaching a 12-year low during early March, share prices in the US rose in the latter part of the month, led higher by the financial sector. This rally followed the announcement of further measures to alleviate the effects of toxic assets upon American banks, and news of better-than-expected new home sales.

Equities advanced in the UK during March; however, their rise was relatively muted, dampened by a raft of disappointing corporate profits announcements and yet more negative economic news. Share prices in Europe posted relatively strong gains overall, although underlying country performance was mixed, reflecting the fortunes of individual companies and a welter of overwhelmingly negative economic data.

Most Asian markets posted strong gains during March, buoyed by hopes that the world might emerge from recession sooner than expected. In particular, financial stocks rallied on the news of the Fed’s quantitative easing measures. Japan announced further measures intended to stimulate flagging economic growth, although Japan’s substantial public debt is likely to hamper its scope to boost its economy. Meanwhile, Japanese exporters were heartened by a weakening in the yen ahead of the fiscal year end, amid mounting hopes that the global financial crisis might be on the wane.

Tags: Financial News, Interest Rates, Investments, stock markets

Worried About Redundancy?

Thursday, April 9th, 2009 | Financial Digest | No Comments

Unemployment figures have been accelerating upwards as the economic environment deteriorates and are predicted to go higher for the remainder of the year, leaving the spectre of redundancy looming large for many people. However, for anybody worried about their job security, there are a few practical steps that can potentially cushion the blow.

Build an emergency fund

Holding three months’ income in readily available funds will provide some breathing space in the event of redundancy. This should be in an instant access savings account or ISA but do check the small print – banks frequently penalise savers for taking money out of a savings account through loss of interest. An emergency fund is particularly important for families where there is only one breadwinner.

Assess your outgoings

Keeping track of expenditure can highlight potential problem areas. You may find you have old direct debits for things you no longer need – insurance payments on long obsolete mobile phones, for example. See if you can switch to cheaper utility providers, better value car insurance or credit cards with lower interest rates. Set a budget and then make sure you stick to it.

Pay off debt where possible

Reducing debt can significantly cut your monthly outgoings. Start with the most expensive debt first, which is likely to be credit and store cards. Banks will also charge heavily for overdrafts, even when they are arranged, and personal loans can be cheaper. It is worth checking the rates for all debt and, if you can’t pay it off, switching to cheaper types of debt. Mortgages will usually be the cheapest debt – so although it is worth paying down mortgage debt, it should be a lower priority than unsecured debts.

Delay large purchases

This is not the time to start a kitchen refurbishment or loft conversion. Keep new purchases to a minimum and consider putting planned expenditure on hold. With house prices falling, refurbishment may not add value the way it did only a couple of years ago.

Check your insurance situation

Unemployment cover can be bought on its own or with policies such as income protection, and protects in the event of longer-term unemployment. The cost will vary depending on when the payments kick in and the level of income needed. Insurers have policies in place to ensure that people don’t take it out in the knowledge they may be made redundant imminently. There is usually a qualifying period and the insurer will not provide a policy if there is already a specific risk to the policyholder’s job.

WORRIED ABOUT REDUNDANCY?

If the worst happens and you do lose your job

Check your financial rights

Everyone is entitled to statutory redundancy, even if the company goes bust. For those who have been employed for more than two years, this is one week’s pay (subject to a statutory maximum – currently £350 per week) for every year of employment. For those over 41, this increases to 1.5 weeks pay for each year, subject to the same statutory maximum. Some companies will pay out more than statutory redundancy.

Check your employment rights

Companies need to follow the proper procedure when making someone redundant and, if they do not, you may have reason to claim for unfair dismissal.

Check what you are entitled to from the Government

Claiming benefits is not a long-term solution, but can offer a temporary respite.

Invest any lump sum wisely

While it is tempting to dip into capital for living expenses, it may be worth investing a lump sum to generate an income. While this may be less than you are used to, it will provide some breathing space to find alternative employment. Alternatively, use the sum to pay down debt and reduce your outgoings.

Maximise your tax benefits

Statutory redundancy payments are tax-free and a total of £30,000 paid on termination can be tax free. The remainder can also be free of tax if it is moved into a pension. This is a suitable option for those nearing retirement. A lump sum of 25% of a pension pot can be taken as a lump sum from 55, so it may only mean tying the money up for a few years.

Ensure you claim any insurance entitlement

It may sound obvious, but it is time to dust down the files and root out any insurance policies you may have forgotten about. Unemployment insurance and income protection will kick in after a certain number of months, depending on the policy. Payment protection insurance has proved poor value, but if you already have historic policies in place, you may also be able to claim.

Look at your mortgage repayments

You may have a number of options depending on the flexibility of your mortgage and it may be possible to take a payment holiday. This will either lengthen the term of your mortgage or increase your payments when they resume, but can give you up to a year with no mortgage repayments. You may also be able to reduce repayments by changing the length of the mortgage or switching to interest-only.

Consider alternative sources of income

Could you rent out a room in your house perhaps ? Under the rent-a-room scheme, you can earn £4,250 per year tax-free. Also, you may be able to take short-term, part-time jobs or raid the attic for things to auction.

Call us for help on 0845 30 50 333

Tags: Adviser, Financial News, Interest Rates, Investments, Redundancy, Savings

Nicola Mould Appointed as Managing Director at Lansdown Place

Thursday, April 2nd, 2009 | Company News | No Comments

The Board of Lansdown Place is pleased to announce the appointment of Nicola Mould as Managing Director.

Nicola joined Lansdown Place as Group Compliance Director in October 2006. She has extensive experience in senior Compliance roles  within the industry, as well as running her own successful consultancy.

Lansdown Place is one of the good news stories of the recession. Formed a little over three years ago with a mission to build a new type of Independent and Impartial Advisory Service, the company has expanded to 20 advisers coving the full range of financial disciplines. With its Head Office in the Old City of Bristol but reaching across the South of England, the company continues to expand, with five new advisors joining so far this year. The company has expanded its back office to support the new advisers.

Nicola said “I am delighted to be given the opportunity to lead this growing business. We have exciting plans for the coming years, which will build on our success to date and continue to focus on providing clients with the very best advice. Lansdown Place is committed to achieving Chartered Financial Planning Status, and we have made good progress towards this. I am pleased to confirm that the principles laid down by the founders of independent and impartial advice for all clients remain as relevant and important to the business today”

Chairman, Paul Wilson said ‘On behalf of the founders and directors, we are delighted that Nicola has accepted this role, she is absolutely the right person to expand the services and reach of Lansdown Place as we enter into a new era in the industry.’

Lansdown Place remains committed to attracting and retaining the industry’s best talent at all levels, and is happy to receive approaches from those interested in joining the company.

Tags: Appointments, Lansdown Place, Managing Director