The Budget 2014

16th April 2014

Following last month’s 2014 budget announcement we have included below a summary of the key changes that may affect you and your business.  If you would like to discuss any of changes in further detail, please do not hesitate to contact us.

1.            Personal Taxes

1.1         Rates and allowances

The personal allowance for 2014/15 will be increased from £9,440 to £10,000, increasing to £10,500 in 2015/16.  The basic rate band will be reduced from £32,010 to £31,865 meaning that higher rate taxpayers will benefit from only part of the increase in the personal allowance in 2014/15.

The capital gains tax annual exemption for 2014/15 will be £11,000, and this will also increase by 1% per annum in 2014/15 to £11,100.

1.2         Transferrable personal allowance

From April 2015 it will be possible for up to £1,050 of an individual’s personal allowance to be transferred to his or her spouse or civil partner provided neither spouse or civil partner is a higher or additional rate taxpayer.

1.3         Starting rate for savings income

In a move to support savers, the starting rate band for savings income will be increased in 2015/16 from £2,880 to £5,000.  At the same time, the rate applicable to savings income within the starting rate band will reduce from 10% to 0%.  This provides further relief on top of the personal allowance for individuals who derive their income from savings and investments.

1.4         Pensions flexibility

A number of changes are being made to the limits on drawdown pensions, trivial commutation lump sums and small pots for registered pension schemes to allow defined contribution members greater flexibility in drawing their pensions.

The government also intends to consult on further measures for greater flexibility in the future. This includes consulting on the amendment or abolition of the age limit of 75 for tax relief on pension contributions, increasing the minimum pension age from 55 to ten years below state pension age, simplification of dependant’s pensions and applying a marginal rate of income tax to withdrawals from defined contribution schemes rather than a 55% rate. The government is also consulting on how best to deal with transfers from defined benefit schemes to defined contribution schemes.

The changes will affect those who are already in capped drawdown as well as those with undrawn benefits.

Pensioners who are currently in capped drawdown are allowed to draw income of up to 120% of an ‘equivalent annuity’ (broadly the level of single life annuity that the fund could provide). This level was increased from 100% on 26 March 2013. The limit will increase further to 150% on 27 March 2014.

Individuals who are looking to go into flexible drawdown on or after 27 March 2014 will only need to have secured pension income of £12,000 rather than the current £20,000. Secured pension income includes state pensions, annuities and scheme pensions. Where this minimum income threshold is met, and the scheme allows flexible drawdown, the individual can draw up to 100% of the fund as pension income.

Individuals who are over 60 who have total pension rights from all schemes valued at less than £30,000 will be able to take the full amount as a lump sum from 27 March 2014 (25% of this would be tax-free and the remainder treated as pension income). This is referred to as a trivial commutation lump sum. This is currently limited to £18,000. Associated rules on small pots will be adjusted accordingly, with an increase in the threshold of what qualifies as a small pot from £2,000 to £10,000.

1.5         Seed enterprise investment scheme (SEIS)

The SEIS was intended to be a temporary measure running from 6 April 2012 to 5 April 2017 to encourage investment in early stage companies by providing certain reliefs.  The reliefs available under SEIS allow investors to take advantage of the 50% income tax relief available on investments up to £100,000, capital gains tax exemption on disposal of the SEIS shares, and exemption of up to 50% of gains made on the disposal of other assets providing gains are reinvested in the qualifying SEIS investments.  The Finance Bill 2014 will amend the legislation to make SEIS permanent.

1.6         Social investment tax relief

Social Investment Tax Relief is a new form of tax relief which will be introduced for investments between 6 April 2014 and 5 April 2019 (inclusive) which will allow individuals who invest in social enterprises to claim certain income tax and Capital Gains Tax (CGT) reliefs. The relief is available on equity investments and loans to social enterprises where certain conditions are met.

For the individual investor the following tax reliefs will be available on qualifying investments of up to £1million per tax year:

  1. An income tax reduction of 30% of the amount invested in social enterprises (maximum income tax relief of £300,000 pa).
  2. Any gains on disposal of the social enterprise will be exempt from CGT.
  3. It will be possible to defer gains made on disposal of other assets up to the amount invested in the social enterprise. These deferred gains will come back into charge, and so be subject to CGT, when the investment is disposed of or if the conditions for social investment tax relief to be available cease to be met.

1.7         New Individual Savings Account (NISA)

The new ISA product will be introduced from 1 July 2014 and will bring with it equal limits for cash, and stocks and shares, and an increase in the allowed savings limit to £15,000 for the 2014-15 tax year.

The government has announced the introduction from 1 July 2014 of a new, simpler ISA product, the ‘New ISA’ or ‘NISA’. The NISA will bring with it equal limits for cash, and stocks and shares, and an increase in the allowed savings limit to £15,000 for the 2014-15 tax year.

The government has also announced that the limits for Junior ISAs and Child Trust Funds will increase from £3,720 to £4,000 which will be effective from 1 July 2014.

1.8         Tax-free childcare scheme

A new Tax-Free Childcare scheme for qualifying childcare costs for the under-12s, worth up to £2,000 per annum per child, will be rolled out from autumn 2015.

The scheme will be open to families where both parents work and earn up to £300,000 between them, or single parents earning less than £150,000.

2.      Partnerships

2.1         Salaried members of LLPs

It was confirmed that the change to the treatment of a ‘salaried member’ of an LLP from that of a partner to that of an employee for both income and corporation tax purposes will come into force on 6 April 2014.

The consequence of the new rules is that the individual’s earnings would be subject to employer’s and employee’s NICs and, as employer, the LLP would be obliged to operate PAYE thereon.

An individual LLP member is a salaried member if all three of the following conditions are met.  In summary:

(a)   the member provides services to the LLP and is remunerated for those services to the extent of 80% or more by way of ‘disguised salary’ the quantum of which does not vary by reference to the overall profitability of the LLP; and

(b)   the member does not have significant influence over the affairs of the LLP; and

(c)  the member’s capital contribution to the LLP is less than 25% of his ‘disguised salary’.

2.2         Partnerships with mixed memberships and disposal of assets through partnerships

It was also confirmed that the planned changes would go ahead to prevent the tax-motivated allocations of business profits or losses where the partners include both individuals and companies, and to prevent tax-motivated disposals of assets through partnerships.

3.           Business Tax

3.1         Class 2 National Insurance

From April 2016 Class 2 National Insurance contributions (NICs) (payable in 2014/15 at a rate of £2.75 per week) will be collected via self-assessment rather than separately via direct debit, or upon demand by HMRC.

3.2         Annual Investment Allowance

It was announced that the annual investment allowance will temporarily increase from £250,000 to £500,000 for expenditure incurred between 1 April 2014 and 31 December 2015 for corporation tax purposes and 6 April 2014 and 31 December 2015 for income tax purposes, after which the limit will fall to £25,000.

3.3         Research and development allowances to be excluded from anti-avoidance loss buying rules

Finance Bill 2014 will include legislation to exclude Research and Development capital allowances from the anti-loss buying rules. These changes will have effect for “qualifying changes” of ownership occurring on or after 1 April 2014.

3.4         Research and Development payable credit for SMEs

The rate of the R&D payable credit for loss-making SMEs will increase to 14.5% from 11% for qualifying expenditure on or after 1 April 2014.

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