March 2014

This Summary covers the key tax changes announced in the Chancellor’s speech and includes tables of the main rates and allowances.

Alongside our text we have included tips and traps which you may want to consider. At the back of the Summary you will find a calendar of the tax year with important deadline dates shown.

We recommend that you review your financial plans regularly as some aspects of the Budget will not be implemented until later in the tax year.

We will, of course, be happy to discuss with you any of the points covered in this report, and help you adapt and reassess your plans in the light of any legislative changes.

Years ago, the contents of the Chancellor’s red box were top secret: nothing was disclosed or discussed in advance. These days, the tax rates and allowances are announced in the Autumn Statement, policies are put out for consultation, and the Chancellor appears on television to discuss some of his proposals the weekend before the Budget. So it is unusual for a speech to spring genuine surprises – but this one contained significant announcements that no one anticipated.

The most striking proposals concerned the relaxation of the rules for taking pension benefits: there will be consultation on the details, but it seems that from April 2015, people who have saved up a fund in a defined contribution scheme will be allowed to choose how much they take out and when they take it. They will pay income tax on what they draw, after the existing 25% tax-free lump sum, but they will not have to sign up for an annuity. Other less radical relaxations take effect before the end of this month.

Another big change that will affect many people is the relaxation of the rules on tax-free Individual Savings Accounts: from July, the annual investment limit will be increased, and for the first time it will be permitted to invest the whole amount in cash funds.

There were big cheers in the House for a penny off beer and the halving of bingo duty, but more cheers from business for a doubling of the Annual Investment Allowance for purchase of plant and machinery – unfortunately, whenever they change that limit, convoluted calculations are required for periods straddling the change.

As has become the custom, the Budget speech was much shorter than it used to be – less than an hour – but the volume of paper setting out the detail gets longer and longer. There is confirmation of changes that have already been announced, new announcements of changes to take effect now, changes to come in future years, and proposals and consultations which may lead to new policies or to nothing. Shortly after next year’s Budget, there will be a general election: Mr Osborne has a long planning horizon, but is that over-optimistic?

We have gone through the papers and sorted out the important information from the rest – ‘this year and next year’ from ‘sometime and never’. This booklet summarises the most significant changes and outlines their likely impact on the average taxpayer.

Significant points

Personal allowances and thresholds announced for 2015/16 – election year
Tax system starts to gear up for separate Scottish income tax rate
Flexibility of taking pension benefits increased from March 2014
Further significant relaxation of pension rules to come in 2015
Individual Savings Account limits increased, rules simplified
Seed Enterprise Investment Scheme reliefs made ‘permanent’
Reduction in CGT main residence exemption confirmed
Annual Investment Allowance increased to £500,000 from April 2014
Tax charges on ‘enveloped dwellings’ to be extended to lower values
Users of tax avoidance schemes to be required to pay tax upfront before

arguing about it in court
Confirmation of measures to close down perceived tax avoidance using partnership structures

Tax rates and allowances (Table A)

As announced in the Autumn Statement, the standard personal allowance will increase in April 2014 by £560 to £10,000 in 2014/15 – the fulfilment of a commitment made in the Coalition Agreement at the start of the Parliament, a year early. For a basic rate taxpayer, the reduction in tax is £112.

Attention has been drawn by the press to significant increases in the numbers of taxpayers paying 40% tax. The level of total income at which the higher rate starts will increase in April 2014 from £41,450 to £41,865; however, that represents a reduction in the ‘basic rate band’ which is charged to 20% tax (down from £32,010 to £31,865). This means the full benefit of the £560 increase in the allowance is not felt at 40% by a 40% taxpayer – someone earning up to £100,000 will enjoy a tax reduction of only £195.

Personal allowances continue to be withdrawn for those with incomes above £100,000, producing a marginal tax rate of 60% in the band between £100,000 and £120,000. For those who have no personal allowances (incomes above £120,000), the reduction in the basic rate band represents a small tax increase of £29.

Future allowances and rates

The personal allowance will rise to £10,500 from April 2015. The basic rate band will again narrow slightly from £31,865 to £31,785, so 40% tax will start on a total income of £42,285. The increases in the 40% threshold (1% each year) will continue to draw more people into paying higher rate income tax.

In the Autumn Statement, the Chancellor announced that married couples and registered civil partners will be allowed to transfer up to £1,000 of their personal allowances to their spouse or partner, starting in 2015/16. This will be linked to the personal allowance, so the amount will in the event

be £1,050. Transfers can only be made to a basic rate taxpayer, so the maximum saving is £210.

Age-related allowances

As announced in 2012, the higher allowances for those above 65 remain frozen at their 2012/13 levels, and only those who were already 65 by 5 April 2013 are entitled to receive them. When the ordinary personal allowance has reached the same levels, the higher allowances will be abolished. As the rate for those born before 6 April 1948 is £10,500, this will apply in 2015/16; only the higher £10,660 allowance for those born before 6 April 1938 will continue, probably for one more year.

Scottish income tax

Following the Scotland Act 2012, the Scottish Parliament has powers to vary the rate of income tax in Scotland, with greater control over spending the revenue from this differential rate. This is not dependent on the outcome of the independence referendum – it is part of devolution. It is expected that a Scottish rate will be introduced with effect from April 2016. The Budget includes provisions to deal with the interaction of the Scottish rate with the rest of the UK tax system, including tax reliefs which use the basic rate such as Gift Aid and personal pension contributions. These are technical provisions which will need to be examined for their practical effect nearer the time.

Pension contributions (Table B)

As announced last year, the limits on tax-advantaged pension reliefs will be lowered on 6 April 2014. The cap on annual pension inputs will fall from £50,000 to £40,000. A member of a pension scheme who has had inputs below their limit in the three years before the change will be able to use the shortfall below £50,000 (not £40,000) to justify higher inputs in 2014/15.

The limit on the value of a tax-advantaged pension fund falls from £1.5m to £1.25m for those taking benefits from 6 April 2014. Anyone with a larger fund taking benefits after that date will suffer an income tax charge on the excess at 55%. People adversely affected – because they have funds on which they have not drawn their benefits which will take them over £1.25m when they do so – can apply for ‘protection’ to reduce the impact of the 55% charge.

Flexible pension benefits – March 2014

The most striking section of the Budget speech concerned the rules for people in defined contribution pension schemes. Traditionally, members of such schemes have been required to use their accumulated fund to buy an annuity by the age of 75. This has become increasingly unpopular as annuity rates have fallen. The rules were relaxed some years ago to allow ‘drawdown’ instead of an annuity – the fund is still identifiable, and the pensioner receives an income based on the returns on that fund, rather than an amount that has been contractually fixed with the pension company. These rules are now being relaxed further with effect from 27 March 2014:

drawdown is generally capped at 120% of an equivalent annuity on the pensioner’s fund (calculated using a published government rate) – this will be increased to 150% of the equivalent annuity;
where a person has a contractual right to income (usually an annuity or existing pension) of £20,000pa, they can draw as much as they like from another pension fund (‘flexible drawdown’) subject to income tax on the amount withdrawn – this requirement will be reduced to £12,000pa;
it will become easier to commute small pension pots to a lump sum payable immediately.

These are very welcome changes, but anyone affected should consider taking advice on the best course of action in their own circumstances.

Flexible pension benefits – 2015

Even more striking is the proposal for further flexibility to be introduced in April 2015. From that date, it is proposed that those eligible to take pension benefits from defined contribution funds will be able to draw any amount they like. The Chancellor confirmed that there is no intention to remove the right to draw 25% of the fund tax-free, but further amounts will be charged to income tax at the pensioner’s marginal rate. The government will consult over the next year on the best way to implement this new flexibility.

This is again very welcome: it will allow people access to the money they have saved up, and remove the need to suffer unattractive annuity rates. It is notable that the Budget predictions include an expectation that this will raise a significant amount of revenue for the Treasury: instead of being unable to draw more than an annuity, savers are expected to want to pay the tax in order to be able to spend their funds. The government may yet consider it necessary to introduce some limits to prevent people cashing in all their savings and leaving themselves dependent on state benefits.

Company cars and fuel (Table C)

The complications of owning a company car continue, with rules announced in previous years coming into force and current announcements of changes to take effect later.

For 2014/15, the percentage of the original list price which is charged as the cash equivalent of a company car will increase by 1% for all vehicles with CO2 ratings between 76g/km (which increases from 10% to 11%) up to 210g/km (where the maximum 35% will be reached – previously 215g/km). Only zero- emissions cars (no charge) and those with very low emissions (up to 75g/km, charged on 5%) are held at the same percentages as for 2013/14.

Further increases have been published going forward into 2018/19, so anyone choosing a new company car now can work out the tax effect of a current decision until they are likely to change it. By 2018/19, a car emitting 0 to 50g/km will be taxed on 13% of the list price, and one emitting 180g/km or more will be taxed on 37%.

The taxable benefit of free fuel provided for use in a company car is calculated by multiplying a fixed figure by the same percentage. This will increase for 2014/15 to £21,700 (2013/14: £21,100), so for many employees the taxable amount for fuel will increase for two separate reasons – the percentage and the amount.

Making good a benefit

Where an employee makes a payment to the employer as a condition of having a company car for private use, the taxable benefit is reduced. The law has been changed to make it clear that from 2014/15 any such payment is only effective if it is made before the end of the tax year in which the private use took place – it will not be possible to extinguish a tax charge later, typically following a PAYE investigation which has disclosed unreported benefits. A similar change applies to the charge on employer-provided vans.

Employee loans

It has been confirmed that the threshold below which low-interest employee loans are not charged to tax will increase to £10,000 from 6 April 2014. For loans above that, the taxable benefit for 2014/15 will be calculated using an official interest rate of 3.25%.

Employee medical expenses

An exemption from income tax and NICs of up to £500 is to be introduced later in 2014 covering the provision of recommended medical treatment to help an employee return to work after a period of absence through sickness or injury. Relief covers the payment or reimbursement of treatment costs.

Employee share schemes

As previously announced, the maximum value of shares that can be issued to employees under an approved all-employee Share Incentive Plan (SIP) is increased from Royal Assent to the Finance Bill (usually at the end of July). The employer can issue up to £3,600 (up from £3,000) of ‘free’ shares to employees, who can also purchase up to £1,800 (up from £1,500) worth of ‘partnership’ shares from their gross pay.

Among other changes to encourage employee share ownership, tax incentives are being introduced for certain employee ownership trusts. These include relief from CGT on gains accruing on the disposal of shares in a trading company to a qualifying trust which acquires control of the company and operates for the benefit of all employees, and an exemption from income tax of £3,600 for certain payments made to employees of qualifying employee-owned companies.

Individual Savings Accounts (ISAs)

The Chancellor decided to increase the attractiveness and flexibility of ISAs with effect from 1 July 2014:

ISAs will be reformed into a simpler product, the ‘New ISA’ or NISA;
the previously announced annual investment limit of £11,880 will be increased to £15,000;
the Junior ISA limit of £3,840 will be increased to £4,000;
the different limits for cash ISAs and stocks and shares ISAs will be removed – it will be possible to put the whole amount into cash;
existing ISA funds will be brought within the new rules, so it will be possible for existing stocks and shares ISAs to be reinvested into cash.

Anyone wishing to take advantage of this new flexibility should consider taking investment advice before moving their funds.

Seed Enterprise Investment Scheme (SEIS)

SEIS is a generous relief that was introduced in 2012/13. A subscriber for shares in a small trading company, which has started a new trade in the last two years, can enjoy a 50% income tax rebate on up to £100,000 invested. If capital gains of up to the same amount are realised in 2014/15 and invested in a SEIS company, half the gains will be exempted. In effect, this will halve the CGT rate on such gains. The potential initial relief for an investment is therefore up to 64% of the cost – 50% in income tax and 14% in CGT. These reliefs will become permanent provided a number of conditions are satisfied, but may be lost if the shares are sold or the company is liquidated in a short time.

The SEIS was originally intended to run until April 2017, with the CGT relief only available for the first two years. The Chancellor has announced that this scheme has been a success and is to be made ‘permanent’. The 50% income tax relief and exemption for half of reinvested gains will therefore be available for investments for the foreseeable future.

Starting rate band for 2015/16

The ‘starting rate band’ complicates the tax affairs of many pensioners – those who have a small amount of non-savings income, and whose savings income takes them above the personal allowance. They are charged at only 10% (the ‘starting rate’) on savings income of up to £2,880 in 2014/15. The Chancellor has announced that this will change to a zero rate for up to £5,000 of savings income in 2015/16. Non-savings income will not be eligible for the zero rate, but it uses up the band. This is a welcome tax relief, but it is just as complicated as the present rule.

Venture Capital Trusts

Investors who subscribe for shares in Venture Capital Trusts enjoy a 30% rebate of the cost against their income tax. The Budget includes measures to prevent a VCT from returning share capital to investors within three years of the end of the accounting period in which the VCT issues the shares. This appears to have been used to exploit the relief, rather than encouraging investment in high growth small and medium-sized companies as intended. Distributions made from realised profits will not be affected.

Annual tax on enveloped dwellings

The ‘Annual Tax on Enveloped Dwellings’ (ATED) was introduced for 2013/14. It applies a flat rate charge based on bands of value to residential property in the UK worth over £2m which is owned by a non-natural person. There are a number of exemptions, such as for working farmhouses or other employee accommodation, and rental properties.

The rates of ATED have increased in line with inflation for 2014/15. Charges for the coming year range from £15,400 (up from £15,000) on a property valued between £2m and £5m to £143,750 (up from £140,000) for a property valued above £20m.

In addition, the scope of the tax will be extended from April 2015 to cover ‘enveloped’ residential properties with a value over £1m, and from April 2016 to values over £500,000.

Accelerated payment of tax in avoidance cases

Taxpayers who have entered into tax avoidance schemes falling under the Disclosure of Tax Avoidance Schemes rules or the General Anti-Abuse Rule, or which have been ruled against in a court case, will have to pay the tax in dispute within 90 days of HMRC issuing a notice requiring payment. The taxpayer can still take the matter to court and recover the tax if successful. However, the scheme will no longer confer the cash-flow advantage of not having to pay the tax until the end of any litigation.

Anti-avoidance measures: partnerships

Following consultation during 2013, the government is enacting measures to counteract the use of partnerships for tax avoidance purposes in three areas:

disguised employment relationships.
tax-motivated allocations of business profits or losses.
tax-motivated disposals of assets through partnerships.

The new provisions apply with effect from April 2014.

Other points

The day before the Budget, Nick Clegg announced proposals for generous tax relief for childcare costs – but not until Autumn 2015.

There will be new investment incentives for ‘social enterprises’ from April 2014, but few details yet.

This information is prepared for guidance only. We recommend that you contact us before acting on any information contained in the booklet and we cannot accept responsibility for any action taken without such advice.

Table A
Allowances and Reliefs

2014/15

2013/14

Allowed at top rate of tax

Personal Allowance (PA)

Personal Allowance (born 6.4.38 - 5.4.48)*

Personal Allowance (born before 6.4.38)*

Blind Person’s Allowance

£10,000

10,500

10,660

2,230

£9,440

10,500

10,660

2,160

Allowed only at 10%

Married Couple's Allowance (MCA)*

only available if born before 6.4.35

Income limit for age-related allowances

8,165

27,000

7,915

26,100

*Age-related allowances are reduced £1 for every £2 by which income exceeds the income limit. PA is reduced before MCA, to a minimum of £10,000 (2013/14: £9,440). MCA is then reduced to a minimum of £3,140 (2013/14: £3,040).

PA is withdrawn at £1 for every £2 by which total income exceeds £100,000. PA is reduced to nil if income is £120,000 or more (2013/14: £118,880).

Bands

2014/15

2013/14

Basic

Higher

Additional

££31,865

31,866-150,000

over 150,000

£32,010

32,011-150,000

over 150,000

Rates differ for General, Savings and Dividend income within each band

Rates

2014/15
unchanged from 2013/14

Basic

Higher

Additional

20%

40%

45%

20%

40%

45%

10%

32.5%

37.5%

General income (salary, pensions, business profit, rent) uses starting, basic and higher rate bands before savings income (interest). Dividends are taxed as the ‘top slice’ of income.

If taxable general income is less than £2,880 (2013/14: £2,790), savings income is taxed at a ‘starting rate’ of 10% until total taxable income exceeds that limit. This ‘starting rate band’ is part of the basic rate band.

Table B
Pension Contributions

The maximum annual tax-efficient gross contributions (up to age 75) in 2014/15 are:

– individuals: the higher of £3,600 or 100% of earnings, to max. £40,000

– employers: £40,000 less employee contributions Only current earnings count for the 100% limit. If less than the max. (£50,000 up to 2013/14) has been paid in any of the preceding three years, it may be possible to increase the current contributions by the shortfall. Maximum tax-efficient fund (lifetime allowance)

where benefits are taken in 2014/15: £1.25m, unless ‘protection’ is claimed for an existing larger fund.

Table C
Car and Fuel Benefits

Car Benefit Assessment 2014/15

Charge based on a percentage of the initial list price of the car; the percentage depends on the carbon dioxide emission ratings of the car, if it has one. For older cars without a rating, the percentage depends on engine capacity.

For 2014/15 the percentage for a petrol engine is :

no emissions

1g/km-75g/km

76g/km-94g/km

95g/km-99g/km

210g/km and above

no tax charge

11%

12%, then + 1% at 100g/km, 105g/km etc.

35% (maximum)

Diesel cars have 3% added to the figure for a similarly-rated petrol car, but still have a maximum charge of 35% (which applies at 195g/km).

Car Fuel Assessment