Following the 20 October 2010 Spending Review announcement, we've summarised the key issues and facts, including the important changes to pensions tax relief and state benefits, and analysed the impacts on you and your clients.
Significant announcements – pensions
- Proposed changes to pensions tax relief will mean tax relieved pension contributions/accruals could be limited to £50,000 a year from April 2011. There will be some winners and losers amongst high earners as a result.
- Labour’s original plans for tapering tax relief for high earners via HIERC will be scrapped.
- A reduced annual allowance (AA) of £50,000 from April 2011. In future this may be subject to indexation increases but not until after 2015/2016.
- Reduction of the lifetime allowance (LTA) from £1.8m to £1.5m from April 2012.
- Review (in November 2010) of potential to allow individuals flexibility to pay large AA tax charges from their pension scheme.
- Practically no change for anyone paying in less than £50,000 a year to a pension scheme.
- The AA is still £255,000 for PIPs ending in the 2010/11 tax year.
- Employer contributions also count towards the £50,000 AA. Where these take the total contributions above £50,000, they could cause a tax liability for the scheme member of as much as 40% or 50% of the amount paid in.
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Significant announcements – State benefits and tax credits
- Male and female SPA will be equalised at 65 by November 2018, two years earlier than originally planned.
- From April 2011 the basic and 30 hour elements of WTC will be frozen for 3 years, after which they will be increased by CPI.
- From April 2012 eligibility for WTC will be changed. Couples must work 24 hours between them with at least one working 16 hours. Currently, at least one individual in the couple must be working at least 16 hours.
- From January 2013 child benefit will be withdrawn for families with at least one higher rate tax payer. Note: the higher rate tax threshold is due to reduce in April 2011 (and subsequent tax years) as the personal allowance is increased to £10,000 per annum. This will ensure that higher rate tax payers do not benefit from the increases in the personal allowance.
- The receipt of basic state pension is going to be delayed for younger clients. Those who plan to retire before their new SPA may wish to consider the future retirement income shortfall this creates or plan to work until their new SPA to avoid this shortfall.
- Individuals may face increasing income shortfalls in the short to medium term as a result of the decision to amend, reduce or freeze the availability of the state benefits covered here.
- Careful planning with investment bonds (deferring assessable income) and pensions (reducing assessable income) can help to preserve tax credits.
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