Less of a Statement, more of a Budget (or three)
The Autumn Statement was delivered by the Chancellor on 5 December. In theory, on becoming Chancellor Mr Osborne abandoned the Pre-Budget Reports that were Gordon Brown’s pre-Christmas showpiece, in place of a basic economic statement (as required by parliamentary statute). In practice, what the Chancellor delivered on this occasion was nearer to a three-year Budget, taking him past the date of the next election.
Quite why Mr Osborne felt the need to tell us about tax numbers for 2015/16 was not made clear. However, it is likely to have everything to do with the projections of government finances out to 2017/18 prepared by the Office for Budget Responsibility (OBR). The Chancellor stopped the OBR from using the assumption that from 2014/15 inflation-linking would apply to tax allowances and benefits by stating what (lower) increases would be imposed. As a result, the substantial quantity of red ink in the forecasts was marginally reduced.
Income tax
More pain
In the run up to the Autumn Statement, no major income tax announcements were expected, not least because the March Budget had already set out the personal allowance and higher rate tax threshold for the 2013/14 tax year. However, the Treasury’s leak-control system proved to be better than it was in spring, and the Chancellor was able to reveal three surprises:
- For next tax year the personal allowance will rise to £9,440, £235 more than previously announced. This figure appears to have been chosen so that RPI-linked increases in 2014 and 2015 will bring the allowance up to the coalition’s £10,000 target just before the election.
- Alongside the increase in the personal allowance was an equal decrease in the size of the basic rate tax band, leaving the 2013/14 starting point for higher rate tax unchanged from what was announced in March (and £1,025 lower than in the current tax year).
- For both 2014/15 and 2015/16 the higher rate threshold will rise by 1% a year against corresponding RPI inflation projections of 3.1% and 2.7%.
The end result of Mr Osborne’s tweaking, according to the Institute for Fiscal Studies, is that in 2015/16 there will be over five million higher rate taxpayers. Gone are the days when higher rate taxpayers were a rare breed – or, indeed, a wealthy one.
Capital taxes
Another turn of the screw
Mr Osborne’s new-found favourite percentage – 1% – cropped up in the capital taxes area as well as income tax and benefits:
- Inheritance tax The Chancellor announced that the nil rate band would rise by 1% in 2015/16, to £329,000. It had been frozen at £325,000 by Alistair Darling in 2009 until 2014/15, a plan the new Government quietly adopted. Once again, this is a delayed sub-inflation increase (the band is now ultimately meant to be CPI-linked). Had the nil rate band been index-linked to RPI from April 2009, in April 2013 it would be rising to about £365,000.
- Capital gains taxMr Osborne froze the CGT annual exempt amount for the current tax year. In the Autumn Statement he said the exemption would increase by 1% in 2014/15 and again in 2015/16 to £11,100. Work backwards and it would appear the 2013/14 exemption will be £10,900, an increase in line with CPI inflation.
These nominal increases imply that more people will be dragged into the inheritance tax net and there will be a rise in the numbers of CGT payers. Fiscal drag – in other words, ignoring the full impact of inflation with the aim of covertly collecting a bigger slice of national income – is a manoeuvre much beloved of Chancellors of all political hues. In the long term, however, reliance on fiscal drag brings into question the credibility of the tax system.
Pensions
More allowance cuts…
The annual allowance – the maximum total tax-efficient contribution that can be contributed to pension plans by you or on your behalf during the tax year – was cut from £50,000 to £40,000, but from 2014/15 rather than immediately. The move, but not the timing, had been widely leaked and will be a further obstacle to funding pensions if you are a higher earner or have left your pension planning until close to retirement. You could find the change means you suffer an unwelcome tax charge if you are a long-serving member of a final salary scheme and receive a promotion. If your pension entitlement during a tax year rises by £2,500 more than inflation, then you will be in annual allowance charge territory unless you can take advantage of the unchanged carry forward rules.
The annual allowance cut in 2014/15 will be accompanied by another cut in the lifetime allowance – maximum total tax-efficient value of pension benefits. This will fall from £1.5 million to £1.25 million, having been as high as £1.8 million only last year. Once again there will be ‘transitional protection’ that you can claim if you are affected. One version will effectively mean all contributions must stop, but another which might emerge after consultation would allow further contributions, effectively only in limited circumstances.
...but income drawdown rises…
One relatively good piece of news was that the Chancellor said he would restore to capped drawdown the 120% of HMRC/GAD rate limit (that is, approximately 120% of the market annuity rate) which existed until he reduced it in April 2011. Full details have yet to be published, but, because legislation is required, any change is unlikely to take effect before 6 April 2013. The increase will go some way towards countering the dramatic effect that falling long-term gilt yields have had on capped drawdown limits over recent years. However, you should remember that higher withdrawals increase the risk of capital erosion and a further reduction in income at subsequent reviews.
…and so do state pensions
While Mr Osborne applied the near ubiquitous 1% increase to most working age benefits for each of the next three years, he was more generous to pensioners:
- The basic state pension will increase by 2.5% from next April, as expected. This is in line with the ‘triple lock’ introduced by the coalition Government, which requires the basic state pension to rise by the greater of: inflation (as now measured by the CPI); earnings growth; a flat 2.5%.
- All other state pensions will rise in line with CPI to September 2012 (2.2%).
Individual savings accounts: Small increases and, possibly, a valuable concession
The maximum investment in an ISA for 2013/14 will be £11,520, £240 up on the current year’s limit. The cash component ceiling will rise to £5,760 and the Junior ISA limit will increase to £3,720. The changes are in line with the September 2012 CPI and the requirement to have a figure divisible by £120 (so the monthly limit is a multiple of £10).
There was also an announcement that the Government would consult on allowing stocks and shares ISAs to include shares listed on the Alternative Investment Market (AIM) and similar specialist markets. This opens up the possibility of an IHT-free ISA, because many (but not all) of the shares listed on AIM qualify for 100% IHT business property relief once they have been held for two years.
In summary: Tax planning becomes more important
“The richest need to bear their fair share – and they will” was the Chancellor’s promise to Andrew Marr in an interview on the weekend before the Autumn Statement. He has kept his word, although you may feel that he has stretched the definition of ‘rich’ well down the income scale. More than ever, if you want to save tax or protect your family’s income and capital, you need to take professional advice: the Government is giving nothing away.
