1.    Personal Allowances and Tax Bands

The increase in the personal tax band to £8,105 was announced in the 2011 budget.  A further increase to £9,205 is to take effect in the 2013/14 tax year.  A reduction in the tax rate from 50% to 45% was also announced again to take effect in the 2013/14 tax year.

In a surprise move the Chancellor announced that the higher age allowances available to those over 65 would be phased out.

The rates of tax applying will be as follows;

Taxable income                  2012/13          2013/14

Up to £8,105                             0%                  0%

£8,105 – £9,205                       20%                 0%

£9,206 – £42,475                     20%                20%

£42,476 – £100,000                40%                40%

£100,001 – £116,210              60%                60%

£116,211 – £118,410              40%                60%

£118,411 – £150,000              40%                40%

Over £150,000                         50%                45%

2.  National Insurance

The rates of National Insurance for 2012/13 will be;

Class 1                                  Employees NI          Employers NI

Up to £7,488                                0%                              0%

£7,489 – £7,605                           0%                            13.8%

£7,606 – £42,475                         12%                            13.8%

Over £42,475                               2%                           13.8%

 Class 2

The rate is increased by 15p per week to £2.65.

Class 3

The rate is increased by 65p per week to £13.25.

Class 4

The rates will be;

Up to £7,605                         0%

£7,606 – £42,475                  9%

Over £42,475                        2%

3.  Capital Gains Tax

The annual exemption remains at £10,600 and rates remain at  18% for basic rate taxpayers and 28% for higher rate tax payers.  The 10% rate for Entrepreneurs relief remains with an unchanged lifetime allowance of £10 million.

4.  Inheritance Tax

There were no changes to the nil rate band, which remains at £325,000 or the rate which remains at 40%

5.  Pensions

The maximum contribution remains at £50,000 but as previously announced the pensions cap is reducing from £1,800,000 to £1,500,000 on 6^th April 2012.

6.  Tax Efficient Services

The ISA investment limit will be £11,280 for the 2012/13 year and up to £5,640 of that can be saved in a cash ISA.  The Junior ISA limit remains at £3,600.

The amount that can be invested under the EIS is increasing to £1 million per year but the amount that can be tax efficiently invested in VCT’s remains at £200,000 per annum.

There was also the announcement of the Seed Enterprise Investment Scheme to encourage investment in very small companies on an investment of up to £100,000 per annum, an individual will be able to claim 50% tax relief.  In 2012/13 only, there will be a CGT exemption for gains relief on the disposal of assets that are invested in the scheme.

7.  Cap on Income Tax Relief

From 6^th April 2013, a cap will apply to income tax relief so that anyone seeking to claim relief of more than £50,000 will have the claim reduced to 25% of income.

8.    Corporation Tax

A reduction of the main rate of Corporation Tax to 26% to take effect from 1^st April 2012 had already been announced.  However, it will now go down to 24% with further reductions of 1% in each of the next two years.  The Chancellor set a goal of a 20% main rate.

9.    Child Benefit

The proposals last year to take away child benefit from families where one parent is a higher rate taxpayer caused widespread concern.  It was seen as inequitable in two respects:

(a)   the whole benefit was to be withdrawn when a persons income was just £1 over the basic rate threshold; and

(b)   a couple where both parents worked and earned £40,000 per annum each would retain child benefit, whereas a couple  where only one parent worked, but earned £45000 per annum would lose their benefit.

The Chancellor went some way to dealing with these inequities.  The new proposals will mean that:

(a)   child benefit will not be lost unless one parent has income in excess of £50,000 per annum;  and

(b)   benefit will then be withdrawn on a tapered basis as income increase from £50,000 to £60,000.

The withdrawal of child benefit will apply from 7^th January 2013.

10. VAT

The VAT registration and de-registration thresholds were increased to £77,000 and £75,000 respectively.

11.  IR 35

A number of high profile individuals have attracted attention for using service companies to avoid employment taxes on roles that clearly had all the attributes of employment. Many of these individuals were actually working for government departments.

The government has said that they will introduce a package of measures to make the existing IR 35 legislation easier to understand.

12.  Tax implications for small businesses

Subject to consultation, a system will be introduced to allow unincorporated businesses with a turnover up to the VAT registration threshold to prepare accounts on a cash basis if they wish.

13.  Comment

Large businesses will welcome the reduction in the main corporation tax rate.

Many pensioners will find themselves worse off after the phasing out of the age allowance.

It will be interesting to see whether there will be any substantial take up of the Seed Enterprise Investment Scheme.

The sting in the tail for many of our clients may be the “simplification” of IR 35.  HMRC already have a working definition for “service company” and it may be that there will be a move to make dividends drawn from service companies subject to employment taxes.

14.  Disclaimer

This document has been produced for general guidance only and does not constitute tax advice.  Whilst every care has been taken it its preparation, Warr & Co Limited will not accept liability for any loss incurred as a result of any use made of this document or its contents.  We will be happy to offer specific advice to clients when requested.  Should you have any queries or wish to discuss any of the points raised please contact Tim Warr, Peter Edwards or Suresh Dhokia on 0161 477 6789

Where an individual enjoys an annual taxable income above £100,000, they will see their personal allowance taper away at the rate of £1 for every £2 of additional income.  This means that by the time their income reaches £114,950, they will have completely lost their personal allowance.  The effective rate of tax in respect of that part of their income between £100,000 and £114,950 is 60%. So an individual with total taxable income of £114,950 will be paying tax at an effective rate of 60% on £14,950.

If that individual were to contribute personally £14,950 to a personal pension plan tax relief would amount to £8,970, leaving a net cost of £5,980.  Now supposing that individual was aged 55 or over, they would be entitled to immediately withdraw a maximum tax free lump sum of 25%, equating to £3,737, leaving £11,213 invested to provide them with a pension at some point.  The net cost of this £11,213 fund after deducting Income Tax relief and the tax-free lump sum would be just £2,243.

Is it possible to better this result?

Suppose for example that the individual in question is aged 50 rather than 55.  They would have to wait 5 years before drawing their lump sum. Ignoring charges, if the pension investment were to grow at 5% per annum compound, the fund would increase to £19,080 and the lump sum entitlement would increase to £4,770.  The result would be a remaining pension fund of £14,310 for a net outlay of £1,210.

Can this be improved yet further?

What if the contribution was instead made by the individual’s employer under a salary sacrifice arrangement?  Looking back at the first example, in this case, in addition to a 60% tax saving there would also be a 2% employee’s National Insurance saving. The net outlay to the individual would be:

Taking this a step further, the individual’s employer would have saved 13.8% employer’s National Insurance by the employee ‘sacrificing’ £14,950 of salary in favour of a pension contribution.  The employer could, in a salary sacrifice scenario, increase the pension contributions by 13.8% to £17,013 and be in a no worse position.  So the net cost to the employee would be:

Furthermore, an even higher fund value of £13,008 would remain for purpose of providing pension.

If the individual in question were again aged 50, they would have to wait 5 years before drawing pension benefits.  Once more if we ignore pension fund charges and again assume 5% compound growth, this fund would increase to £21,713.  The tax-free lump sum would then be £5,428 and the individual would be left with a pension fund of £16,285 for a cost of £253, i.e.

Not quite a free pension, but not far off.

A person in their late 40’s or early 50’s might repeat this retirement planning over many years to build up a more meaningful pension fund at a very low cost to enhance whatever other plans they might have made for their retirement.

It is worth noting that individuals aged 55 or over that can benefit from the immediate withdrawal of benefits, including the tax-free cash lump sum may not reinvest or recycle this to gain further pension and tax benefits. However, recycling of excess or surplus income is permissible and we intend to cover this particular opportunity in further detail in a future article.

Planning such as this is likely to prove to be particularly useful to key individuals within a company that can influence or negotiate the structure of their remunerative package. Alternatively, perhaps individuals such as Computer Consultants, IT Contractors and Management Consultants affected by Part 8 of the Income Tax (Employment and Pensions) Act 2003, better know as IR35 could benefit.

Of course, this type of planning may also appeal to earners caught by the 50% tax band, although with less financial benefit due to the relevant tax rate.

If you would like to discuss any aspect of this planning, feel free to contact us for an informal discussion.

Disclaimer

The content of this article should not be relied upon as a specific recommendation. It should be used for general information only purposes. It does not constitute financial advice. Always seek independent financial advice before making a decision based on the content of this article.

The legislation applies to all employers, not just large businesses so, one-man companies such as a Computer Contractors, IT Consultants, Management Consultants etc.. have the same requirements to consider as a company with a thousand employees.  The system is policed by penalties and so Contractor Accountants who assist with the affairs of many one man companies are often particularly busy between 6^th April and 5^th July each year collecting information from their clients and filing returns.

For many years, large employers have been able to apply for dispensations to cover expenses where it is accepted by HMRC that no liability arises.  So, for example, an employer who has a dispensation will still have to complete a P11D for employees who have company cars, but he won’t have to record details of reimbursed travelling or subsistence expenses.  Often HMRC will agree to round sum expenses being paid.  However, HMRC have routinely turned down requests made by one man companies such as computer contractors simply because it is not practical to have any form of internal checking of expenses within the company itself.

All of this has changed from 6^th April 2011. HMRC will accept requests for dispensations from one-man companies.  The applications can be submitted online by the employer or their agent.  So Contractor Accountants can apply for dispensations for their computer contractor clients.

Dispensations are now routinely issued to cover expenses such as:

a)    travelling expenses excluding normal commuting;

b)    subsistence and accommodation expenses incurred in connection with travelling;

c)    telephone costs in connection with business calls identified from an itemised bill; and

d)    entertaining costs.

Although strictly speaking a dispensation applies from the date approved, if a contractor applies now HMRC will treat the dispensation as applying from 6^th April 2011.

Of course employers who apply for a dispensation need to ensure that they comply with its terms.  Usually for a Computer Contractor this means:

a)    recording on a P11D any benefits not covered by the dispensation such as private medical insurance;

b)    avoiding round sum expense payments such as £5 for lunch; and

c)    retaining receipts for all re-imbursed expenses.

For those who choose not to apply for dispensations there is likely to be a nasty surprise in the not too distant future.  HMRC have set out their view that if an employer reimburses an employee for an expense, the reimbursement should be taxed through the PAYE system and then the employee should claim relief on his tax return.  This procedure is not tax neutral because National Insurance will be due on the reimbursement.

We at Warr & Co have already commenced applying for dispensations for our various freelance contractors clients – make sure your accountant does the same.

Finally please email a question you may have on the above to the team at Warr & Co using the link below.  http://www.warr.co.uk/contact/

We have taken the opportunity of summarising some of the key points for our clients. In summary these are:

• The state pension age will rise from 66 to 67 from 2026, which is eight years earlier than originally planned.
• The Government will launch a new tax advantaged investment in April 2012, offering 50% income tax relief in addition to a one off capital gains tax incentive.
• The Capital Gains Tax (CGT) exemption will be frozen for 2012/2013 at £10,600.
• As previously announced the annual Individual Savings Account (ISA) allowance limit will increase in line with the Consumer Price Index (CPI) to £11,280 for 2012/2013, of which up to £5,640 may be invested into a cash ISA.
• The Government reminded us of its previous planned cuts to Corporation Tax – a 1% cut to the main rate of corporation tax to 25% from April 2012 along with successive reductions of 1% each year to a rate of 23% by 1 April 2014
• Prior to the Autumn Statement, HMRC announced an improvement to the pension carry forward rules for tax years 2008/2009, 2009/2010 and 2010/2011.
• In the days leading up to yesterday’s announcement the Minister for Pensions confirmed that the staging dates for auto-enrolment will be amended for small businesses. They will now be expected to auto-enrol employees from May 2015 instead of April 2014.

In the coming weeks, we will comment further on some of these issues. In the meantime, should you have any queries, feel free to contact us.

Well, subject to meeting certain conditions the employer will be entitled to claim the cost of the function as a tax deductible expense without any liability crystallising on his employees.

The conditions are:

(i)            the total cost of the function must not exceed £150 per person attending;

(ii)          the function must be open to all employees (or all employees at a particular location); and

(iii)         a function of some kind must actually take place.

The employer does not have to restrict the function to employees only and so at the discretion of the employer, employees may bring guests.  Where guests do attend, they are included in making sure that the cost of the function does not exceed £150 per person attending.

An employer may be a multi-national PLC or a one person limited company such as a computer contractor.  If the employer is self employed then the allowance is not available for the proprietor or partners, but is available for their employees.

A function must actually take place, so if instead of organising a Christmas party an employer provided his employees with Christmas hampers, a benefit in kind would crystallise on his employees.

The function does not have to take place at or near Christmas.  So if he so desired, an IT contractor could organise a function for himself and his spouse (as a guest) at his contract renewal.  Nor does there only have to be one function a year.  So the contractor referred to above could celebrate Christmas with his spouse and contract renewal with a fellow computer contractor.  Provided of course that the total cost per person over the tax year does not exceed £150.

If you need further information then contact Warr & Co specialist Management Consultant Accountants & Contractor Accountants.

The system is policed by penalties which until 5^th April 2010, remained very much the same.  Basically, a penalty of £100 was charged if a return was not filed on 31^st January following the end of the tax year (31^stOctober in the case of paper returns).

However, this penalty was limited to a maximum of one times the tax outstanding at 31^st January.  So in practice a person avoided a penalty when filing late if they ensured that their liability had been paid in full by 31^stJanuary.  A second £100 penalty was charged if a return was still outstanding on the following 31^st July.

In the case of persistent offenders, daily penalties can be applied when sanctioned by a Tax Tribunal.

Where tax was paid late, there was a 5% penalty applied to any amount outstanding one month after the due date and a second 5% penalty after a further six month.

Penalties for the year to 5^th April 2011 and subsequently are changing.  In particular, a penalty will be charged even if there is no tax outstanding.  Penalties for late filing will be as follows: -

(a)   £100 where the return is 1 day or more late; and

(b)   £10 per day for up to 90 days where the return is filed more than 3 months late; and

(c)   £300 or if greater, 5% of the tax due when the return is filed more than 6 months late; and

(d)   a tax geared penalty of up to 100% of the tax due or £300 or if greater when the return is filed more than 12 months late.

There are new penalties too when tax is paid late. The existing 5% penalties at 1 month and 6 months remain, but there will be a third 5% penalty when tax is paid more than 12 months late.

The change that was proposed is that from 6th April 2013, child benefit will be clawed back from parents where one partner is a higher rate taxpayer. So using tax rates for 2011/12, a husband who is the breadwinner of a family unit comprising himself, his wife and two children, will have to repay all of the child benefit paid to his wife if his taxable income exceeds £42,475 by just £1.

At present the rates of child benefit paid are £20.30 per week for the eldest child and £13.40 per week for each additional child. In the fictional example above, over a whole tax year, £1,752.40 will have been paid to the mother of the children and if the father is a higher rate taxpayer his tax liability will be increased by the same amount.

So what tax planning is available to counter this seemingly unfair tax? Well, for many couples, there is no answer. If in our example the husband had a salary of £100,000 per annum there is no sensible planning that would enable him to reduce his taxable income below £42,476. But for those whose income is up to say £50,000 per annum there is plenty that can be done, but just remember we are talking total taxable income here, not just salary so account must be taken of investment income. So here are some ideas to think over in preparation for this change:

1. Be prepared to turn down that pay rise your boss offers you.

2. Benefit someone less fortunate than you by making a charitable donation under gift aid.

3. Ask your boss if you can have a weeks unpaid leave.

4. Benefit yourself by making a contribution to your pension scheme.

5. Gift your investments to a lower earning spouse or partner so that he / she receives the income that those investments generate.

By and large any planning carried out has to be during the tax year and with the best will in the world, you might get your fine tuning wrong and find out after the end of the tax year your income is say £100 over the top of the basic rate tax band, is there any scope for planning then? Well, yes there is. If you make a gift aid donation before the following 31st January and before filing your tax return you can elect to have that donation treated as though it was paid in the tax year just ended. So a net donation of £80 would be sufficient to reduce taxable income by £100 and avoid an expensive claw back of child benefit.

Suppose you earned £50,000, your wife earned £30,000 and you each contributed £4,000 gross to your individual pension plans. As a family, child benefit would be preserved if your wife suspended her contributions and you doubled yours.

You may find that the level of your income is such that tax planning requires unaffordable levels of pension contributions. If this is the case, why not skip a year’s contribution and double up in the following year? That way you may be able to preserve child benefit every other year. In fact, if you think you may be in that position in two years and are making contributions to a pension plan, why not suspend contributions now so that you can pay more after 6th April 2013?

Planning is fairly straightforward for those who are employed, but less so for those who are self-employed and those who are owner managers of a limited company. We have produced detailed guides covering these areas. If you would like a copy, please send an email to info@warr.co.uk with “Child Benefit Self-Employed” or “Child Benefit Limited” in the header.

Disclaimer

This document has been produced for general guidance only and does not constitute tax advice. Whilst every care has been taken in its preparation, Warr & Co will not accept liability for any loss incurred as a result of any use made of this document or its contents. We will be happy to offer specific advice to clients when requested. Should you have any queries or wish to discuss any of the points raised please contact Tim Warr or Peter Edwards on  0161 477 6789      .

The annual exemption for the 2011/2012 tax year is increased by £500 to £10,600. The rates of 18% for basic taxpayers and 28% for higher rate tax payers remain unchanged. The 10% rate that applies to gains on the disposal of certain business assets will see the lifetime limit double to £10 million.

Inheritance Tax (IHT)

The nil rate band remain frozen at £325,000, but the rate at which inheritance tax is charged will reduce from 40% to 36% where an individual leaves at least 10% of his estate to charity

Pensions

The complex anti forestalling legislation introduced by the previous government ends on 5th April 2011. A simplified system takes effect from 6th April 2011. The maximum contributions attracting full tax relief will be £50,000 per annum and relief not utilised in one year can be carried forward for up to two years. The pensions cap which is currently £1,800,000 will reduce to £1,500,000 with effect from 6th April 2012.

It is no longer compulsory to purchase an annuity so long as a suitable drawdown arrangement is in place. A person who has pension income of at least £20,000 per annum can choose to have the remainder of any pension funds paid to him in full, but subject to income tax.

Tax Efficient Savings

From 6th April 2011 the Individual Savings Account (ISA) limit increases to £10,680 of which up to £5,340 can be held as cash. Parents of children who have a child trust fund can contribute up to £1,200 per annum without any liability to tax on any income or growth earned. Parents of children who do not have a Child Trust Fund will be able to contribute to a Junior ISA.

There are increases in the amounts that an individual can invest in Venture Capital Trusts and the Enterprise Investment Scheme, and the rate of tax relief for Enterprise Investment Scheme investments will increase from 20% to 30% from 6th April 2011.

It is probably the case that owner managers have the most opportunities available, but there is certainly some scope for tax planning for the self-employed and employees.

In this article I consider some of the planning ideas that individuals can consider and I also look at the some of the changes taking place to the system for the 2011/12 tax year.

A useful starting point is to look at allowances and tax bands.

The Personal Allowance

This is the amount of gross income an individual can receive before paying tax for the 2010/11 year it is £6,475

The Basic Rate Tax Band

This is the amount of taxable income over and above the personal allowance, which is just taxed at the basic rate (20%). For the 2010/11 year it is £37,400.

The Higher Tax Rate

Taxable income between £37,400 and £150,000 is taxed at 40% and taxable income above £150,000 is taxed at 50%

The Personal Allowance Taper Level

This is the level of gross income an individual can have before his personal allowances start to be tapered away at £1 for every £2 of additional income. It is set at £100,000 and means that individuals whose income is between £100,000 and £112,950 face an effective marginal tax rate of 60%

The Capital Gains Tax Threshold

This is the level of capital gains an individual can make in a tax year before paying capital gains tax. For the 2010/11 year it is £10,100. Capital gains tax is charged at 18% for basic rate taxpayers and 28% for higher rate taxpayers. A reduced rate of 10% can be claimed in respect of gains on certain business assets.

The Lower Earnings Limit

This is the minimum salary a person can earn in order for that year to count towards his state retirement pension. For the 2010/11 year it is £97 per week (for each of the 52 weeks) or £5,044 for a director who is employed for the whole year. An individual needs 30 such years to qualify for a full state pension.

The Primary Earnings Threshold

This is the level of earnings at which National Insurance becomes payable. For the 2010/11 year it is £5,715, or £110 per week. Above that level employees NI is calculated at 11% and employers NI at 12.8%. The self employed pay 8%.

The Upper Earnings Limit

This is the level of earnings at which the employee’s liability drops from 11% to 1% and the liability for the self employed drops from 8% to 1%. For the 2010/11 year it is £43,875

TAX PLANNING AREAS

I list below some areas where individuals may find that they can reduce their liabilities by taking action now.

Salaries for Owner Managers

Most small company directors are aware that they will probably benefit from a low salary/high dividend profit extraction. But what is the optimum level of salary? The problem is that for a director with no non company income, personal allowances are lost if salary is below £6,475 but National Insurance is paid if salary exceeds £5,715. So which is best, £6,475 or £5,715? The answer is £5,715, so a director drawing a salary of say £550 per month would benefit by not drawing salary for February and reducing March salary to £215, compensating for lost income with an additional dividend.

Optimum Dividend Levels for Owner Managers

A small company director with no non company income can receive gross income of £43,875 before paying higher rate tax. Dividends are received net of a Notional 10% tax and so dividends should be divided by 0.9 to convert to gross income. For a director receiving a salary of £5,715, dividends of £34,344 will exactly use his basic rate tax band (assuming no non company income).

At a higher level a person with gross income between £100,000 and £112,950 will face the 60% tax trap. Assuming no other income and a salary of £6,475, dividends of £84,172 will take gross income to £100,000. The marginal rate on net dividends just in excess of this will be 43% compared to a 25% rate where income is just below £100,000. So it is well worth trying to ensure that gross income, including dividends, does not fall between £100,000 and £112,950. This point is equally relevant to employees and the self employed who have earned and other gross income close to £100,000 and who also receive dividends perhaps from listed shares.

At a higher level still, the 50% rate starts where gross income exceeds £150,000. This total would be reached by, for example, a salary of £10,000 and a dividend of £126,000. An individual with such an income considering a further dividend now should consider deferring that dividend until after 5th April 2011.

Pension Contributions

It is, of course, well known that pension planning offers generous tax breaks. But for those whose gross incomes are expected to slightly exceed £43,875, £100,000 or £150,000, a personal pension contribution is well worth considering. For example, a person whose total gross income this year will be £110,000 can reduce his tax liability by £6,000 by making a gross contribution of £10,000 to a pension scheme. If he is 55 or over, he has instant access to 25% of this premium as a tax free lump sum, and so he can find that he has £7,500 invested in a pension fund for a net outlay of £1,500.

Individuals with high gross income and existing pension contributions need to seek professional advice before making pension contributions because of complex anti avoidance legislation introduced by the last government.
Gift Aid contributions reduce gross income in exactly the same way as pension contributions.

Capital Allowances

The self employed can reduce their taxable income by investing in plant for their business before the end of their accounting period. For example, a self employed solicitor making accounts up to 31 March 2011 who expects his profits to be £112,000 could reduce his liability by £7,200 by investing £12,000 in plant before 31st March 2011. So if he was planning to replace his computer system in the near future, there would be a tax advantage in doing so in March rather than April.

Of course no businessman should invest in plant just to obtain a tax advantage. The need to invest in plant needs to be there before tax planning is considered.

Capital Gain Tax Planning

An individual with a share portfolio who regularly realises gains should consider disposals to increase gains for the year to close to £10,100. Where this limit is exceeded, he should consider disposing of shares standing at a loss. It is important to remember that disposals and acquisitions of the same shares within a 30-day period are matched.

Post 5th April 2011 Planning

By and large, once 5th April has passed, there is little that can be done to reduce a liability for the 2010/11 tax year. One exception is Gift Aid. A person who makes a gift aid donation between 6th April 2011 and 31 January 2012 can carry that contribution back to the 2010/11 tax year. To do so, he must include the contributions on his 2011 tax return and file by 31st January 2012. In marginal situations, the tax saving can be high. Suppose for example an individual has a gross salary of £100,000 and a dividend of £900 net. The dividend will increase his liability by £387. If he contributed £800 net (£1,000 gross) to a charity by means of gift aid, he would eliminate this £387 liability.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Should you have any queries or wish to discuss any of the points raised, please contact Tim Warr on 0161 477 6789      .

Removal of obligation to purchase an annuity at age 75

Although an individual technically can do this presently via Alternatively Secured Pension this is a complex and not popular option.

Individuals with money purchase pension funds will now be able to defer the decision indefinitely beyond age 75 from 5th April 2011. Also the condition that age 75 was the final date by which tax free cash could be taken is being removed. This option may now be taken after the 75th birthday.

There will continue to be a Lifetime Allowance test at age 75 and a charge will apply at the time on funds in excess of the Lifetime Allowance.

Protection from the Lifetime Allowance charge

The Government has previously announced a reduction in the Lifetime Allowance from 6th April 2012 from £1.8 million to £1.5 million.

Where protection already exists, such as Primary or Enhanced, this will remain intact. However, there will be an additional form of protection introduced called ‘Fixed Protection’. The Government has recognised that some individuals will have planned their pension funding based on the current allowance of £1.8 million, and who could therefore be adversely affected by the reduction.

Therefore these persons may apply before 5th April 2012 for Fixed Protection which will maintain the allowance at £1.8 million. There are several conditions that have to be met including that no money purchase contributions can be made on or after 6th April 2012, nor can there be any defined benefit (final salary) annual accrual from membership post 5th April 2012. In other words, in regard to the latter, active membership of the employer scheme would have to cease.

Protected Tax Free Lump Sums

Individuals with an existing protected lump sum at ‘A’ day (6th April 2006) will maintain the 20% up-lift in this figure since that date which reflects the same level of increase in the Lifetime Allowance.

There will therefore be no corresponding reduction when the Lifetime Allowance decreases.

Income Drawdown (or Unsecured Pension Income)

In addition to the Capped Drawdown option (similar to the existing version) there will be a new Flexible Drawdown option.

From 6th April 2011, individuals over age 55 that meet the ‘Minimum Income Requirement’ (MIR) of at least £20,000 per annum will be able to drawdown an unlimited amount of their pension funds. Such withdrawals will be treated as income for tax purposes. Income included for satisfying the MIR must be guaranteed and payable for life such as state pensions, level annuity income and scheme pensions.

On death, any lump sum death benefit from an Income Drawdown pension fund will be firstly taxed at 55%, a rise form the current 35%.

Should you have any queries or wish to discuss any of the points raised, please contact Jeff Crewdson on 0161 477 6789      .