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What the chancellor has done to pensions and benefits
Both benefit claimants and the wealthy have taken a hit in tax and benefit measures announced in today's Autumn Statement.
by Lorna Bourke on Dec 05, 2012 at 15:22
It could have been worse. Both benefit claimants and the wealthy have taken a hit in tax and benefit measures announced today by chancellor George Osborne in his Autumn Statement.
In attempts to plug the £10 billion gap (see 'No miracle cures') in government finances he has, as expected, cut tax relief on pension savings and limited rises in out-of-work welfare benefits – normally increased in line with inflation – to 1%. With inflation running at around 2.5% a year the lowest income families will effectively see a 1.5% reduction in the spending power of their benefits.
But the starting point for higher rate tax is to be increased by 1% and personal tax allowances are to go up by £1,335 in 2013-14 to £9,440 putting an extra £266 a year into workers’ pockets.
As expected the chancellor has lowered the maximum investment in pensions which attracts tax relief from £50,000 a year to £40,000 and cut the ‘lifetime limit’ – the maximum value of pension savings – from £1.5 million to £1.25 million. Together these changes are estimated to save £1 billion by 2016-17. A transitional 'fixed protection' regime will be introduced for those who may be affected by the reduction in the lifetime allowance.
Justifying the cuts the chancellor pointed out that 90% of all pension pots at retirement are worth less than £1.25 million with the median pension savings at just £55,000. In other words it is only the richest 10% who will be affected by this reduction. He also mentioned that the average annual contribution to a pension scheme is just £6,000 so the vast majority of pension savers will be unaffected by the annual limit of £40,000 – way above what most people can afford to save and considerably more than average earnings of around £25,000.
These latest cuts follow a reduction in tax relief on contributions in 2010 from £255,000 to £50,000 so high earners have lost out substantially since the coalition came to power. The pensions industry will be relieved however that Osborne didn’t go further and remove higher rate tax relief on pensions altogether on the grounds that it is the wealthier savers who benefit most from this generous tax concession. This would have saved up to £7 billion a year.
Most important, the reduced limit on contributions does not take effect until April 2014 so there is still plenty of time for wealthier taxpayers to get a huge subsidy by making the maximum payment for the current 2012-13 tax year and for 2013-14. For a 50% tax payer this subsidy is worth £25,000 on a £50,000 contribution.
The good news is that those in retirement who have seen their income from pension drawdown from Sipps (self-invested personal pensions) curtailed will enjoy an increase in the maximum income that can can be taken with the limit rising from 100% of an equivalent annuity purchase to 120%.
Are you a high earner? Read Lorna Bourke's update on how the pension allowance changes might affect you.
While pension savers won’t like the cutback in their generous tax concessions, it has been demanded as a quid pro quo by the Lib Dems in return for accepting reductions in the welfare budget. From April 2013 out-of-work benefits – but not pensions, carers allowances and disability benefit – will be increased by just 1% rather than rising at the rate of inflation, which would have meant an increase of around 2.5%. In effect this is a real cut in spending power of around 1.5% and will save an estimated £2.5 billion.
Child benefit rates are frozen in 2013-14 but will increase by 1% in 2014-15 and 2015-16. Tax credit disability elements are increased in line with inflation as measured by the consumer price index (CPI). But other elements are either frozen or will increase by 1% in 2013-14. All rates are increased by 1% in 2014-15 and 2015-16. The guardian's allowance is increased in 2013-14 in line with CPI.
The chancellor’s justification for this effective cut in benefits is that while wages are frozen for many employees – in particular large numbers of public sector workers – it is wrong to increase benefits in line with inflation which would reduce the incentives to work.
With benefits eating up an ever-larger proportion of government spending it is one area where big savings can be made. Social security benefits, including the state pension and tax credits, are forecast to cost £202.9 billion in 2012/13 accounting for 30% of total public expenditure, according to the Office for National Statistics.
Housing taxes and benefits
Wealthy homebuyers can breathe a sigh of relief that there has been no increase in stamp duty at the top end of the scale and no ‘mansion tax’ or increase in the higher bands of council tax which the chancellor dismissed as being too expensive to administer and unlikely to raise any extra revenue.
And there was good news for unemployed homeowners. Support for mortgage interest, which pays the interest on mortgage payments on loans up to £200,000 after 13 weeks of unemployment will be extended for another year. However, it has not been reformed and the largest number of claimants are pensioners. This is because a partner’s income is taken into account if you are an unemployed claimant and this disqualifies most.
Most tax thresholds, including higher rate tax, capital gains tax (CGT) and inheritance tax (IHT) which has been frozen at £325,000 since 20009 will increase by 1% in 2015-16 – well below the rate of inflation to which they used to be linked. The increase is still some way off so there won’t be any celebrations here.
For the 2013-14 tax year the p[ersonal allowance – the amount of income you can receive tax free – will increase to £9,440 and the basic rate limit will be set at £32,010. For 2014-15 and 2015-16 the increase in the higher rate threshold – the starting point for 40% tax – will be capped at 1%.
For 2013-14, there are no changes to the percentage rate of contribution for class 1 and class 4 national insurance contributions (NICs) but there are changes to all of the thresholds and limits.
More about this:
More from us
- Autumn Statement: ‘No miracle cures’ as Osborne misses debt target and extends austerity
- Pension problems Osborne has given high earners
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