Your Questions

December 7, 2012 6:03 pm

How did Osborne’s statement affect our pockets?

Q&A: John Whiting

FT Money’s Lucy Warwick-Ching puts your questions on the Autumn Statement to John Whiting, tax director at the Chartered Institute of Taxation.

The chancellor said that from April 6 2014 the amount people can invest each year into a pension will fall to £40,000. I have unused allowances from the past three tax years – can I top my pension up?

You will still be able to carry forward unused allowances in the same way as you can under the current rules. The notes published by HMRC along with the Autumn Statement set this out clearly. The rule is that you can use the balance of your last three annual allowances. So, if at April 6 2014 (when the new lower limits starts) you have made no pension investments for three years, you will have £150,000 to utilise. If at April 6 2016 you have made no pension investments for three years, you would have £130,000 (1 x £50,000 plus 2 x £40,00) to carry forward.

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What happens to people who have invested in their pension and built up a pot of between £1.25m and £1.5m? Will they now find the money they invested in good faith is double taxed? Or is there some exemption for funds within the old limit, but outside the new limit?

There is transitional protection to cover this sort of situation. When the new limit of £1.25m comes in from April 2014, anyone with an existing pot of over £1.25m, but below the current £1.5m limit, can apply for ‘fixed protection’. Essentially that will preserve the tax advantages on the higher pot – but it means no further contributions can be made after April 2014, by you or your employer.

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I work in the public sector and am worried that my total pension pot may exceed the new proposed £1.25m allowance. Is there anything I can do to protect myself?

There will be the same restrictions based on the value of the benefits secured under the pension scheme so, yes, it will be possible to protect a £1.25m-£1.5m pot. Again there must be no further contributions after April 2014 but in addition there cannot be any increases in benefits above a set limit. That limit will allow inflationary increases, for example, so there is some protection.

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Can you explain the announcement about the increase to maximum drawdown limits from 100 per cent to 120 per cent?

The plan is to increase the capped drawdown limit for pensioners who use drawdown from their pension pot to 120 per cent – instead of 100 per cent – of the value of an equivalent annuity.

 
FT Money Show podcast

FT Money talks to John Whiting, tax policy director at the Chartered Institute of Taxation, about how the chancellor’s Autumn Statement will affect you

Drawdown is essentially a way of taking money out of your pension scheme, other than taking it through the traditional annuity purchase. In simple terms you can choose the income level you wish to withdraw from your pension, ranging from no income at all up to a capped maximum income. You can choose to convert your entire pension to drawdown all at once, or you can convert smaller segments as and when you need them (this is known as partial drawdown).

You can usually take up to 25 per cent of each amount you move into income drawdown as a tax-free lump sum, before leaving the remainder invested from which to draw a taxable income. This is something to investigate carefully and discuss with your pension provider.

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I earn £41,000 – am I better off as a result of the changes to personal allowances and income tax thresholds?

If we just look at income tax, your current year’s bill on £41,000 is £6,579 – ignoring any other reliefs beyond the personal allowance. That bill was set to drop to £6,359 for 2013/14 but will now go down a bit further to £6,312 thanks to the higher personal allowance announced by the chancellor. With an income of £41,000, you stay just below the starting point for the 40 per cent rate. If you earned another £1,000, your relative gain would be smaller as some of your income would next year be taxed at 40 per cent as the starting point for the higher rate falls from £42,475 to £41,450. The limit will rise by 1 per cent from April 2014.

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My wife and I have two children. Was there anything in the Autumn Statement for us? Neither of us earns £50,000 so we will continue to receive child benefit.

There are a few crumbs of comfort. The child element of the child tax credit goes up by £30 a year from next April in line with the 1 per cent rise the chancellor mentioned. Child benefit also goes up by 1 per cent, but only from April 2014.

The main way you may benefit is the increase in income tax personal allowances. The personal allowance – the tax-free amount – was due to rise from the current £8,105 to £9,205 from April 2013. It will now rise to £9,440, a further £235, worth £47 a year to basic rate taxpayers.

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There was a lot of talk about a tax on expensive properties – is this no longer happening?

It seems not – or not for the moment. The chancellor referred to ‘no new tax on property’ and that has to be read as meaning there will be no ‘mansion tax’ on high value properties.

However, to put this into context, we already have a 7 per cent stamp duty land tax rate on properties worth over £2m, introduced in March. There are also a number of measures aimed at those buying a house worth £2m plus owned through companies, including a 15 per cent rate of Stamp Duty Land Tax when the property is put into the company; an annual charge of at least £15,000 and a proposed capital gains tax (CGT) charge on disposals of the property. More details are expected in the finance bill next week.

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When the chancellor said he is confirming funding for £120,000 “new” homes, what does “new” mean?

There are a number of measures to help housing. One of the schemes is the “FirstBuy” scheme, announced on September 6, which provides funding for equity loans aimed at helping 16,500 first-time buyers. Another is targeted at “affordable housing” which may be what you had in mind. That will mean investment of £300m into the ‘Affordable Homes Programme’ which is expected to deliver 16,500 affordable homes – presumably newly-built ones as it will also bring 5,000 empty homes back into use.

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I hear the government has decided to press ahead with the introduction of “employee owner” contracts. Was there any more detail about these announced in the Autumn Statement?

I assume you are referring to the “employee shareholder” plan – the idea of taking shares in your employer in exchange for giving up rights. We didn’t get many more details beyond what we knew, which is broadly that it applies to employee shareholders; they can receive shares of at least £2,000 but not more than £50,000; they agree to reducing their employee rights and the shares received will be free of CGT. The CGT exemption will not really help many people, as most can manage their disposals using the annual exempt amount in any event.

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