What does the pre-Budget report mean for you? Leonie Kerswill, tax partner at PricewaterhouseCoopers, and Michael Owen, financial planning director at Duncan Lawrie Private Banking Group, answer your questions on personal finance, tax and pensions.
Fuel is going to increase again, however most companies only give 40p per mile. this figure has not increased for a number of years. Is this fair?
Leonie Kerswill: The reason that most companies give 40p per mile is because this figure is in line with HMRC’s agreed allowable amounts. The 40p actually relates to the first 10,000 business miles in an employees’ own car, with additional business miles payable at 25p per mile. This allowance is designed to cover all running expenses (not just fuel) and if your employer pays less, then you can claim a deduction against your income for the balance.
Also remember that if you give another employee a lift on the business trip, then your employer can pay you an additional 5p per mile, however, if this doesn’t get paid you can’t claim it against your income.
I’m about to re-mortgage to a new deal - will the pre-budget speech be likely to send interest rates down or up? Should I hold off re-mortgaging until the next Bank of England rate meeting?
John Lawton, Malmesbury, Wiltshire
Michael Owen: Do remember it is only fixed rate mortgages that are time-sensitive and the rates on offer generally discount forthcoming movements in interest rates perhaps up to three months ahead. Discounted or Tracker rates will merely mirror the Base Rate at the time. The momentum on fixed rate borrowing appears to be upwards which would suggest that you should act sooner rather than later, but it will depend on how long you wish to fix the borrowing rate for and other general economic factors.
Under the current chancellor, the personal tax regime is dynamnic. Today’s open road is often tomorrow’s cul-de-sac. How can individuals effectively plan for the long-term given such uncertainty?
Aubrey Greene, London
Leonie Kerswill: Tax law changes regularly - at least once a year, and very often twice - as demonstrated by the announcements in the latest PBR. While this can be frustrating for those whose strategy is affected by changes in legislation, it is important that people review their affairs regularly and think about whether the measures they adopt might leave them in a situation that they will find it difficult to get out of.
I’ve heard a rumour that tax relief on pension linked term assurance has been removed. Is this true? As it only came back into place in April, I know of many people who have changed to get cheaper life insurance cover - what will happen to these new policies? Following on from Mr Brown’s last minute change of plan last December regarding being able to put residential property into a pension policy, is this another indication that he doesn’t actually think through what he is doing before he makes these big announcements, and then panics when people look to use reliefs and allowances to the maximum?
Chris Wilkins, Lutterworth
Michael Owen: Pension Term Assurance was withdrawn on 6 December having only been reintroduced in April this year. However, policies that are already in place will keep tax relief as long as the terms are not changed in the future. Policies that have been applied for but are not yet “on risk” are likely to receive tax relief only until April 5 2007 when it will be withdrawn. It is not currently possible to apply for a PTA policy if you have not already started the process.
It is disappointing to have yet another new introduction withdrawn more quickly; perhaps the government watching where every penny of tax relief goes more closely than we all thought!
What impact will Gordon Brown’s veiled announcement about avoidance of managed service companies trading in the IT industry and subject to IR35 tax rules have on me as an IT contractor whose own limited company enables me to be paid by dividend in a tax efficient manner?
Leonie Kerswill: The proposed new rules apply to managed service companies, which are effectively umbrella type organisations that pull together a number of contractors. You say that you have your own limited company so it doesn’t sound like you operate in this way, in which case any announcements in the PBR shouldn’t effect your current trading arrangements.
I have got two trivial pensions - one worth £6,500, the other worth £9,000. I had intended to transfer both of these into one SIPP where I could monitor the progress more closely, as they are both in closed funds and the performance is abysmal. The annual annuity from these is just too small to make it worthwhile taking at the moment, so I intended to leave it invested for five years and review the situation again. If I die before I take an annuity, will Gordon Browns new rules on taxing pension pots at 70 per cent plus IHT apply to this my SIPP. I am 62 and still working, and intend to work until I am 65, health permitting. When I do retire I will not be a taxpayer, as my state pension will be dependent on my husbands contributions.He has a full contribution record.
J Tomnie, Coventry
Michael Owen: Under rules concerning “triviality”, it is possible to fully encash a pension fund that is worth £15,000 or less this tax year (rising to £16,000 from 6 April 2007). The first 25% of the fund is paid tax-free with the remaining three quarters treated as income and taxed under income tax rules. Your policy is just above the threshold this financial year but may not be after April.
If you die while the policy is in a personal pension or SIPP the benefits of the plan can normally be paid to your dependents free of IHT. However, once you “crystallise” the fund in a SIPP (by taking tax-free cash and/or income) then more complex and less tax efficient rules apply.
You might find that a SIPP, for what is a relatively modest sum in pension terms, is not very cost effective. Stakeholder pension plans are low-cost arrangements and many providers allow policyholders to monitor plan values and switch between funds via the internet. Although it will offer a more limited choice of investment options, that might be a more appropriate choice.
Please check that you won’t incur transfer penalties in leaving your closed with profits policies or lose potentially valuable Guaranteed Annuity Rates first.
Has the PBR taken any measures with regard to tackling the problems of the IR35 legislation. Is there to be a new regime with regard to service companies. Also what about the settlements legislation.
Claire Howarth, Leeds
Leonie Kerswill: IR35 describes the legislation that was introduced in 2000 which was designed to impose PAYE and NIC charges on personal service companies where the owner/user works as a contractor of another organisation but is effectively an employee of that organisation. There were no changes announced in the PBR on these rules but what we did see was the introduction of draft legislation aimed at managed service companies to prevent what the government perceive as the avoidance of tax and NIC.
Managed service companies have been used to effectively sidestep the IR35 rules and are normally companies (although they can be set up as partnerships) that have acted as intermediaries and have been used by many contractor businesses to structure arrangements to allow them to take out sufficient amounts as salary to meet the minimum wage levels with the balance being paid as a dividend. As dividends aren’t treated as earnings there is no NIC and for basic rate tax payers no additional tax to pay.
The draft legislation will be subject to consultation with comments invited until 2 March 2007, but once introduced the intention is that if it applies anything paid to an employee would be treated as earnings and liable to PAYE and NIC rather than dividends.
As regards the settlements legislation there were no announcements on this in the PBR but you may be aware that HMRC have been given leave to appeal to the House of Lords next June against the Court of Appeal decision, which they lost, in the case of Jones v Garnett (Arctic Systems Ltd), which I assume is what you’re referring to. In the meantime taxpayers can follow the principles set out in the Court of Appeal judgement.
Why is it that after announcing the changes in the rules last April, originally understood to be in response to widespread public dissatisfaction with CAs, the Treasury changed its mind, and introduced truly draconian measures to dissuade people from opting for ASPs? The Treasury has said that the ASP concession was only for the benefit of a small religious sect, the Bristol Brethren. The legality of such a concession is doubtful and possibly open to challenge. Yet, on the other hand, what is wrong with parents’ natural desire to provide for their offspring?
Rohinton Homawala, London
Michael Owen: It is disappointing that having heralded the removal of the requirement to buy an annuity at age 75 the government has back-tracked on the issue so spectacularly.
Many commentators have explained that the tax-take was greater under the previously proposed ASP rules rather than the income tax paid on annuities. However there are two schools of thought here: Firstly, have the major annuity providers lobbied hard but coyly against ASP because of the loss of business or the cross-subsidy that annuities give them, or is the Government just paranoid about the prospect of funds on which income tax relief was given, passing down the generations.
I agree that it is a major detractor for those in their late 60s or early 70s now who had hoped to be able to pass on something to their family having enjoyed the income from it during their lifetimes and now will not be able to do so tax efficiently. Whether it is sufficiently disappointing to discourage middle-aged pension savers we shall have to see.
How does the taxation of ASP (alternatively secured pension) work?
Chris Gladman, Leicester
Leonie Kerswill: ASP is the formal name for the income drawdown rules that were introduced from April 6 2006 to allow over 75s to avoid having to buy an annuity. The rules, as they stood before last Wednesday, allowed you to leave your pension fund invested when you reached 75 and to draw an income of between 0 per cent and 70 per cent of the annuity you could have bought with the fund which is subject to income tax. This amount was retested annually but always on the basis of the annuity a 75 year old could have taken.
On death the fund first had to be used to provide a pension for a spouse or dependant, and if there weren’t any then it could be used to increase the funds of other scheme members, with a 40 per cent inheritance tax (IHT) charge, passed to charity tax free or returned to the sponsoring employer less an overall effective tax rate of 61 per cent.
The new rules announced in the PBR mean that from 6 April 2007 the annual income taken out has to be between 65 per cent and 90 per cent of the annuity a 75 year old could have bought, and if you take out less then there is a 40 per cent tax charge on the shortfall. In addition, on death if there are no surviving dependants then the passing of the pension assets to other scheme members will be treated as an unauthorised payment and subject to tax charges of up to 70 per cent. It also looks like the residual funds will then be included in the deceased member’s estate for IHT purposes, in which case they would suffer a further 40 per cent tax, that could mean an effective tax rate of 82 per cent!
HMRC will, however, be consulting on the new rules to make sure that they interact correctly with existing legislation. This is therefore, a case of watch this space.
Michael Owen: There are several aspects to the taxation of ASP. During the lifetime of the policyholder any income withdrawn is subject to income tax in the normal way. The same is true of a spouse or civil partner that may continue to receive income after the death of the policyholder.
However, the capital value on death may also be subject to Inheritance Tax and other charges. Potentially these are: 40 per cent Inheritance Tax, 40 per cent unauthorised payments charge, 15 per cent unauthorised payments surcharge and a 15 per cent scheme sanction charge. In total netting down the payment one by one, perhaps 82 per cent of the policy value will be lost after the second death in various taxes and charges.
It is worth pointing out that the policy value can be paid to charity without tax.
How much extra will a child get on child’s tax credit a week next April?
Ernest Robinson, N Ireland
Leonie Kerswill: The child element of child’s tax credit goes up by £80 from next April, to £1,845.
As a tax payer newly moving into the upper tax bracket, how can I be sure that my charitable donations receive the full tax relief? Does the charity receive a larger refund automatically, or should I increase my donation by roughly 20 per cent in the expectation that I can claim some relief on my self-assessment form. Or is it wishful thinking on my part that I won’t be taxed on everything I take home?
Steve Owen, Feltham
Leonie Kerswill: Charities only ever get basic rate relief, so you moving into the higher rate tax bracket makes no difference to them. It will, however, affect you. This is because you are now entitled to higher rate tax relief on charitable donations. It appears that you complete a tax return, so provided that you claim the payment on your tax return and submit it by the end of September, you should get the right amount of relief.
If you miss the deadline for submitting your return in time for HMRC to calculate your tax then you can still get it, provided you follow the instructions.
Michael Owen: Whether you are a higher rate taxpayer or not, the recipient charity is only able to recover basic rate income tax on qualifying charitable donations. Your donation is deemed to have been paid net of 22 per cent.
Higher rate taxpayers can claim additional income tax relief via Self Assessment by recording the gift in the appropriate section of the form. In such cases, an additional 18 per cent of the “grossed-up” payment is given as an offset to tax due or as a tax refund.