In this article we cover some of the miscellaneous budget announcements impacting pensions, tax and trusts.
Pension tax relief for individuals
In the budget paper there is a call for evidence on pension tax administration.
Those earning around or below the level of the personal allowance and saving into a pension may benefit from a top-up on their pension savings equivalent to the basic rate of tax, even if they pay no tax. Whether they receive this top-up depends on how their pension scheme administers tax relief.
Essentially those paying contributions via the Net Pay method don’t get the top-up which is in contrast to those making the contribution to a private pension that operates the relief at source method.
For example, a Net Pay contribution of £80 would be deducted by the individual's employer, from his or her salary before tax is calculated and paid into the pension scheme. So a Net Pay contribution will result in £80 in their pension.
If the same client took the salary of £80 they would receive £80 in their hands as they are a non-taxpayer. If they subsequently paid an £80 relief at source contribution the scheme administrator claims basic rate tax relief from HMRC, which is paid directly into the scheme. So the client would have £100 in their pension.
Or to look at it another way, if the client takes the salary it would only cost them £64 to get £80 in their pension using the relief at source contribution method but it would cost them £80 to get £80 into their pension via Net Pay.
The client is therefore losing out on basic rate tax relief if making pension contributions via Net Pay in these circumstances. The government has committed to reviewing options for addressing these differences and will shortly publish a call for evidence on pensions tax relief administration.
Pension lifetime allowance
The lifetime allowance (LTA) will increase in line with CPI for 2020-21. The CPI rate is 1.7% which would suggest an increase to £1,073,000 if rounded up to the nearest £100 but the government has confirmed the standard LTA is rising to £1,073,100.
This £18,100 increase could mean delaying taking some or all benefits until after 6 April 2020 may help reduce or eliminate the LTA charge which could apply if benefits are crystallised in the 2019-20 tax year for those who don’t have a protected LTA.
For example, a client with uncrystallised pensions savings of £1,072,000 with no previous benefit crystallisation events would incur an LTA charge of £9,350 if the excess is taken as a lifetime allowance excess lump sum or £4,250 if the excess is designated for income purposes such as flexi-access drawdown (FAD) or annuity.
It should be noted that if the client designates the LTA excess to FAD or annuity and pays 40% income tax on the income from the excess funds the effective rate of tax will be 55% which is the same as taking the excess as a lump sum.
If a client is likely to be a basic rate taxpayer or lower then designating for income purposes will be more tax efficient than taking as a lump sum. However, if the client is likely to be subject to additional rate tax it would be more tax efficient to take the excess as a lump sum (although if taking as a lump sum there may be other taxes to consider such as IHT).
CGT Annual Exempt Amount
The annual exempt amount for capital gains tax is increased annually in line with increases in the Consumer Prices Index, rounded up to the nearest multiple of £100. It also provides that the annual exempt amount available to most trustees of settlements is one half that due to individuals.
The rate of Consumer Prices Index to September 2019 was 1.7%. Consequently, the annual exempt amount for the year 2020 to 2021 will be increased to £12,300 for individuals and personal representatives.
This will also have the effect of increasing the annual exempt amount for trustees of settlements to £6,150. If a trust’s settlor has set up more than one trust (settlement), the tax-free allowance will be divided equally between the number of trusts, up to a maximum of 5. If there are 5 or more, the tax-free allowance would remain the same for each subsequent trust i.e. £1,230 per trust.
Junior ISA and Child Trust Funds
While the ISA allowance has been frozen at £20,000, the amount families can save into a Junior ISAs (JISAs) and Child Trust Funds (CTFs) will be more than doubled in 2020-21, increasing from £4,368 to £9,000.
This increase will help with those looking to increase gifts to minor children in a tax efficient way. This is welcome in terms of tax efficient growth but the level of funds that could be available to the child, well strictly speaking the adult at age 18, could be substantial. Therefore parents may be reluctant to make use of this additional allowance, certainly on a regular annual basis.
From a planning perspective this raises the question of whether it may be appropriate to discount a JISA or CTF in favour of an alternative solution due to the higher allowance if the client has concerns over the amount of funds available at age 18.
For example, most offshore bonds have a minimum premium of £20,000. If a client has two children would they be prepared to add an extra £2,000 and invest £20,000 into an offshore bond and place the bond into a discretionary trust so they have control on when the children receive the funds?
The ability to assign segments to the children when they are still non-taxpayers could still achieve the same tax efficiency if planned correctly.