The Chancellor described this year’s Budget as one for “Makers, Doers and Savers”. He introduced some vote winning measures aimed at helping pensioners and savers and continued to target sectors where there is tax avoidance.
Personal Tax Rates and Allowances
The personal allowance and higher rate thresholds for 2014/15 had already been announced, but the Chancellor took great delight in announcing that the personal allowance for those born after 5 April 1948 would increase to £10,500 from 2015/16 (increasing in line with the Consumer Prices Index thereafter). In his speech he also announced that he would be passing on the benefit of the increased allowance to higher rate taxpayers. However, this isn’t quite correct as the higher rate threshold is increasing to £42,285, £80 short of giving higher rate taxpayers the full benefit!
There remains a disparity between the personal tax- free allowance and the starting point for national insurance, which is £7,956 for 2014/15.
The proportion of an individual’s personal allowance that will be available to transfer to a spouse or civil partner will increase to £1,050. This change will only be effective from April 2015 and it will only apply if neither party are higher rate or additional rate tax payers.
A welcome measure for savers was the increase in the starting rate of tax for savings income – this increases from £2,880 for 2014/15 to £5,000. From April 2015, the starting rate of tax will reduce from 10% to nil. This should take some savers out of the tax net altogether.
On the day before the Budget, an extension to the tax-free childcare support scheme was announced.
The scheme, starting in Autumn 2015, was due to be worth £1,200 per child per year, as announced in the 2013 Budget. This is now being increased to £2,000 (based on childcare costs of £10,000). It will be available where both parents work and earn up to £300,000 between them, or for single parents earning less than £150,000.
There were no leaks to spoil the Chancellor’s surprise measures regarding defined contribution pension schemes. In summary the measures are:
- Pension scheme members can currently ‘drawdown’ income from their pension funds of up 120% of the Government Actuaries Depart- ment (GAD) rate. This will be increased to 150% for pension anniversaries starting on or after 27 March.
- Those pensioners who qualify for ‘flexible drawdown’ may withdraw unlimited amounts from their pension funds, providing they have a minimum income of £20,000. This minimum income requirement will reduce to £12,000 for applications for ‘flexible drawdown’ after 27 March.
- For pensioners over 60, the trivial commutation limit for pension savings increases from £18,000 to £30,000, with effect from commutation periods after 27 March.
- The size of a small pension fund that can be taken as a lump sum will increase from £2,000 to £10,000 and the number of schemes that can be withdrawn as lump sums increases from two to three.
Further changes are to be introduced from April 2015, after a consultation period. The intention is that from age 55, defined contribution pension scheme members will be able to draw as much or as little as they want from their pension funds. Any pension withdrawn will be taxed at the individual’s marginal rate of tax.
From 1 April 2014 the turnover threshold for VAT registration increases from £79,000 to £81,000 and the de-registration threshold increases from £77,000 to £79,000.
Savings and Investments
Seed EIS – This tax incentive was introduced from April 2012 as a temporary measure to enable early stage companies to raise capital. The income tax and capital gains tax reliefs available to the investor will now be made permanent.
ISAs now NISAs (new ISA) – The subscription rates for cash and stocks and shares ISAs are being increased and merged at £15,000 per annum from 1 July 2014. In addition, the transfer restrictions between stocks and shares and cash accounts are being removed. The annual subscription limit for Junior ISAs and Child Trust Fund is also increasing from £3,840 to £4,000.
Venture Capital Trusts (VCTs) – As announced in the Autumn Statement, income tax relief on VCT investments will be restricted where they are linked to a share buy-back or where there has been a disposal of shares in the same VCT in the previous six months.
Pensioner Bonds – From January 2015 National Savings & Investment will launch a range of fixed rate savings bonds for the over 65s. The maximum investment in these bonds will be £10,000 and details and rates will be released in the Autumn Statement.
Premium Bonds – The limit will be increased from £30,000 to £40,000 from 1 June 2014 and again to £50,000 in 2015/16. The chances of winning the top prize will be doubled as there will be two £1 million prizes instead of one.
Social Investment Tax Relief – The scheme provides income and capital gains tax incentives to investors in qualifying social enterprises. The scheme is modelled on the Enterprise Investment Scheme (EIS) and the Chancellor announced that the rate of the income tax relief will be 30%, which is in line with tax relief given to investors in VCTs and EISs.
Inheritance Tax (IHT) – As previously announced the IHT nil rate band has been frozen at £325,000 until 2017/18. However, David Cameron has now included a pledge to increase this to £1 million in his election manifesto.
After consultation, the Finance Bill 2015 will include legislation to extend the IHT exemption for armed forces personnel who die on active service to cover all emergency services personnel who die in the line of duty.
For more control over pension savings, pensioners will be able to withdraw all their pension savings in a lump sum. As now, 25% of the lump sum will be tax-free. The member will still have the option to purchase an annuity, providing an income for life.
The Chancellor doubled the Annual Investment Allowance (AIA) from 1 April 2014 from £250,000 to £500,000. This gives 100% tax relief for expenditure by businesses on plant and machinery and will be welcomed by those in business.
Where small or medium sized enterprises incur expenditure on Research and Development (R&D) but have no corporation tax liability, the cash credit they can claim increases from 11% to 14.5% for expenditure after 1 April 2014.
From April 2016, Class 2 national insurance contributions for the self-employed will be collected through self assessment. Although they are currently due for payment on 31 January and 31 July, the same payment dates as self assessment, tax payers can chose to pay these by direct debit or monthly standing order.
The Government continues to discourage the ownership of residential properties by non-natural persons (mainly companies) and the 15% ‘higher rate’ stamp duty land tax on properties worth more than £2 million will be extended to cover properties valued at more than £500,000. The change applies to land transactions on or after 20 March (the day after Budget Day).
The Chancellor also announced the introduction of two new bands for the Annual Tax on Enveloped Dwellings (ATED). Residential properties valued between £1 million and £2 million will be liable to an annual charge of £7,000 from 1 April 2015. From 1 April 2016, properties worth between £500,000 and £1 million will pay £3,500 annually. These charges will be increased by CPI each year.
Anti-avoidance is now a regular feature of Budgets and some measures have been previously announced. These include the following:
- Off-shore employment intermediaries
- New rules affecting partnerships
- The use of dual contracts by non-domiciles
- Upfront payment of taxes by users of avoidance schemes within the Disclosure of Tax Avoidance schemes
- Giving HMRC powers to collect debts direct from tax payers’ bank accounts
Please note that this is a brief summary of the proposals in the 2014 Budget and the rules are subject to change. The information given is of a generic nature and is not intended to constitute specific advice. Please contact your usual Paradigm Norton adviser if you have any questions.