On 19th March 2014, Chancellor George Osborne delivered his fifth Budget. Perhaps the biggest announcement for employees is the proposal to make Defined Contribution (money purchase) occupational pension schemes much more flexible.
The Chancellor confirmed that from 6th April 2014, the income tax personal allowance will rise to £10,000. From April 2015, it was announced that the level of the personal allowance will rise to £10,500. So that higher rate taxpayers benefit from this increase in allowances, the basic rate limit will be reduced to £31,785 (£31,865 for 2014/15).
The government states that the changes they have made to personal allowances since they came into power mean over 3.2 million people will have been lifted out of income tax by April 2015. Further, the government’s increases to the personal allowance between 2010 and 2015 are worth £646 to a typical higher rate taxpayer in cash terms, and £805 to a typical basic rate taxpayer.
Budget 2014 also announced that the transferable tax allowance for married couples and civil partners announced at Autumn Statement 2013 will be set at 10% of the personal allowance from 2015/16. This means it will be £1,050 in 2015/16.
Defined Contribution Pensions
According to Budget 2014 documentation, the government intends to “introduce the most fundamental reform to the way people access their pensions in almost a century by abolishing the effective requirement to buy an annuity, giving people much greater freedom over how they access their pension savings.”
From April 2015, the government will change the tax rules to allow people to access their defined contribution pension savings as they wish from the point of retirement.
Drawdown of pension income under the new, more flexible arrangements will be taxed at marginal income tax rates rather than the current rate of 55% for full withdrawals.
The tax-free pension lump sum will continue to be available. Those who continue to want the security of an annuity will be able to purchase one. Equally, those who want greater control over their finances in the short term will be able to extract all their pension savings in a lump sum.
And those who do not want to purchase an annuity or withdraw their money in one go will be able to keep their pension invested and access it over time.
To help a retiree decide on their best options, the government will introduce a new guarantee that everyone who retires with a defined contribution pension will be offered free and impartial face-to-face guidance on their choices at the point of retirement. This will take effect from April 2015.
From 27 March 2014 the government will:
- Reduce the amount of guaranteed pension income people need in retirement to access their savings flexibly, from £20,000 to £12,000;
- Increase the capped drawdown limit from 120% to 150% to allow more flexibility to those who would otherwise buy an annuity;
- Increase the size of a single pension pot that can be taken as a lump sum, from £2,000 to £10,000;
- Increase the number of pension pots of below £10,000 that can be taken as a lump sum, from two to three;
- Increase the overall size of pension savings that can be taken as a lump sum, from £18,000 to £30,000.
New type of Voluntary NICs
Budget 2014 announced further details of a new scheme of Voluntary National Insurance contributions (VNICs) to allow pensioners to top up their Additional State Pension.
The scheme will be open for 18 months from October 2015 and available to everyone reaching State Pension age before 6 April 2016. This will help pensioners with savings who want to boost their State Pension income in a way that protects them from price inflation and provides them with an income for life. It could particularly benefit those with gaps in their Additional State Pension record, such as the self-employed and women who have taken time out from work to raise children.
Simplifying expenses and benefits
For a while now, the Office for Tax Simplification has been examining the UK tax system and looking for ways to simplify it. One of the areas they examined was expenses and benefits.
As highlighted by the OTS review of employee benefits and expenses, working practices have changed. The current rules for benefits and expenses are complex and can lead to unfair outcomes.
Budget 2014 goes no further other than to state the government does intend to “implement OTS recommendations to simplify the taxation of employee benefits and expenses.” To this end they also announced they “will undertake a call for evidence on remuneration practices in the 21st century to inform future changes.”
Some of the changes it is known that government are examining include abolishing the £8,500 threshold, voluntary payrolling of benefits, a trivial benefits exemption, and a general exemption for non-taxable expenses. The government also intends to review the rules underlying the tax treatment of travel and subsistence expenses.
Tax exemption for employer-funded occupational health treatments
As announced at Budget 2013, the government will introduce a tax exemption for amounts up to £500 paid by employers for medical treatments for employees. The tax exemption is expected to become available with the rollout of the Health and Work Service in October 2014.
Employer provided benefits in kind: beneficial loans
As announced at Budget 2013, the threshold for the small loans exemption limit will be increased from £5,000 to £10,000 from April 2014.
Company Car Tax (CCT) rates for 2016/17
Budget 2012 and Budget 2013 set out CCT rates and bands for 2016/17, including the removal of the diesel supplement. The appropriate percentage of the list price subject to tax will be 7% for the 0-50 grams of carbon dioxide per kilometre (gCO2/km) band and 11% for the 51-75 gCO2 /km band in 2016/17.
CCT rates for 2017/18 and 2018/19
The appropriate percentage of a car’s list price subject to tax will increase by two percentage points for cars emitting more than 75 gCO2/km, to a maximum of 37%, in both 2017/18 and 2018/19.
In 2017/18 there will be a four percentage point differential between the 0-50 and 51-75 gCO2/km bands and between the 51-75 and 76-94 gCO2/km bands. In 2018/19 this differential will reduce to three percentage points. The differential will reduce further to two percentage points in 2019/20 in line with the Budget 2013 announcement.
Fuel Benefit Charge (FBC)
From 6 April 2015, the FBC multiplier for both cars and vans will increase by RPI.
Van Benefit Charge (VBC)
From 6 April 2015, the main VBC rate will increase by the increase in the Retail Prices Index (RPI).
The government will extend VBC support for zero emission vans to 5 April 2020 on a tapered basis. In 2015/16 the VBC rate paid by zero emission vans will be 20% of the rate paid by conventionally fuelled vans, followed by 40% in 2016/17, 60% in 2017/18, 80% in 2018/19 and 90% in 2019/20, with the rates equalised in 2020/21.
The government will review VBC support for zero emission vans in light of market developments at Budget 2016.
Company Car Tax
As announced at Autumn Statement 2013, to protect tax revenues, and taking effect from 6 April 2014, the government will introduce legislation to:
- Ensure individuals make payments for private use of a company car or van in the relevant tax year;
- Ensure that where an employer leases a car to an employee, the benefit is taxed as a car benefit rather than as employment earnings.