2012 Budget Summary

George Osborne delivered his third Budget on Wednesday 21 March 2012.
Our view

We're pleased that the Chancellor has managed to resist the temptation to tinker further with restrictions on tax relief and the annual allowance for pension scheme contributions.

In fact, the forewarning of a reduction in the 50% rate of tax allows some individuals to continue getting tax relief on their pension contributions at this level for another tax year.

Paying pension contributions may be a means of preserving some or all of the Child Benefit for those with taxable income of more than £50,000.

Thankfully all the pre-Budget rumours about reductions in tax relief on pension contributions or in the annual allowance proved unfounded, and few new measures directly affecting the pensions industry were announced. HM Revenue & Customs (HMRC) has announced however, that there will be 'a number of technical improvements' made to the annual allowance rules through secondary legislation.

There are various parts of the Budget that are worth commenting on. Here's our take on them, with links to Treasury or HMRC documents if you would like more details.

Tax rates

Section 1.3 of http://www.hmrc.gov.uk/budget2012/ootlar-main.pdf

Currently individuals with taxable income over £150,000 pay 50% income tax on their taxable income over £150,000. This additional rate of tax will drop from 50% to 45% from 6 April 2013. Until then, individuals with taxable income over £150,000 can continue to claim tax relief at 50% on some or all of their pension contributions.

Basic rate tax will remain at 20% and higher rate tax at 40%.

Personal allowances

Section 1.6 of http://www.hmrc.gov.uk/budget2012/ootlar-main.pdf

The personal allowance for individuals aged under 65 is going up to £8,105 for the 2012/13 tax year and to £9,205 for the 2013/14 tax year. This is part of the Coalition's objective of eventually increasing the personal allowance to £10,000.

This means that for the 2012/13 tax year, the personal allowance for under 65s is £8,105 with basic rate tax (20%) being levied on the first £34,370 of taxable income, higher rate tax (40%) on the next £115,630 and additional rate (50%) on taxable income over £150,000.

In the 2013/14 tax year, the personal allowance for under 65s will be £9,205 with basic rate tax (20%) on the first £32,245 of taxable income, higher rate tax (40%) on the next £117,755 and additional rate (45%) on taxable income over £150,000.

A surprise was the change to the higher personal allowance for individuals aged 65 and over. From 6 April 2012 individuals aged 65 to 74 have a higher personal allowance of £10,500 and for individuals aged 75 and over it is £10,660. For those who are already getting this higher personal allowance, their allowance will be frozen until the standard personal allowance catches up. From 6 April 2013 those born after 5 April 1948 will only be entitled to the standard personal allowance of £9,205.

State pensions

Section 1.211 of http://cdn.hm-treasury.gov.uk/budget2012_complete.pdf

The Chancellor confirmed that the State Pension will become a flat rate for future pensioners. Although the level has been widely reported as being £140 per week, the actual commitment is to set it at a level above the standard Guarantee Credit. The standard Guarantee Credit is £142.70 for the 2012/13 tax year and the change is not due to be made until early in the next Parliament.

It was also announced that the state pension age will in future be increased to take account of increase in longevity.

Child benefit

http://www.hmrc.gov.uk/budget2012/cb-income-tax.htm

From 7 January 2013, a new income tax charge will apply to families receiving Child Benefit and where one person has income of more than £50,000 in the tax year. If both partners have income above £50,000, the charge will only apply to the one with the higher income.

The tax charge will be 1% of the of the amount of Child Benefit for every £100 of income over £50,000, so Child Benefit will be completely lost where one of the partners has income over £60,000.

The income used to calculate this tax charge is the 'adjusted net income'. To calculate the adjusted net income, you can deduct pension contributions paid gross by the individual from their actual earnings. This means that individual pension contributions can be used to restore Child Benefit. Salary sacrifice could also be used.

Pension contributions for a spouse

Section 2.67 of http://cdn.hm-treasury.gov.uk/budget2012_complete.pdf

If an employer pays a pension contribution into a pension plan for an employee's spouse, as part of the employee's flexible remuneration package, there will be no tax or National Insurance advantages for either the employer or the employee. This will be included in the Finance Bill 2013, but it's not clear what date it'll be effective from.

Employer asset backed pension contributions

http://www.hmrc.gov.uk/budget2012/emp-pens-conts-tech-note-710.pdf

Draft legislation was published on 22 February 2012 to limit tax relief available to employers where they fund Defined Benefit pension schemes by instalment payments from structured funding vehicles backed by assets owned by the employer. These changes have been designed to ensure that unintended, excess tax relief can't arise in respect of such contributions, while preserving as much flexibility for employers and pension schemes as possible. Some employers were claiming tax relief twice; up-front for the discounted value of a future income stream and again for each instalment of the income stream. The Finance Bill 2012 will include further changes to the draft February legislation which close a few technical loopholes.

Lifetime allowance - fixed protection

Section 2.63 of http://cdn.hm-treasury.gov.uk/budget2012_complete.pdf

Before 6 April 2012 it's possible to apply for the lifetime allowance to be fixed at £1.8 million rather than reduce to £1.5 million from 6 April 2012. In return, no further contributions can be paid to defined contribution pension schemes and accrual in a defined benefit scheme is limited. New regulations will be included in the Finance Bill 2013 to prevent someone from losing fixed protection through no fault of their own; for example through statutory increases to deferred pensions.

Annual allowance

http://www.hmrc.gov.uk/PENSIONSCHEMES/annual-allowance-guidance.htm

Further regulations will be introduced to ensure that the annual allowance rules work as intended. The amendments will clarify how the 'scheme pays' rules apply in the year the member takes benefits and the exemption from the annual allowance for deferred members where a transfer of benefits is made during the pension input period.

Qualifying Recognised Overseas Pension Schemes (QROPS)

http://www.hmrc.gov.uk/pensionschemes/transfers-qrops.htm

A QROPS is an overseas pension scheme that can receive a transfer of a member's pension fund from a UK registered pension scheme. The rules on transferring to a QROPS are changing from 6 April 2012.

Overseas pension schemes will have to meet new conditions to qualify as a QROPS. There are also new information and reporting requirements and shorter reporting time limits. These changes will affect:

  • an individual transferring their pension savings;
  • a UK registered pension scheme making a transfer to a QROPS;
  • a QROPS that receives or has received a transfer from a UK scheme.

Qualifying life assurance policies

http://www.hmrc.gov.uk/budget2012/life-ins-tech-note-630.pdf

The Government will introduce an annual limit of £3,600 to the amount of premiums that can be paid into Qualifying Policies issued on or after 6 April 2013. The limit is not per policy, it will apply to all qualifying life policies owned by an individual. After consultation, these changes will be included in Finance Bill 2013.

Cluster polices

Section A135 of http://www.hmrc.gov.uk/budget2012/ootlar-main.pdf

Gains from life insurance policies, life annuity contracts and capital redemption policies are taxed as income when a 'chargeable event' happens. Chargeable events can be the policy maturing, being assigned for money or money's worth or surrender of part or all of the policy.

Some arrangements have been designed to defer income tax by shifting investment profits from one policy when it comes to an end to another connected policy. The new rules will treat all such connected policies as a single policy.

The information provided is based on our current understanding of the Budget 2012 and associated documents and may be subject to alteration as a result of changes in legislation or practice.

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