The personal allowance for 2013/14
For those aged under 65 the personal allowance will be increased from £8,105 to £9,440. This increase is part of the plan of the Coalition Government to ultimately raise the allowance to £10,000 which will be achieved from 2014/15.
The reduction in the personal allowance for those with 'adjusted net income' over £100,000 will continue. The reduction is £1 for every £2 of income above £100,000. So, for 2012/13, there is no allowance when adjusted net income exceeds £116,210. For 2013/14 the allowance ceases when adjusted net income exceeds £118,880.
From 2013/14 the higher age related personal allowances will not be increased and their availability will be restricted to people who were born before 6 April 1948.
Planning should be considered before 6 April 2013 where adjusted net income is expected to exceed £100,000. Broadly, adjusted net income is taxable income from all sources reduced by specific reliefs such as Gift Aid donations and pension contributions. Consider whether these could be made to protect some or all of the personal allowance.
Alternatively, for those running their own company, the timing of dividend receipts from the company should be considered.
Tax bands and rates for 2013/14
The basic rate of tax is currently 20%. The band of income taxable at this rate is being reduced from £34,370 to £32,010 so that the threshold at which the 40% band applies will fall from £42,475 to £41,450 for those who are entitled to the full basic personal allowance.
The 50% band applies in 2012/13 where taxable income exceeds £150,000 but the rate will fall to 45% in 2013/14.
Dividend income is taxed at 10% where it falls within the basic rate band and 32.5% where liable at the higher rate of tax. Where income exceeds £150,000, dividends are taxed at 42.5% in 2012/13 and 37.5% in 2013/14.
Planning should be considered before 6 April 2013 where income is expected to exceed £150,000. Deferring income until 2013/14 or reducing income by specific reliefs such as Gift Aid donations and pension contributions should be considered.
The personal allowance for 2014/15
The personal allowance for people born after 5 April 1948 will be increased to £10,000. The personal allowance will then increase in line with inflation.
Tax bands and rates for 2014/15
The basic rate of tax is currently 20%. The band of income taxable at this rate is being reduced from £32,010 to £31,865 so that the threshold at which the 40% band applies will rise from £41,450 to £41,865 for those who are entitled to the full basic personal allowance.
The additional rate of tax of 45% is payable on taxable income above £150,000.
New scheme for tax free childcare
New tax incentives for childcare have been announced. To be eligible, families will have to have all parents in work, with each earning less than £150,000 a year and not already receiving support through Tax Credits or Universal Credit.
The relief will be 20% of the costs of childcare up to a total of childcare costs of £6,000 per child per year. The scheme will therefore be worth a maximum of £1,200 per child.
The scheme will be phased in from autumn 2015. For the first year of operation, all children under five will be eligible and the scheme will build up over time to include children under 12.
The current system of employer supported childcare will continue to be available for current members if they wish to remain in it or they can switch to the new scheme. Employer supported childcare will continue to be open to new joiners until the new scheme is available.
The Government will consult on the detail of the new scheme but it is expected that parents will be able to open an online voucher account with a voucher provider and have their payments topped up by the Government. Parents will be able to use the vouchers for any Ofsted regulated childcare in England and the equivalent bodies in Scotland, Wales and Northern Ireland.
The existing system of employer supported childcare is offered by less than 5% of employers and used by around 450,000 families. It provides an income tax and National Insurance Contributions (NIC) relief. The maximum relief is an exemption from income tax and NIC on £55 a week. This relief is per employee so if both parents are in employment the maximum exemption is £110 per week. In the new scheme the limit is per child.
The annual allowance is an annual limit for giving tax relief on pension contributions. Contributions can be paid in excess of the limit but may give rise to an income tax charge on the member of the pension scheme. For tax year 2014/15 onwards the annual allowance will be reduced from £50,000 to £40,000.
There is also an overall limit, known as the lifetime allowance, on the total amount of tax relieved pension savings that an individual can have over their lifetime. For tax year 2014/15 onwards:
- the standard lifetime allowance will be reduced from £1.5 million to £1.25 million
- a transitional 'fixed protection' regime will be introduced for those who believe they may be affected by the reduction in the lifetime allowance.
Legislation will be introduced in Finance Bill 2013 to make these changes.
The Government has also announced that an individual protection regime will be offered in addition to fixed protection and consultation on the detail of this regime will be undertaken in 2013 and legislation in 2014.
The Government considers that these measures are expected to affect only the wealthiest pension savers as 98% of individuals currently approaching retirement have a pension pot worth less than £1.25 million which will be the revised level of the lifetime limit from 2014/15.
However the measures may well affect employees in a defined benefit pension scheme as the annual increase in the capital worth of their accrued pension rights can be significant. If this increase exceeds the annual allowance, an income tax charge can arise.
The Government has listened to concerns about drawdown limits. The Chancellor has announced that the Government will raise the capped drawdown limit from 100% to 120% giving pensioners with these arrangements the option of increasing their incomes from 26 March 2013.
Individual Savings Accounts (ISAs)
From April 2013 the overall ISA savings limit will be increased to £11,520.
The Government will consult on allowing investment in SME equity markets such as the Alternative Investment Market (AIM) to be held directly in stocks and shares ISAs, to encourage investment in growing businesses.
To further support these companies, the Government will abolish stamp tax on shares for companies listed on growth markets including AIM and the ISDX Growth Market, from April 2014.