Pension tax relief may be cut further

By Ian Pollock, Business reporter, BBC News


Government plans to restrict pension tax relief for the higher paid may be even more aggressive than those put in place by the previous Labour administration.

The coalition is planning to replace the big tax changes that Labour had put in place, starting next April.

These would have raised an extra £4.6bn by 2014-15.

However a Treasury consultation paper suggests a range of options, one of which might raise even more - £5.3bn.

The alternative proposals being put forward by the Treasury were welcomed by the National Association of Pension Funds (NAPF) which said they would be "less damaging" than Labour's plans.

"It's a simpler approach that that will encourage higher earners to stay in their workplace pensions, so helping protect pensions saving for all staff," said Joanne Segars of the NAPF.

Coalition plans
The Treasury suggests that each taxpayer's annual pension allowance - the amount their pension pot can grow tax free - should be slashed from the current £255,000 a year to between just £30,000 and £45,000 a year.

Under the Treasury plan, a £40,000 limit to the annual allowance - after which an extra tax bill would be generated - might be exceeded by someone whose pension entitlement in a final salary scheme had risen by just over £2,000 in a year.

Chas Roy-Chowdhury of the Association of Chartered Certified Accountants (ACCA) said the coalition's plans might catch more people in the tax net who were considerably lower paid than those targeted by Labour.

"It is still likely that many earning a lot less than the £130,000 could be affected where they are in a defined benefit (final salary) scheme," he said.

"This will depend on the valuation method and length of enrolment in the scheme but could affect even those on half the £130,000 especially if they make additional voluntary contributions (AVCs)," he warned.

Pay rise impact
To work out the increased value of someone's pension pot if they are a member of a defined contribution scheme is easy.

They are given an annual statement each year of the value of their pension investments.

However membership of a traditional final-salary scheme involves using a formula in which the rise in someone's accrued pension is multiplied by 10.

Thus a pay rise, perhaps due to promotion, which had the knock-on effect of increasing someone's pension entitlement by £4,000 in a year would currently fall within a £40,000 limit.

However the Treasury is suggesting that this annual accrual should be multiplied by much more, perhaps by 15 or even 20.

More tax
The Treasury consultation document illustrates the possible effects of the new approach.

Its figures suggest that by 2012-13, a £45,000 annual pension allowance would raise a similar amount to that expected under Labour's plans - in the region of £3.6bn.

But a lower £30,000 annual allowance would raise £4.8bn - £1.2bn more than Labour intended.

By 2014-15, an annual allowance of just £30,000 would raise an extra £5.3bn in tax while a £45,000 annual allowance would raise £3.9bn by that year.

Those estimates take into account the possibility that some taxpayers might tweak their pay arrangements to avoid breaching the new lower allowances.

Raj Mody of the accountancy firm PwC said it was possible that twice as many individuals in final salary pension schemes would breach the new limit.

For example, a 50-year-old employee in a typical final salary scheme earning £80,000 a year who, through promotion, got a 20% pay rise, could find themselves with an additional tax bill of over £10,000, he said.

"An unintended consequence of the new regime is therefore likely to be a continued shift of employers and individuals away from final salary schemes to defined contribution plans," Mr Mody added.

Labour's plans
With the highest rate of tax now at 50%, Labour had planned to restrict the amount of tax relief available to the highest paid.

It had calculated that in 2008-09 a quarter of all pension tax relief, worth £28.4bn that year, was going to the tiny minority of tax payers who earned more than £150,000 - worth an average of £20,000 a year each.

To rein in the new 50% tax relief now available on top earners' pension contributions, Labour put in place two changes due to start next April.

The first was that tax relief would be tapered away from 50% down to 20% as people's incomes rose above the £150,000 level.

The second and more profound change affected those with incomes of more than £130,000.

If the value of their employer's pension contributions, when added to their personal income, took their gross income over £150,000, then they would start to be taxed on the value of those employer contributions at a rate of as much as 30%.

This approach was widely criticised as far too complex.

Many experts suggested that the coalition, if it still wished to rein in tax relief for higher earners, should simply restrict the amount by which anyone's pension pot could grow each year before it started to lose tax relief.

That is the plan on which the Treasury is now consulting.

Posted by Joe Martin providing business services for small businesses and the self employed. Find me at joemartin.co.uk

Clegg rejects MPs' call for AV referendum date change

Posted on www.bbc.co.uk/news/uk-politics

Deputy Prime Minister Nick Clegg has rebuffed calls backed by 44 Tory MPs for the date of the referendum on voting reform to be moved.
Elections for the Welsh Assembly, the Scottish Parliament, the Northern Ireland Assembly and some English councils are all also due for 5 May.

The MPs fear differing turnout across the UK and overshadowing of the debate.

Mr Clegg said it was "disrespectful" to suggest voters "could not make two different decisions at the same time".

He said everyone in Scotland, Wales and Northern Ireland, plus 80% of people in England were already due to vote on 5 May 2011, so it would save them having two trips and cut costs by £17m.

But senior Tory backbencher Edward Leigh told Mr Clegg as he took deputy prime minister's questions, that the referendum should be on a different date so there could be a "proper debate" about the issue.

Earlier a Downing Street source had called reports of a revolt against electoral reform "a little exaggerated".

ormer cabinet ministers Peter Lilley, John Redwood and Sir Malcolm Rifkind have signed a Commons motion of complaint about the referendum date.

Also among the signatories to the document, tabled by Tory MP and former defence spokesman Bernard Jenkin, is former shadow home secretary David Davis.

'Odd result'
Mr Jenkin suggested ministers had room to change the date as it was not part of the coalition agreement itself.

"Therefore it is of less status than, for example, a point of principle," he told BBC Radio 4's World at One.

The choice of date, he said, should not be determined by the cost of staging the referendum but on whether it would provide a "true and fair test of public opinion".

Holding it on 5 May could lead to an "odd result" because of wide variations in turnout in different parts of the country, he added.

"One has the suspicion that Nick Clegg wants it on this date to disguise the fact that, out there, there is an awful lot of apathy about changing the voting system."

Under the post-election agreement reached by the Conservatives and Liberal Democrats, the coalition is committed to hold a referendum on adopting the "alternative vote" (AV) system.

This allows voters to rank candidates in their constituency in order of preference.

Anyone getting more than 50% of first-choice votes in the first round is elected, otherwise the candidate with the fewest votes is eliminated and their backers' second choices allocated to those remaining. This process continues until a winner emerges.

Prime Minister David Cameron, who opposes getting rid of the current "first-past-the-post" system, will campaign against such a change. His deputy, the Lib Dem leader Nick Clegg, will push for the reform.

It is feared the issue will cause inter-party strife.

The motion submitted by the 44 Tory MPs argues that referendums on issues of national importance should be held "in isolation", as turnout would be "artificially inflated" in parts of the country where elections are being held.

It urges the Electoral Commission - which has said a referendum is "deliverable" on 5 May but there are some "risks" attached to the date - to make the final ruling.

My personal view is that opponents are worried about a higher vote in favour. Perish the thought!

Posted by Joe Martin providing business services for small businesses and the self employed. Find me at joemartin.co.uk

Hike in VAT will hit consumers at the tills, in pubs and at the pump

James Thompson writes for Independent:

The government forecasts that the rise in VAT to 20 per cent will fill the Treasury coffers with an additional £13.5bn in the final year of this Parliament in 20015 – making it the biggest driver of revenues unveiled yesterday.


But the rise will hit consumers every single day from 4 January next year whether they are buying clothing, going to the pub, filling up their car, eating at a fast-food restaurant or booking holiday accommodation in the UK. In short, this regressive tax, which takes no account of a person's ability to pay, will hit those on the lowest income the hardest.

In real terms, the VAT rise will add 2.1 per cent to the price of everyday goods, leading to an extra 2.5p on a litre of petrol, 12p on a packet of cigarettes and an average of 7p on a pint of lager, according to Kelkoo, the price comparison website.

The only good news for hard-pressed UK consumers is that the Chancellor wrong-footed some forecasts by keeping items classed as "essential", including food, children's clothing, newspapers and magazines, exempt from VAT.

George Osborne said: "The years of debt and spending make this [VAT rise] unavoidable." The Treasury has forecast that the rise in VAT will generate additional revenues of £12.1bn in its first full year of implementation in 2011/12, but this would rise to £13.45bn in 2014/15.

But Harriet Harman, the acting leader of the Labour Party, said that rise in VAT "punished the poorest the most", saying it would leave pensioners, for example, with less money to spend. The Government hopes that by delaying the increase in VAT till January, it will minimise the impact on consumer spending at a time when the recovery is fragile. But economists fear that the rise in VAT could trigger a sharp rise in inflation and therefore higher interest rates, which could lead to a "double-dip" recession.

Simon Newark, a VAT partner at the accountancy firm UHY Hacker Young, said: "A VAT hike could push up prices on the high street by around 2 per cent, which would have a very significant impact on inflation. Higher inflation could trigger interest-rate rises, risking the spectre of the double-dip recession."

The impact on consumer spending of the rise in VAT will be most marked on big-ticket items, such as TVs and washing machines. According to the price comparison website Kelkoo, the price of a Lady Gaga CD will only rise from £8.95 to £9.14 in January, but it would add £63.79 to a sofa from DFS priced at £2,995.

Yesterday's survey by Kelkoo also found that after the change in VAT, 43 per cent of Britons will spend less once the new rate takes hold. Of those surveyed, the biggest group at 30 per cent said they would cut back on dining out. Following closely behind, 28 per cent said they would reduce their spending on home entertainment, such as music, DVDs and video games, and 26 per cent plan to trim their expenditure on travel, holidays and hotels.

Based on a survey of 2,000 people and their spending plans with VAT at 20 per cent, consumers will spend £324 per person less on retail goods from £1,836 to £1,511, said Kelkoo.

Stephen Robertson, director general of the British Retail Consortium, said: "We didn't want a VAT increase. It'll hit jobs, consumer spending, the pace of recovery and add to inflation, but we accept the Government has no easy options."

In May, the BRC warned that increasing VAT to 20 per cent would cost 163,000 jobs and reduce consumer spending by £3.6bn over four years. While opinion among retailers was divided about how much spending the recent rise in VAT sucked forward, many shoppers did snap up big ticket purchases before it went back up to 17.5 per cent on 1 January 2010.

The accountancy firm Deloitte said that the average worker earning £24,000 will pay an extra £183-a-year as a result of the VAT rise.

The rise in VAT will also hit motorists at the pump. The Automobile Association said with fuel duty going up 1p a litre in October and another 0.76p a litre on 1 January, the hike in VAT adds £117.98 to the annual cost of fuel for a family with two petrol cars, based on today's prices.

For pub goers, the Campaign for Real Ale said the VAT increase would add 10p on to a pint of beer and would increase the rate of pub closures from the current level of 39 a week in the struggling sector.

But in a rare piece of goods news for the nation's drinkers, the Chancellor did not unveil an increase in beer tax in yesterday's Budget.

Brigid Simmonds, the British Beer and Pub Association's chief executive said: "We applaud the Government's decision to freeze beer tax and deliver on its promise made in the coalition agreement to not penalise pubs, responsible drinkers and important local industries."

ZERO AND REDUCED-RATE VAT

0%: Books, children's clothing and footwear, lottery tickets, maps, magazines, and food. (Some food and drink items, such as snacks and alcoholic drinks, are standard VAT-rated.)


5%: Children's car seats, gas or electricity for domestic usage, energy-saving materials, smoking cessation products, contraceptives and women's sanitary towels.

Case Study: 'This will have a huge effect on some firms'

Tom Harvey, 33, of the Lake District, runs Clocktower Electrics with his parents in Cumbria. They employ four other members of staff, selling washing machines and domestic appliances, with a turnover of £300,000.


"The VAT rise was what we expected. For retailers selling non-necessity items or with extremely low margins, it could have a huge impact. Some businesses will have to look at their business models and see whether they work now they need to incorporate this higher level of tax. But for us, I don't think the VAT rise will make too much of a difference. We might see a bit of a boost in sales beforehand and people might start buying appliances at the cheaper end of the scale. But if your washing machine is broken, it needs replacing; it's not something you can put off. I don't think an extra £10 on a £500 washer is going to make any difference to people. So I think raising the VAT is a sensible way of balancing the books.

"I'm happy to see a reduction in corporation tax in the budget – it will be very beneficial to small companies like ours and can only be a good thing. "Small businesses" to the government can mean around 200 employees, not five. Enterprise schemes and so on are snapped up by the bigger companies and it can feel like small and medium sized businesses are ignored.

"I believe in conservative values both at home and as a business owner. I have always voted Conservative and will continue to do so unless they make a big mistake. I think the Government put forward a strong budget."



Posted by Joe Martin providing business services for small businesses and the self employed. Find me at joemartin.co.uk

The Cost of Retirement

Landmark reform of the UK pensions system aims to deliver increased financial security for an ageing population. But what impact will it have on small businesses?

We are living longer than ever before. By 2050, the number of people over 100 years old is expected to increase from 9,000 today to 160,000. However, there will only be two tax-paying workers for every pensioner, as opposed to the current ratio of four. To address this, the government has set about making radical changes to the existing pension system to deliver greater financial security for a rapidly ageing population.
In undertaking a landmark reform of the UK pensions system, it has completed a lengthy programme of national consultations, which culminated in the introduction of the Pensions Act 2008. From October 2012, employers across the country will be bliged to automatically enrol their staff into a pension scheme.
"It is in black and white: from 2012, employers across the country will, by law, be required to provide and contribute to pensions for their staff," says Mike Cherry, the FSB's pensions spokesman.
With employer contributions set at three per cent (employees will contribute four per cent, the government one per cent), the reforms are expected to add a significant amount to wage bills.
Evidence collected by the FSB shows that currently the majority of small employers 87 per cent of micro businesses, for example - do not operate occupational pension schemes at all. So, this reform not only represents a significant financial burden, it will also involve a lot of administration.
A simple, low-cost pension scheme, NEST (National Employment Savings Trust), will be launched in 2011 meet the needs of low to medium earners and their 'employers. It will be one of the schemes employers can use to fulfil their duties under the reforms.
While the FSB is in full support of moves to confront the pensions crisis, it is also concerned that the systems in place are overly complicated and is working hard to make them as simple as possible.

The message is clear: the reforms are coming, they will affect every business that employs people, so make sure you are prepared.
"First of all factor in the costs of these reforms into your long-term projections," says Cherry. "Read up on what exactly is required and also start to think about which provider to go with - there won't be a default pension scheme rolled out across the board - it's up to employers to make an informed decision."
"The legislation has gone through Parliament," says Cherry. "All our efforts are now being put into making sure that the operational side of these reforms is simple and straightforward."
Source: The Magazine of the Federation of Small Businesses FIRST VOICE OF BUSINESS
FSB

PENSION REFORMS: THE BASICS
~ Employees between
22 years old and state pension age earning more than £5,035 must be automatically enrolled.
~ Enrolment will be phased in over a period of time, starting with large employers, then medium and then small.
~ Employer contribution levels will be phased in gradually, starting at one per cent, then two per cent, .and finally three per cent. The jobholder's contribution will be
phased in during the same period.
~ Employers will be able to choose the pension scheme(s) they want
to use, provided the scheme(s) meet certain quality criteria.
~ The Pensions Regulator will be writing to all employers one year, and again three months, in advance of their automatic enrolment start date, detailing how to comply.

For more information about the pensions reforms, visit Department for Work and Pensions




Posted by Joe Martin providing business services for small businesses and the self employed. Find me at joemartin.co.uk

Answer to Paul_1DayLater who's on Twitter

In answer to your Twitter Paul; I’ll start with a couple of clichés;
Horses for courses! Sledge hammer to crack a nut!

I work from home so my overheads are low. I don’t have fancy offices and a receptionist; there’s just me and my son who works part time bookkeeping for me. I just charge for our time plus Vat and if you’re Vat registered that’s not a problem’ cos as you know; you get the Vat back!

Why would you want to use an accountancy firm that’s capable of dealing with the likes of Marks and Spencer if you’re a small company?

To make a medical analogy I see myself as a GP. If I come across aspects I feel needs the opinion of a consultant, and there have been times when I’ve done, just that. The client might not see much change out of £300.00 but at least they are satisfied that they have the best advice for that situation and not paying in that order for everything else that needs to be done.

I have just taken on two new clients who have used high profile local accountants; both have been local branch committee members of a highly regarded national business institution.

The chairman is likely to see his fees at around about 30% of the previous level. He is local.

The other a former secretary is likely to move to the coast, we don’t have any coast here in Cheltenham, and is not at all daunted by the distance. There are certain aspects of his tax situation I warned him I might not be able to deal with and need to consult with someone with greater knowledge in that field than I have. In the event I shall thoroughly research the aspect and put it to the client. Let’s face it; there’s no point in paying £1,000 for a £900 tax saving.

I’ve also recently taken on my cousin’s limited companies in London, and he found because he was so small everything was late, incurring fines they eventually paid, and it took me ages to obtain information I needed.

So I come back to the clichés do you hire a Bugatti Veyron; yes I’d love one, when a Smart Car will do?

Posted by Joe Martin providing business services for small businesses and the self employed. Go to http://www.joemartin.co.uk