2008 Pre-Budget Report -
A Financial Planning Perspective
Alistair Darling delivered his Pre Budget Report (PBR) to Parliament on 24th November 2008. This years report was made against a backdrop of turbulence in the global markets which is effecting economies around the world. In our previous article, we have taken a look at the key changes from a tax and accounting perspective. Here we take the opportunity to examine additional implications from a financial planning standpoint.
Personal Allowances, Rates & Bands
| 2008/2009 | 2009/2010 | |
| Basic personal allowance | £6,035 | £6,475 |
| Personal allowance for those aged 65 to 74 | £9,030 | £9,490 |
| Personal allowance for those aged 75 and over | £9,180 | £9,640 |
| Blind person's allowance | £1,800 |
£1,890 |
| Married couple's allowance | £6,625 |
£6,965 |
| Income limit for age related allowances | £21,800 |
£22,900 |
| Minimum amount of married couple's allowance | £2,540 | £2,670 |
| Basic rate limit | £34,800 |
£37,400 |
| Starting rate limit for savings income | £2,320 |
£2,440 |
From 2010/11, the basic personal allowance will be subject to income limits of £100,000 and £140,000. If an individual’s gross income is above the income limit of £100,000, the amount of their allowance will be reduced by £1 for every £2 of income above the income limit, up to a maximum of one half of the basic personal allowance.
From 2010/11, if an individual’s gross income is above a second income limit of £140,000, the amount of their allowance will be further reduced by £1 for every £2 of income above the income limit, until the allowance is extinguished.
From 2011/12, taxable non-savings and savings income above £150,000 will be liable to income tax at 45%.
From 2011/12, there will be three rates of tax for dividends. Dividends otherwise taxable at the basic rate will continue to be taxable at the notional 10% tax rate, and dividends otherwise taxable at the higher rate will continue to be taxable at the 32.5% dividend rate. Dividends otherwise taxable at the new 45% rate will be liable to income tax at a new rate of 37.5%.
Trust Income
From 2011/12, it is proposed that the rate of income tax paid by trustees on trust income will be increased to 45% from 40%. This would appear to make non-income producing investments such as investment bonds more attractive to trustee for trust based investments.
Inheritance Tax (IHT)
Within the PBR, there were no new announcements regarding IHT. In light of this, it is assumed that the proposed increase in the nil rate band to £325,000 will be implemented.
No changes were announced to trust based IHT solutions. Therefore, discounted gift trusts and gift & loan schemes should continue to play a valid role in reducing IHT where appropriate. Equally life cover written in trust to provide for a deemed liability remains a valid alternative.
Pensions
The current legislation provides for the Lifetime Allowance (LTA), presently £1.65m for the tax year 2008/09, to increase to £1.75m for 2009/10 and to £1.80m for 2010/11. It has not been clear what the Government’s intention would be for subsequent tax years, but it has been generally assumed that the LTA would be increased on a similar basis to the one that has applied since the LTA was introduced in 2006/07. However, it has now been frozen at £1.80m for the 5 tax years beyond 2010/11, i.e. up to and including 2015/16.
Certain other features of the pensions tax legislation are set by reference to the LTA (for example the commutation limit for small amounts of pension rights which is 1% of the LTA). On the face of it, these limits will also be frozen. However, there is a suggestion that a different basis might be devised.
The current legislation provides for the Annual Allowance (AA), presently £235,000 for 2008/09, to be increased to £245,000 for 2009/10 and to £255,000 for 2010/11. As with the LTA, it had been generally assumed that the AA would continue to be increased. However, it has now been frozen at £255,000 for the 5 tax years up to and including 2015/16.
The freezing of the LTA is effectively a cap on the application of the tax relief for pensions. Therefore, over a period of time an increasing number of people will find the value of their pension benefits caught by the ceiling. It is not clear whether tax relief for pension contributions will be available at the higher tax rate of 45% proposed for 2011/12 onwards.
The increase in NI contribution rates proposed for 2011/12 could make salary sacrifice more attractive.
As with any financial planning, the suitability or otherwise of any planning should be considered carefully based upon an individual specific circumstances. If you wish to discuss any of these points outlined, please do not hesitate to contact Steve Prosser, Jeff Crewdson or Chris Raggett.
Date of Article: 26th November 2008
