Financial Planning News

2013 March Budget - What It Means For You

23-March-2013 10:53
in General
by Admin

So far, but we await the full budget notes, the Budget fulfilled the announcements from last year and possibly no too-nasty surprises.


 There were a number of headline-grabbing policies announced that will have either a direct or indirect impact on UK investors.

In spite of a negative outlook for the UK’s economy, with projected growth for the year halved to 0.6%, many financial experts are saying The Budget statement will have a positive effect on markets.Key elements directly affecting investors will include:
  • Growth expected to be 1.8% in 2014; 2.3% in 2015 and 2.7% in 2016 (assuming these expectations are correct)
  • £10,000 income tax limit brought forward one year, to 2014
  • Shared equity schemes extended for homebuyers
  • Corporation tax cut to 20% in 2015 (good for SMEs)
  • Stamp duty abolished on AIM-listed companies 
  • Flat-rate pension of £144 per week moved forward one year to 2016 
  • Child trust funds allowed to transfer to Junior ISAs

Economic growth
The hope is the Budget’s focus on making the UK attractive for international business should offset any negative economic news.

I believe The Budget, has helped focus on pushing the UK’s relative attractiveness as a location for international companies and encouraging the development of small businesses, especially those with a high level of intellectual property.

This coupled with the reduction of corporation tax to 20%, 10% research and development tax credit and more favourable tax treatment for employers granting ownership to employees are all positive.

The outcome is the headline rate of growth is likely to remain "uninspiring", I can see the direction the government are taking and this targets to raise the level of productivity by the private sector versus the public sector; and in turn this could boost the market.

Only time will tell whether the Budget has gone far enough and we will have to wait at least until 2014 when the majority of the measures introduced will take effect.

Anti-Avoidance - General Measures and IHT Specifics
The much heralded General Anti-Avoidance Rule (GAAR) will be introduced in Finance Bill 2013. It will cover a wide range of taxes, such as income tax, capital gains tax, inheritance tax (IHT) and corporation tax. It will add to existing measures against tax avoidance and focuses on marketed tax avoidance schemes.

Specific legislation will be brought in to counter some specialist IHT avoidance schemes.

  • Only a debt that's repaid out of the estate by the executors will be allowed as a deduction from the estate.
  • If assets that attract IHT reliefs such as Business Property Relief or Woodlands Relief are bought with the borrowed money, any relief will be only be given on the repaid amount of the debt.


Tax breaks
The tax reductions for low earners, such as bringing the £10,000 income tax limit forward one year, are a welcome development.

Low interest rates will continue to pressure those relying on bank interest on their savings, in spite of the tax breaks. The news will therefore be particularly disappointing for savers. Although significantly more promising for investors.
Good news for drawdown users - and GAD rate overhaul means more to come
A 20% hike in pension drawdown limits has been confirmed; and the barrier to transferring protected pre-April 2011 drawdown cases removed and an overhaul of the GAD drawdown rates.

We welcome the move back to 120%:-

Higher income limit

  • The existing income limit will simply go up by 20% from the start of the client's next drawdown year after 25 March 2013. It'll happen automatically - there's no need for a formal income review.
  • This means some clients will have a year's wait for the income hike. But advisers may be able to help give an immediate income boost, and supercharge the 20% increase when it does come, by triggering a review of the existing limit in the interim.

Transfer barrier lifted

  • Until now, anyone transferring a pre-April 2011 drawdown pot with a protected 120% income limit dropped down to the 100% limit from the start of their new drawdown year. This created a real barrier to these transfers, effectively trapping many clients with their existing drawdown provider.
  • The existing 120% income limit will now continue after a transfer until the scheduled 5 yearly review date, creating a level playing field for clients and their advisers. And this change is backdated - it applies to any transfers of protected pre-April 2011 drawdown funds made in a drawdown year starting after 25 March 2012.

Review of GAD rates

  • GAD drawdown rates are supposed to mirror market annuity rates. But they don't - increasing the pain for drawdown users in recent years.
  • A review of the table has been kicked-off to get the rates back on track, potentially further boosting drawdown income limits from later this year.

Pension allowances cut - but there's still room for manoeuvre
From tax year 2014/15, the pension annual allowance drops to £40,000 with the lifetime allowance cut to £1.25M. But despite the rumours, there's no change to pension tax relief. And the 2% of the population affected by these cuts have time to plan for them.

Those clients affected should use the advance notice to review their pension funding and start considering other saving vehicles for the future.

Annual allowance

  • The drop to £40,000 applies to pension saving for the 2014/15 tax year. But many will see their contribution limits cut in a matter of weeks rather than in a year's time.
  • This is because the annual allowance test isn't based on payments made in the tax year - it's what's paid in the pension input period (PIP) ending in the tax year that matters. So any PIP starting after 6th April 2013 suffers the reduced £40,000 allowance.
  • Carry forward continues, but the new £40,000 allowance will soon start to eat into what can be paid. Payments for 2015/16 will have carry forward based on £50,000, £50,000 and £40,000.
  • Make the most of the current rules while you can. Think carry forward from 2009/10 onwards based on a £50k allowance, 50% tax relief on payments made this tax year and protecting against the reduced LTA.

Lifetime allowance

  • The standard LTA will drop from the current £1.5M to £1.25M from 6 April 2014. But there will be two new options to lock into a higher LTA before then.
  • Fixed protection 2014 gives a continued £1.5M LTA - but at the cost of giving up future ‘benefit accrual' after 5 April 2014. There will also be an individual protection option, expected to give a personal LTA equal to the 2014 fund value for those with funds between £1.25M and £1.5M - without the need to stop pension saving. It's expected that this will be available alongside the new fixed protection 2014 as a safety net.
  • Consider using the new tax year, and what's left of this one, for a final funding boost before locking into the higher allowance. And start thinking about alternatives to pensions for the future.
  • But don't throw the baby out with the bath water. Giving up on pensions could mean missing out on employer pension payments. So if there's no compensation for leaving a company pension scheme, staying in for 45% of something might be better than 100% of nothing.

All systems go for flat rate State Pension from 2016 - but further blow for DB

The new flat rate State Pension of £144 a week will start from April 2016, a year earlier than originally planned. Details will be confirmed in the Pensions Bill.

A simpler State Pension is expected to make it easier for people to see exactly what they will get from the State when they stop working. This greater clarity will make it easier for them to set targets for their own retirement savings, to top up the State Pension. And making it easier to plan for the future has to be a good thing.

But related changes to DB schemes aren't such positive news:

  • 2016 is confirmed as the end date for DB contracting out. This will see both employer and employee NI going up, further increasing the cost burden of maintaining benefits at current levels.
  • Employers will have a controversial new power to unilaterally reduce benefits to compensate, but this might simply be the final nail in the coffin for some.
  • And the scrapping of the proposed relief from smoothing returns is another blow for beleaguered employer sponsors.
Stamp duty on AIM-listed stocks
The removal of stamp duty on some of the smallest and fastest-growing companies in the UK is good news for investors. 
It is often said that SMEs (small to medium sized enterprises) are the lifeblood of the British economy. Many of these are developing the technologies and products of the future and looking for growth capital through AIM.Hopefully, this will encourage more investors to consider an investment into this market, which in turn will help develop the UK markets. (These are UK companies striving to grow, develop and employ and are the lifeblood of the UK economy and a significant part of the future of UK business.) Abolishing stamp duty on AIM shares is likely to speed up the movement of capital into smaller company equities and help more AIM-listed stocks gain visibility and make a great growth market story more attractive to more investors.
Abolishing CGT on the sale of companies to employees provides a much-needed incentive to unlock hidden talent within UK companies.I see this Budget as being mindful of the role that growth companies are playing in advancing the UK’s progress down the road to recovery
Child trust funds
The consultation to allow CTFs (Child Trust Funds) to be transferred to Junior ISAs is excellent news for those stuck in these inferior and expensive products.
CTFs have been suffering from limited choice and higher charges on investments, as well as lower rates for cash savings for more than two years now and the situation has been getting worse, with a number of providers raising fees in recent months.
For gilt investors, the Budget is probably marginally negative, owing to the higher peak in debt/GDP and the reduced probability of further quantitative easing.Question marks are raised over who will buy the £108 Billion in new gilts to be issued in 2013/14 - another cause for concern.
Incentives for homebuyers
The Help to Buy Scheme are potentially significant, and could be a welcome tailwind for UK mid cap managers.
Family tax breaks - find out what's on offer for your clients and their families
The sandwich generation is being squeezed from both sides. They may be spending more time (and money) supporting elderly parents. And they may be facing a peak in costs if they have young children. If one parent is at home, household income is likely to be lower. Or with both parents working, there will be childcare costs to fund.

Childcare changes in 2015
Working families struggling to meet childcare costs will get a welcome £1,200 a year boost from the Government. The new scheme will open up tax relieved childcare for the 2 million families who are unable to access the current employer linked scheme.

From 2015 they will get 20% tax relief on savings used to purchase childcare vouchers up to a maximum of £6,000 for each child under 5 years old. And the savings could even be recycled into a pension contribution which could help to reduce the tax charge on child benefit - see below.

Keeping child benefit
A pension contribution is more than a tax efficient way of saving for retirement - it can also help to retain child benefit.

Child benefit is worth £1,752 every year for a family with 2 children. This is at threat if either parent has annual income in excess of £50,000. It will be lost altogether if this figures rises above £60,000. A pension contribution is one way to keep child benefit in the family. For example, for an individual on income of £60,000, a pension contribution will reduce this figure to £50,000 at a net cost of only £6,000 - and they'll get the child benefit back.

Child Trust Funds and Junior ISAs
Following consultation announced in today's budget, legislation is likely to be introduced in Finance Bill 2014 to allow existing Child Trust Funds to transfer into Junior ISAs (JISAs).

The maximum contribution that can be made to JISAs is £3,600 every year from birth to 18 and is a valuable allowance. If maximised, it could grow to around £85,000 (assuming growth of 3% a year) over the 18 years. And the child would be entitled to their fund at 18. Too much too soon? Certainly in the view of some parents. While it would be useful towards university costs, it could end up being used less wisely.

The lack of control over hard-earned savings could be a worry for many parents, who may prefer to provide for their children's future using an investment in trust.

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