Look out for changes to tax and pensions
GEORGE Osborne is behind on his deficit reduction targets, so there is little room for manoeuvre in today’s Budget. Many changes have already been hinted at. And adjustments in the following areas, which could have a bearing on your personal finances, are likely to be rubber stamped today.
The tax-free personal allowance for income tax will rise to £9,440 in April. There have been hints that this threshold may rise to £10,000 in 2014 – a year earlier than planned. But there are no plans for this to benefit anyone earning over £100,000 a year. It is likely they will continue to be excluded from any rise in tax free allowances. However, top rate taxpayers will finally see income tax fall to 45 per cent for income over £150,000 a year. Those earning between £34,371 and £150,000 a year, and the self-employed may see National Insurance Contributions (NIC) rise, according to the Institute for Fiscal Studies. And the higher rate income tax band is also due to fall by £2,360 in April to £32,011. The Treasury estimates that this may drag 400,000 people into the 40 per cent bracket by 2015-16.
The government has already announced plans to implement a single-tier state pension in 2016. Women are the winners; “it will increase the average pension for women from 75 per cent of the average pension for men, up to 80 per cent,” says Tom McPhail of Hargreaves Lansdown.
But these reforms may accelerate the decline of final-salary pension schemes, due to the abolition of second state pension – where savers received NIC rebates, and used them to replace all, or part of the additional state pension via a private final-salary scheme. Which? argues that those that opted back in to the second state pension will face higher NIC contributions, and so will employers that provided the scheme.
A cut in the lifetime tax-free pension allowance, from £1.5m to £1.25m, has already been announced. The annual allowance was also reduced to £40,000.
There may be a further reduction in the annual allowance to £30,000. However, George Bull of Baker Tilly thinks that a capping of the tax-free amount that you can withdraw from a pension fund is more likely. Currently, you can withdraw a 25 per cent lump-sum; this may be replaced by a cash-cap.
SAVERS AND INVESTORS
The tax-free allowance for individual savings accounts (Isas) will increase to £11,520 in April. It is unlikely that savers can expect any new incentives today.
However, more sophisticated investors may be luckier. The Enterprise and Seed Enterprise Investment Schemes (EIS and SEIS) offer generous tax incentives to invest in young companies. For example, the SEIS offers 50 per cent income tax relief, and allows investors to shelter capital gains liabilities. The chancellor may extend these tax advantages.
But Jason Hollands of Bestinvest says “they are niche products, only suitable for sophisticated investors, and carry higher risks”. And typically the companies that you would invest in only have a short track record.
A consultation has also been launched into holding companies listed on the alternative investment market (Aim) within Isas. Hollands argues “that this won’t make much difference to most investors, who tend to buy funds rather than individual shares”. And remember that these companies are riskier than better capitalised ones, so it is only likely to benefit investors that are comfortable both taking a higher level of risk and share-picking.