Chancellor set to limit access to pension cash

The Treasury denies there are plans to cut the amount that can be taken as a tax-free lump sum. Picture: Esme Allen

George Osborne is also set to launch a fresh crackdown on tax avoidance and announce further simplification of tax rules. Experts say this will ncrease inheritance tax bills.

However, the headlines from Thursday’s package will be occupied by a further rise in the personal tax allowance, confirmation of a married couples’ tax break and measures aimed at reducing energy bills.

Peter Young, partner at Johnston Carmichael in Edinburgh, said: “Despite the improving economic outlook, the Chancellor still has very limited room for manoeuvre in terms of fiscal policy and may use the Autumn Statement to tinker rather than make wholesale changes.”

The personal allowance – the amount that individuals can earn each year before paying income tax – is already due to go up in April from £9,440 to £10,000 a year. The Chancellor will this week bow to Lib Dem demands to increase it to £10,500, taking effect from April 2015.

That would save £100 a year for basic rate taxpayers, according to the Lib Dems, although the Institute for Public Policy Research puts the figure at just £54. The IPPR’s estimate came in new research suggesting that raising the personal allowance is of greater benefit to better-off households than the low paid.

Yet many middle and higher income earners have also lost out from the higher personal allowance, Young noted.

“This is because whilst the allowance has been increased, the threshold at which a person pays higher rate tax has been reduced,” he said. “So the effect is that people earning over, say, £42,000 a year have not significantly benefited from the increase.”

He warned that any extra rise in the personal allowance may again be accompanied by a cut in the point at which higher rate income tax kicks in, dragging more middle income earners into the 40 per cent tax band.

The giveaways in the Autumn Statement will be offset by tax tweaks affecting savers, pension investors and families seeking to mitigate inheritance tax.

Speculation has been swirling for weeks over a possible restriction on the pension cash that can be paid tax-free at age 55. While the Treasury denies plans to cut the amount that can be taken as a tax-free lump sum from pension pots – currently 25 per cent – it is believed to be considering a limit on the cash amount that savers can take, possibly £36,000.

John Fletcher, director of financial planning at Brewin Dolphin, said: “The British public is already losing trust in the pension system, and any restriction on higher rate tax relief or the 25 per cent lump sum would hugely limit the attractions of pension saving.”

There are rumours too that the government is poised to impose a lifetime cap on the amount that can be saved into individual savings accounts (Isas), most likely at £100,000.

Tax experts also warn that Osborne could launch a fresh crackdown on the trusts used by many families to mitigate inheritance tax.

As it stands, individuals can set up as many trusts as they like in a bid to reduce their IHT bill, while in some cases they can use more than one nil-rate band (currently £325,000, above which the estate is liable to IHT at 40 per cent).

HM Revenue & Customs has been consulting on simplifying IHT and trusts, and details should be set out on Thursday.

Martin Campbell, director of tax at Anderson Strathern in Edinburgh, warned that simplification would result in higher IHT bills.

“It is widely expected that the tax benefits arising from setting up a number of trusts will be lost by the government restricting it to each taxpayer having the benefit of just one IHT nil-rate band to be spread between all the trusts set up during their lifetime.

“If this is introduced for both existing and new trusts then it will nullify a great deal of previous IHT planning.”