Pension contributions (Table B)
It was announced in the Autumn Statement that the limits on tax-advantaged pension reliefs will be lowered further on 6 April 2014, after being reduced to £50,000 on 6 April 2011. The cap on annual contributions will fall again to £40,000. It has been confirmed that anyone who has paid less than the current limit in the three years before the change will be able to use the shortfall below £50,000 (not £40,000) to justify higher contributions in 2014/15.
The limit on the value of a tax-advantaged pension fund will fall from £1.5m to £1.25m for those taking benefits from 6 April 2014. Anyone with a larger fund taking benefits after that date will suffer an income tax charge on the excess at 55%. People adversely affected by this reduction – for example, already having pension rights valued at more than £1.25m but not wishing to take benefits before April 2014 – can apply for ‘protection’ which will lessen the impact of the change.
Someone who takes their pension benefits may buy an annuity, or instead take ‘drawdown’ – keeping their own fund identifiable and receiving some or all of the income arising. The maximum amount of drawdown income has been fixed at 100% of the annuity that could have been purchased with the fund. This will now be increased to 120%, apparently to take effect from 26 March 2013. This should increase the flexibility available to people drawing their pension benefits.
Seed Enterprise Investment Scheme (SEIS)
SEIS is a generous relief that was introduced in 2012/13. A subscriber for shares in a small company in the first 2 years of its trade can enjoy a 50% income tax rebate on up to £100,000 invested. If capital gains of up to the same amount are realised in 2012/13 and invested in a SEIS company in 2012/13 or 2013/14, the gains will be exempted. These reliefs will become permanent provided a number of conditions are satisfied, but may be lost if the shares are sold or the company is liquidated within a short time. The combination of these reliefs mean that an investor can put £100,000 into a company at a cost of only £22,000.
The CGT exemption will now be extended to one-half of any gains realised in 2013/14 and invested in SEIS shares in 2013/14 or 2014/15. In effect, this will halve the CGT rate on such gains (making the potential cost £36,000 instead of £22,000 in the above example).
The original SEIS rules contained a serious trap: the company could not be acquired from a formation agent, but had to be incorporated by the people who intended to claim the relief. This pitfall will be removed from 6 April 2013, but not retrospectively.
Individual Savings Accounts (ISAs)
The annual limit on investment in tax-free ISAs increases to by £240 to £11,520 for 2013/14. This limit increases in line with the Consumer Prices Index each year, adjusted so that the result divides by 12 to allow for regular monthly contributions.