February 2012 Newsletter | The tax year end approaches, Pension Auto-enrolment

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The tax year end approaches...

February is now upon us, with the spring Budget due next month, on 21st. That means the time for year end tax planning has once again arrived. While a large slice of what will be in the Budget has already emerged in draft Finance Bill clauses, there will inevitably be some surprises. Planning therefore is best completed by 20th March, ahead of the Chancellor’s speech.

The changes introduced in Mr Osborne’s last two budgets mean that 2011/12 year end planning is slightly different from earlier years in several areas:

Pensions

Fixed protection The standard lifetime allowance, which effectively sets a limit on the normal tax-efficient maximum value of your pension benefits, will fall from £1.8m to £1.5m from 6 April 2012. Fortunately you can elect for ‘fixed protection’, which will keep your personal lifetime allowance at the current level. The election is not without its drawbacks and it will only be appropriate in certain circumstances.

A claim for fixed protection has to be made on a special HMRC form and received by them (in Nottingham) no later than 5 April 2012, so time is short

Contributions This is the first tax year end in which the new £50,000 annual allowance and carry forward rules need to be taken into account when planning year end pension contributions. The most important point to note is that April 5 will be the last date on which you can use any unused relief from 2008/09, as the carry forward period is limited to three tax years. How much unused relief you have available can be a complex calculation, so seek advice early if this may be relevant to you.

Maximising contributions now by using carry forward could be particularly valuable if you are going to opt for fixed protection, as this would mean that no further pension contributions can be made nor extra benefits accrue after the end of this tax year.

Individual Savings Accounts (ISAs)

The standard ISA contribution limit for 2011/12 is £10,680, of which up to £5,340 may be placed in a cash ISA. For the recently launched Junior ISA, the limit is £3,600. Unlike pension contributions, there are no carry forward provisions, so maximising your contributions whenever possible is normally a wise move. With the higher rate tax threshold and CGT annual exemption both frozen in the coming tax year, the tax shelter offered by ISAs has become increasingly relevant.

If you arranged a cash ISA as part of your planning this time last year, you should check what interest rate your money will earn after the ISA's anniversary - you may find that it has fallen from a sub-inflation 3% to around base rate, ie just 0.5%.

Inheritance Tax (IHT)

The draft Finance Bill clauses released in December confirm that the IHT nil rate band will be index-linked to the Consumer Prices Index…from April 2015. Until then the nil rate band will remain at the 2009/10 level of £325,000. Inflation has already devalued the nil rate band and will continue to do so.

There have been suggestions from the Office for Tax Simplification that IHT needs a radical overhaul, but whether or not this will happen, for now you should review whether to use the three main yearly IHT exemptions before 6 April.

Income timing

As well as the starting point for higher rate tax being frozen in the coming tax year, there are currently no plans to raise the £100,000 income level at which your personal allowance starts to be withdrawn or the £150,000 threshold for 50% tax.

In some instances this can mean that bringing forward income from next tax year is worthwhile, even if your tax bill arrives earlier. For example, if you expect your income to be marginally above £100,000 next tax year, but comfortably below that level in 2011/12, you could close interest-bearing accounts before 6 April and have the interest paid in this tax year, when it will not affect your personal allowance.

Capital Gains Tax (CGT)

Capital gains tax underwent a major change in 2010. However, the Chancellor has now put the tax structure on ice and announced that he will not increase the annual exemption (£10,600) from April. If you are in a position to realise gains on some of your investments, you ought to consider doing so before 6 April so that you do not waste your annual exemption. With CGT at 28%, the annual exemption could save you nearly £3,000 in tax if you are a higher or additional rate taxpayer.

If you cannot avoid capital gains tax, then examine the timing of your gains and losses:

• A gain realised on 5 April 2012 will mean tax payable on 31 January 2013.
• A gain realised on 10 April 2012 (after Easter) will mean tax payable on 31 January 2014.

The opposite is true of losses – the earlier you realise them, the quicker your tax bill could be reduced. However, as losses are always set against gains made in the same year before the annual exemption, you should avoid realising losses which takes your net gains below £10,600.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs)

VCTs and EISs are to undergo a range of changes from next tax year. While most of these will be beneficial, there is one which may mean ‘limited life’ variants are much less common from 2012/13 onwards. The new Seed Enterprise Investment Scheme (SEIS) offering 50% income tax relief, which the Chancellor revealed in November, will not become available until next tax year.

The current tax benefits of VCTs and EIS are:

Benefit	VCT	EIS
Income tax relief on initial investment	30% on investments up to £200,000 in 2011/12	20% on investments up to £500,000 in 2011/12
Minimum holding period to avoid tax relief clawback	5 years	3 years
Dividends	Tax-free (but no reclaim for tax credits) and often paid from capital.	Taxable (but profits usually retained, not distributed)
CGT reinvestment relief	None	Gains may be reinvested up to three years after realisation or one year before. No investment limit
Capital gains on proceeds	Nil	Nil (except for reinvested gain)
IHT business assets relief	None	Usually available after two years’ ownership

VCTs and EIS are both high risk investments in very small companies and should only form a small part of a well diversified investment portfolio. The high risk involved is the main reason why the government is prepared to offer such generous tax reliefs.

It may seem like the January sales are only just finished, but the sooner you begin year end planning the better. Good Friday falls on 6 April this year, so the key date ahead of the tax year end is Budget Day (21 March).

Pension Auto-enrolment

In late January, the Department for Work and Pensions (DWP) launched an advertising campaign for pension auto-enrolment, which begins in October 2012. At the date of launch, it was still not clear what the dates most employers would have to auto-enrol eligible employees. Back in November the Minister for Pensions, Steve Webb, had announced another deferral of auto-enrolment, but had only provided minimal information.

Two days after its ad campaign began, the DWP issued a press release spelling out the revised timings. As the Minister had promised, the revisions only affect employers with less than 250 employees – about three quarters of all employers. The revised schedule is shown in Table 1 below.

Table 1 – Auto-enrolment Staging Dates

Employer size (by PAYE scheme size) or other description	Automatic Enrolment duty date
	From	To
250 or more members	1 October 2012	1 February 2014
50 to 249 members	1 April 2014	1 April 2015
Test tranche for less than 30 members	1 June 2015	30 June 2015
30 to 49 members	1 August 2015	1 October 2015
Less than 30 members	1 January 2016	1 April 2017
Employers without PAYE schemes	1 April 2017	- - -
New employers Apr 2012 to Mar 2013	1 May 2017	- - -
New employers Apr 2013 to Mar 2014	1 July 2017	- - -
New employers Apr 2014 to Mar 2015	1 August 2017	- - -
New employers Apr 2015 to Dec 2015	1 October 2017	- - -
New employers Jan 2016 to Sep 2016	1 November 2017	- - -
New employers Oct 2016 to Jun 2017	1 January 2018	- - -
New employers Jul 2017 to Sep 2017	1 February 2018	- - -
New employers Oct 2017	Immediate duty	- - -

The increased timescale for the introduction of auto-enrolment has a knock on effect on the phasing in of minimum percentage contribution levels, which will not now reach the final level until October 2018 (see Table 2). The earnings on which these will be based has still not been finalised, although a recent consultation pointed to employer and employee contributions in 2012/13 based on earnings between £5,564 and £39,583 where the employee’s earnings were at least £8,105.

Table 2 – Phasing of Minimum Contributions

Period	Minimum Employer Contribution	Minimum Total Contribution
1/10/12 – 30/9/16	1%	2%
1/10/16 - 30/9/18	2%	5%
From 1/10/18	3%	8%

This delay in the introduction of auto-enrolment will mean many employees of small employers have longer to wait before they fully benefit from compulsory employer contributions. If you are an employer, the DWP advertising campaign might start prompting questions from your workforce much sooner.

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