Budget 2012 – Key Points

When George Osborne delivered his Budget to Parliament recently, he made it clear that the overall aim was to reward work and support growth. To achieve this, several measures were introduced that may affect you, which are outlined below:

PENSIONS

Pension Funding
Pension funding remained relatively untouched by this budget. The annual allowance remains £50,000 and rules around the carrying forward of contributions are untouched.

Pension tax relief on contributions still applies at up to 50%. The announcement of the cutting of the upper rate of income tax to 45% from April 2013 gives a window of opportunity for those people paying 50% tax, to obtain relief at the higher rate on contributions before April 2013.

With careful planning those who have not made any recent pension provision could make contributions of up to £200,000 before April 2013 by using carry forward, although professional advice should be sought in these circumstances.

Employers looking to fund pension shortfalls might want to do so before Corporation Tax drops any further.

State Pension Reforms
The Chancellor reaffirmed plans its plans for state pension reform, giving a strong indication of the need for people to save privately to retire earlier or enjoy higher retirement income. 

Steps towards a flat-rate £140 a week state pension will be released in the spring. In the summer, proposals will be put forward for automatic reviews of state pension age to reflect increasing longevity. Ultimately, this could mean younger people waiting until they are 75 or more before they can draw their state pension

Income Drawdown Limits
Despite heavy lobbying from pension groups and the pensions industry for a review of income drawdown limits the Chancellor made no concessions on this in his statement.

INCOME TAX

Reduction in top rate of tax from 2013
The additional rate of income tax will remain at 50% for 2012/13, and be cut to 45% from 6 April 2013. At the same time, the personal allowance will be increased to £9,205.

For 2012/13, the £630 increase in the personal allowance to £8,105 is matched by a corresponding drop in the basic rate limit. Higher rate tax will be paid once income reaches £42,475.

From April 2013, the reduction in the basic rate limit to £32,245 is greater than the increase in personal allowance, and the higher rate tax will start once income reaches £41,450.

Child Benefit
As expected, changes were announced to soften the impact of the child benefit changes for higher rate tax payers. Claimants will only lose child benefit if they or their partners have income over £50,000. Those with income between £50,000 and £60,000 will see a gradual reduction in child benefit. The tax charge will equal all of the child benefit payment where they or their partner earn more than £60,000. These changes will be introduced from 7 January 2013. It will be possible to either make a pension contribution or a gift aid donation to reduce the level of income.

CAPITAL TAXES

Inheritance Tax (IHT) savings for Non-UK domiciled spouses
The amount that a UK domiciled spouse can transfer free of IHT to their spouse domiciled in another country is to be increased. It means that these married couples and civil partners will pay less IHT on their combined estate. The changes will be included in the 2013 Finance Bill after consultation in 2012.

Trust Inheritance Tax (IHT) Charges to be made easier
There will be a consultation on the IHT charges paid by flexible and discretionary trusts. The aim is to simplify the calculation of the 10 yearly anniversary and exit charges. It is hoped that these changes will help clients making gifts into trusts to understand the ongoing costs of the trust. The Government will issue a consultation document outlining their ideas and we hope this will be in 2012.

Knowledge of budget changes is no substitute for structured planning of your own affairs. Changes in legislation are interpreted and taken into consideration by your adviser at Loughtons as part of our Ongoing Review Service.

If you would like to understand how the budget changes impact upon your own circumstances, please contact us with no obligation on 01626 833225.

The above comments do not constitute financial advice and you are advised to obtain appropriate professional advice before proceeding further.