Emergency Budget 22 June 2010

Pensions

The Government has announced it is considering restricting pensions tax relief from 6April 2011 by reforming the existing pension tax allowances.

There will be a consultation exercise to determine what level the annual allowance should be set at but provisional analysis suggests this will be in the range of £30,000 - £45,000 and will commence on 6 April 2011.

Legislation will be introduced in the next Finance Bill 2010 to introduce powers to repeal the current plans for a high income excess relief charge.

In the meantime the existing 'anti-forestalling' measures will continue to restrict higher rate tax relief for certain individuals from 22 April 2009 through to 5 April 2011. Less complication please !

The Government has also announced the end of so-called compulsory annualisation at age 75. This will take effect from April 2011 following consultation. In the meantime, pension scheme members and dependants, who reach age 75 on or after 22 June 2010 without having secured a pension, won’t have to buy an annuity or otherwise secure a pension income until they reach age 77.

This will enable them to defer their decision on what to do with their pension savings until the new rules are finalised next year. Potentially good news - but the devil will be in detail.

Income tax and national insurance

The basic personal allowance will increase to £7,475 from 6 April 2011. The basic rate tax threshold will reduce to effectively restrict the benefit of the increased allowance to lower earners. The long term objective is to increase the personal allowance to £10,000.

The 1% national insurance rise will still apply from April 2011, but employers will benefit from an increased secondary threshold which will reduce the impact of the increase. Many employees can still reduce the impact of increased national insurance charges by using salary sacrifice. Pension planning is clearly going to become an even more important area for personal financial planning.

Corporation tax

The planned increase in corporation tax from 21% to 22% for companies with chargeable profits of less than £300,000 has been reversed. Instead the tax rate will be reduced to 20% from 1 April 2011. The full rate of corporation tax will reduce from 28% to 27% on 1 April 2011, with further reductions applying every year until it is down to 24%. Good news for many companies and may encourage further company investment.

Tax efficient investments

The Government announced prior to the Budget that it will reduce and then stop Government contributions to Child Trust Funds. This always had an air of gimmickry, no great loss.

From 6 April 2011 the ISA subscription limits will increase annually in line with inflation. Good news.

Capital gains tax

From midnight, 22 June, a new rate of capital gains tax (CGT) of 28% will apply to individuals with total income and gains that exceed the basic rate limit. This will apply to gains arising on or after 23 June 2010.

The increase in CGT rates from 18% to 28% will re-ignite the debate on the merits of mutual funds versus investment bonds, while further reinforcing the benefit of using the ISA allowance.

The CGT increase will make investment bonds more attractive for some customers, although the CGT allowance continues to allow scope to manage capital gains from mutual funds. A good independent financial adviser should be able to add serious tax-efficencies for most investors.