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Private client expert John Endacott gives his Pre – Budget Thoughts.

Ministers may have promised the tax profession that there will be no radical changes to the tax system without prior consultation, but will Chancellor George Osborne, be able to resist the temptation of trying to pull a rabbit of two out of his hat?

In the run up to the 2012 Budget we are gathering together the thoughts of various tax experts. This time we feature private client expert John Endacott’s Pre – Budget Thoughts.

This an extract, you can read John's full blog here

Personal Allowance – an increased allowance does not really help the very poor 

Under the terms of the Coalition Agreement the personal allowance should be increased to £10,000 over the lifetime of the current Parliament which is for a fixed term and will end in 2015. 

Most previous governments have decided that dramatically increasing the personal allowance was not an effective way to help poor families.  

1.         A number of people that earn less than the personal allowance so not getting the full benefit. 

2.         Many high income families will benefit where you have a dual income household with incomes below this level as the full benefit of the personal allowance will flow through.  Similarly there may be households with other adult members working in them.  

3.         Non-working spouses and children still all have a personal allowance - the greatest beneficiary of any change will be the trust funds as the amount that can be distributed to beneficiaries tax free will increase.  It will make paying for school fees much easier for many people. 

The upshot: a dramatic increase in the personal allowance is a very expensive thing to do and it depends what assumptions the Treasury makes as to what impact it has on tax planning and taxable behaviour.  

Pensions – the £50,000 limit likely to stay, with no changes to cash withdrawl limits 

The idea of abolishing higher rate (40%) and additional rate (50%) tax relief is very difficult to see being implemented.  Abolishing higher rate tax relief work very badly for non-contributory pension schemes (such as that operated in the civil service - the people that are likely to be deciding on any such policy) where large tax charges would arise every year on many employees who would have no funds from which to pay them because the monies would be within the pension scheme. 

One possibility is that the government could reduce the £50,000 limit as far as most taxpayers are concerned outside the final salary schemes then a limit of £20,000 or £30,000 would be more than sufficient even before one starts to take into account the carried forward capability.  The other thing is that it just looks inconsistent to drop the limit one year and then mess about with it another year. 

So what does that leave?  Well, it leaves the tax free cash. 

The issue here is the average pension fund in the country is actually very low and so by sticking with 25% tax cash free but with a monetary financial limit, it is possible to leave most pension funds unaffected.  It would appear to deal with the issue whilst still being relatively simply to implement.  Perhaps a limit on tax free cash of £50,000 might be applied. 

I think there will be likely to be a delay of at least a year before any such changes are introduced and this will be likely to lead to a rush to take lump sum benefits.  Longer term I certainly think it is unwise for contributors to pension funds to bank on the tax free cash being available. 

John Endacott