Tax year end planning: investments
The Budget takes place on March 19, so tax year end planning time has arrived.
Although the UK economy is now generally seen as firmly in recovery mode, the austerity regime of tax increases – disguised or otherwise – is continuing. Much as politicians will like to talk about tax cuts, a Budget deficit of around £110bn shouts more loudly.
Among the items to review on the investment front are:
- ISAs The maximum ISA investment in 2013/14 is £11,520, of which up to £5,760 may be in a cash ISA (probably earning interest below that 2% inflation rate). You cannot carry forward unused ISA allowances, so as far as possible you should contribute each tax year. The tax benefits of ISAs are well demonstrated by the fact that last year the Treasury examined the option of capping their value.
- Capital Gains Tax In 2013/14 you can realise gains of up to £10,900 with no capital gains tax liability. As the developed markets generally rose last year, you may find some gains in your portfolio that you can realise. You cannot simply sell and then immediately repurchase to crystallise a gain, but there are other options which have similar effect. For example you could sell your direct holding and then buy back in an ISA.
Tax year end planning: pensions
There are important year end deadlines for pensions looming into view
On 6 April 2014, two major changes will take effect concerning pension allowances:
- The Annual Allowance (AA), which effectively sets the maximum tax efficient pension contribution from all sources during a tax year, will be cut from £50,000 to £40,000. This is the second cut to the AA, which was £255,000 in 2010/11.
- The Lifetime Allowance (LTA), which effectively sets the maximum tax efficient total value of pension benefits, will be cut from £1.5m to £1.25m. This is also a second cut – the LTA was £1.8m in 2011/12.
The AA cut is a reminder of the importance now of taking full advantage of each year’s AA. When the allowance was £200,000+, regular contribution was a much less important factor. Fortunately, if you have not used the full AA in any of the three previous tax years, there is scope to do so using special “carry forward” provisions. 5 April (a Saturday) is the final day for carrying forward any unused AA from 2010/11.
As far as the LTA reduction is concerned, the government has announced two transitional protection options for those who are, or might in the future, be affected. One of these options, Fixed Protection 2014 (FP2014), will only be available to claim until 5 April 2014, while the other, which has more limited scope, will not be finalised until summer. Very broadly speaking, FP2014 will preserve your LTA at a minimum of £1.5m, provided that from 2014/15 onwards, no more contributions to your pensions are made and you accrue no further benefits.
If carry forward and/or the new transitional protection could be relevant to you, you should seek expert advice as soon as possible. Both are aspects of pensions which may involve considerable research before a decision can be taken.
50% top tax again
The shadow Chancellor has promised to reinstate a 50% additional rate of income tax if Labour forms the next government.
Ed Balls’ announcement that he would raise the additional rate of tax from 45% to 50% were he to be Chancellor after the May 2015 election received much publicity, even if it was hardly an unexpected move. The increase is about politics – it polls well – rather than revenue-raising:
- According to HMRC estimates, in 2013/14 there are just 287,000 additional rate tax payers – that is less than 1% of all tax payers.
- HMRC further estimates the total income tax paid by these individuals after deductions of allowances given as tax reductions will be £49.3bn, of which £33.2bn is additional rate. Over 80% of the additional rate tax was deducted from earnings.
- It is not possible to say that if 45% tax raises £33.2bn, then 50% tax will raise proportionately more (about £3.7bn). As 2013/14 is the first year of 45% additional rate tax, it is likely that the year is benefitting from deferral of income that occurred in 2012/13, especially as the Chancellor revealed the move to 45% more than a year in advance. The reverse happened in 2010/11, when 50% tax started nearly twelve months after it had been announced by Alistair Darling: the end of 2009/10 saw a pre-emptive surge of bonus and dividend payments.
- HMRC’s ready reckoner for tax changes suggests that each 1% rise in the additional rate brings in about £200m a year of tax after the first year, implying a 50% tax might add £1bn to the Treasury’s coffers – small beer in the scheme of things.
When the Office for Budget Responsibility looked at the impact of 50% tax in 2012 it concluded that “Estimating the size of … behavioural responses is very difficult, especially for high income individuals who are likely to be more willing and able to alter their working lives and financial arrangements in response to tax changes than the bulk of the population.”
The tax rate for people earning more than £150,000 will not be cut from 45p to 40p according to Chief Secretary to the Treasury, Danny Alexander. He warned that any attempts to reduce it will be met with staunch oppositon by the Liberal Democrats. ‘I wouldn’t go to cutting below 45%,’ he said. ‘I would say that would happen over my dead body. It’s clearer and simpler and better to say we are going to stick where we are. We have the 45p rate and that’s the right place to be’.
A cut has not yet been put forward, but senior Tories including Boris Johnson have called for it to fall to 40p. Mr Johnson, the Mayor of London, says that a future Conservative manifesto would require an outline of what they will do to keep tax rates in line with global peers. ‘UK income tax is now higher than the EU average. That never used to be the case and I don’t see why it should be the case for the long term and I see no reason why we shouldn’t bring it down’, he said.
In 2013, the coalition reduced the top rate from 50p to 45p in return for a bigger than scheduled rise in the amount people can earn before paying income tax. This move has, however, angered many Lib Dem politicians.
Another tax avoidance victory for hm revenue and customs
HMRC wins court appeal against £100m offshore tax avoidance scheme.
HM Revenue and Customs have won a victory in a court appeal against an offshore tax avoidance scheme, which has been welcomed by the government. This is the third attempt to appeal by the ‘serial avoidance promoter’. Prior to the Court of Appeal’s decision, the First-tier and Upper Tribunals had also agreed with HMRC’s decision. ‘This is an important win for HMRC and is the latest in a string of successes. It is excellent news for the vast majority of taxpayers who play by the rules’, said the Exchequer Secretary to the Treasury, David Gauke.
According to HMRC, the tax avoidance scheme would have resulted in a loss of £100 million to the Exchequer. It involved transferring millions of pounds of UK government gilts to and from the British Virgin Islands. A HMRC spokesman said that the aim was to ‘manufacture an unwarranted tax deduction of £1.2 million’. On 15 January, the Court of Appeal ruled the scheme was specifically designed to avoid tax – the third bid of the scheme for legitimacy which got rejected.
Some 230 people had participated in the scheme, but 18 individuals have already settled their tax bills, paying a total of £20 million. After the court ruling, it is expected that the outstanding £80 million will now be paid.
End of year reporting under Real time information
New year end procedures apply to employers reporting in real time.
Under RTI, employers no longer need to worry about filing employer annual returns P35 and P14. Instead they simply need to indicate on the last full payment submission (FPS) for the tax year that it is the last submission and answer the end of year questions and declaration. Where no payments are made in the final pay period, the employer must instead submit an employer payment summary (EPS), again indicating that it is the final submission of the year and answering the end of year questions and declaration.
