A welcome piece of good news was a further £235 increase in the personal allowance for 2013/14, the amount of income that most taxpayers can receive before they start to pay income tax. The personal allowance was already due to jump by £1,100. But at £9,440 next tax year, the new personal allowance will be very close to the coalition Government’s goal of £10,000. As part of the phasing out process, age allowances will be frozen in 2013/14.
The benefit of the increased personal allowance will be partially clawed back from higher rate taxpayers, because the threshold or starting point for 40% tax will not rise by a corresponding £235. Instead, it will remain at £41,450, as announced in the last Budget; a reduction of £1,025 from the 2012/13 level. In both 2014/15 and 2015/16 the higher rate threshold will rise by just 1%, half of the Government’s target rate of inflation.
The manipulation of the higher rate threshold means that by 2015/16 there will be over 5 million higher (and additional) rate taxpayers, according to the Institute for Fiscal Studies. If you are not a higher rate taxpayer today, you may well be soon.
The annual allowance – the maximum total tax-efficient contribution that can be contributed to pension plans by you or on your behalf during the tax year – will be cut from £50,000 to £40,000 in 2014/15. The change means you could suffer an unwelcome tax charge if you are a long-serving member of a final salary scheme and receive a promotion or large pay rise.
The annual allowance cut will be accompanied by another reduction in the lifetime allowance – the maximum total tax efficient value of your pension benefits. This will drop from £1.5 million to £1.25 million, having been £1.8 million in April 2011. To ease the pain there will be ‘transitional protection’, which you can claim if you have, or might have, pension benefits worth more than £1.25 million.
The Chancellor did reveal one private pension increase: a 20% rise in the maximum amount that can be taken under capped income drawdown. The change will take effect from 26 March 2013.
Capital gains tax
The capital gains tax annual exemption was frozen this tax year at £10,600. For 2013/14 it will rise in line with inflation. In the following two years the exempt amount suffers the same fate as the higher rate threshold – a 1% annual increase – taking it up to £11,100 in 2015/16.
The 1% increase appeared on the inheritance tax agenda, too. The nil rate band, which is currently £325,000, will rise by 1% on 6 April 2015, after six years of freeze.
A 1% annual increase will apply to most working age benefits for each of the next three years from April 2013. However, the Chancellor was more generous to pensioners. The basic state pension will increase by 2.5% from next April, bringing the single pension to £110.15 a week. All other state pensions will rise in line with inflation.
The value of tax relief’s depends on your individual circumstances and are subject to change. Tax laws can change. The Financial Services Authority does not regulate tax advice.