Pensions Savings Boost
Before the Budget there was much speculation that pension savings tax relief, currently available at the taxpayer’s marginal rate of income tax, would be cut. We were pleased that this did not materialize. However, there will be another Budget in November when this may be addressed again. It would be prudent for higher rate (£50,000* plus income) and top rate (£150,000 plus income) taxpayers, who have scope to fund their pension, to do so before the Autumn. We will continue to make the case for the retention of marginal rate relief and the principle of 100% income tax deferral on pension savings.
From 6 April 2020 individuals with threshold income (which is their income after deducting their own pension contributions) of £200,000 or less in a tax year will no longer be restricted by the tapered annual allowance in that tax year and their pension savings allowance will be £40,000.
Those with income between £100,000 and £125,000 can gain more tax relief by making pension contributions. They receive 40% income tax relief and reduce the income which counts towards a restriction on their personal allowance, the first £12,500 of income which is usually tax free. Someone with income of £125,000 could save £25,000 in a pension and restore the whole of their personal allowance, giving an effective rate of relief of 60% on their savings.
Those with threshold income over £200,000 must work out their adjusted income (threshold income plus their own and any employer pension contributions to defined contribution schemes or pension defined benefit accrual). If adjusted income is over £240,000 the pension savings allowance will reduce by £2 for every £1 of adjusted income over £240,000.
Once adjusted income reaches £312,000 or more, the pensions allowance will remain at a flat £4,000 - less than the current £10,000.
These high earners will need to consider other ways of saving for retirement. For all who aspire to reach these levels of income, planning for retirement earlier in life, will be key to maximizing the tax subsidy on retirement savings.
The other restriction on tax relieved pension savings, the Lifetime Allowance, limits the value of all the private pensions an individual may draw down, at age 75 or on earlier death. This will rise to £1,073,000 from 6 April and with CPI inflation. Where an individual’s pensions exceed this there is a tax charge of 25% of the excess, if this is drawn as income or 55%, if taken as a lump sum.
Capital Gains Tax
There was no change in the rates of capital gains tax which remain at 10% and 20%, (18% and 28% for residential property). The annual tax-free allowance will increase from £12,000 to £12,300.
There was an unpleasant surprise for entrepreneurs, whose tax rate remains at 10% when disposing of a qualifying business but with the lifetime limit immediately cut from £10 million to £1 million.
A pleasant surprise was in store for under 18s, whose tax-exempt savings allowance will rise to £9,000 per year from 6 April. This more than doubles the allowance which can be saved in either Junior ISAs or Child Trust Funds. Parents or guardians can open these, but anyone may add to them. They may be invested in cash or stocks and shares. From 16 the child will be able to manage the investment and access it from 18.
Child Benefit and Tax-Free Childcare
A 1.7% increase in child benefit from April was confirmed but the threshold income at which this starts to be taxed remains at £50,000. Those with income in this bracket may restore their eligibility for tax free childcare by making pension savings, which reduce the income counted.
Working parents of the under 12s will be able to use Tax Free Childcare accounts to fund wraparound childcare facilities provided by schools. These accounts, which can be used to fund registered childcare, nurseries and nannies, give parents a 20% subsidy of up to £2,000 per year on their savings into a Childcare account. This is not available to parents where one has income in excess of £100,000. As with child benefit, those with income in this bracket may restore their eligibility for tax free child benefit by making pension savings, which reduce the income counted.
Director of Public Policy
*Higher rate tax for Scottish resident taxpayers of 41% starts on incomes over £43,430
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