The Chancellor’s March 2014 Budget has provided some key opportunities for financial planning. In summary, the changes (some of which are yet to be confirmed) have been as follows:
The biggest changes have been in relation to pensions, with much greater flexibility being afforded to members of defined contribution schemes. With this added flexibility the need for advice at retirement becomes increasingly important.
Changes to be implemented from 27March 2014:
The amount of income that individuals in Capped Drawdown can take will increase from 120% of GAD to 150%.
Minimum income requirement for Flexible Drawdown will decrease from £20,000 to £12,000.
Trivial commutation limit will increase from £18,000 to £30,000.
‘Small pots’ rules are to be extended from 2 to 3 pots and the maximum amount is to increase from £2,000 to £10,000.
Proposed changes from 6 April 2015:
The Government is proposing complete flexibility for members of defined contribution pension schemes, as follows:
- No restriction on the level of income that can be withdrawn
- No requirement to purchase an annuity
- Tax free cash of 25% remains unchanged
- Benefits taken above the tax free cash limit are to be taxed at the individual’s highest marginal rate of income tax
There is also a proposal to reduce the 55% tax payable on lump sum death benefits from Income Drawdown arrangements. However, the extent of the proposed reduction is unknown at this stage.
Transfers from public sector Defined Benefit schemes are to be banned. The ban may be extended to private sector DB schemes but this is currently under consultation.
Annual Allowance – Will reduce as planned to £40,000 from 2014/15
Lifetime Allowance – Will reduced as planned to £1.25m from 2014/15
Carry forward will still be available and will be based on £50,000 for years prior to 2014/15
Various transitional reliefs apply and advice in this area is essential where any of the above allowances may be breached.
Personal Allowance – Increasing to £10,000 for 2014/15 (£10,500 for 2015/16)
Age Related Allowance – (people born 5 April 1938 – 5 April 1948) frozen at £10,500
Age Related Allowance – (people born before 5 April 1938) frozen at £10,660
Basic Rate Threshold for Income Tax – Reduced to £31,865 for 2014/15
Higher Rate Tax Threshold – Higher rate tax will be payable for those with income exceeding £41,865 in 2014/15 (an increase of £415 from 2013/14).
The 10% starting rate tax band has been increased to £2,880 for 2014/15. From 2015/16 the 10% band will be abolished and replaced by a 0% savings rate band of £5,000. This is eroded by an individual’s taxable non-savings income and therefore, the 0% rate will only apply where non-savings income is below £5,000.
The £100,000 personal allowance income limit and £150,000 additional rate tax thresholds remain unchanged for 2014/15.
Nil Rate Band – Frozen at £325,000 until 5 April 2018
With rising asset values the frozen Nil Rate Band is causing an IHT liability for more people. If an individual’s estate is valued at more than £325,000 or a married couple have assets greater than £650,000 then there are several exemptions and allowances that can be used to reduce the potential inheritance tax liability. In addition, there are various arrangements, trusts, and investments that can be used for effective inheritance tax planning.
Capital Gains Tax
Capital Gains Tax Exemption – Increasing to £11,000 for 2014/15 (£5,500 for Trusts)
We believe the capital gains tax exemption is an often under utilised exemption. By investing for capital growth and/or making regular use of the capital gains tax exemption a structured portfolio can provide a tax efficient return for both individuals and trustees.
Initially there will be an increase in the ISA allowance to £11,880 from 6 April 2014 (with up to £5,940 being able to be paid into a Cash ISA).
From 1 July 2014 Cash and Investment ISAs are being replaced by ‘New ISAs’ (NISAs).
The limit will be £15,000 which can be invested wholly in cash, stocks and shares, or a combination of the two.
Investors can open a maximum of one Cash NISA and one Investment NISA per tax year.
Existing ISAs will be converted to NISAs on 1 July 2014.
Transfers from Cash NISAs to Investment NISAs and vice versa will be allowable.
Junior ISA – Increase in contribution limit to £3,840 from 6 April 2014 and to £4,000 from 1 July 2014.
Main rate will reduced, as planned, to 21% from 1 April 2014 and to 20% from 1 April 2015, bringing it in line with the small profits rate.
For holistic financial advice speak to an experienced, qualified adviser at Springfield Financial Services.