PRE-BUDGET REVIEW: AUTUMN STATEMENT 2012

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Contents Page

1.0 Introduction

2.0 Three Key Issues

3.0 Key Issue Proposed

4.0 Conclusion

5.0 References

6.0 Bibliography

Introduction
The purpose of the pre budget review is to draw the attention of investors to the proposed changes to be made to the economy and also be able to make necessary arrangement to adapt to the policy. The 2012 pre budget proposed by the Chancellor is based on three key issues; the Personal Allowance Increase, which is meant for the aging population, an issue which has always been addressed from previous budgets. The purpose of the increase in Annual Investment Allowance is to support small and medium firms to boost production from £25,000 - £250,000 for just a short period of two years. Lastly, the pension savings allowance decrease, which the government aims to use for reducing its budget deficit by a quarter of a million pounds that would be of benefit on the long run. These subjects shall be addressed in details on how it would have an effect on the government, employees, employers, corporations, and pensioners because this change would either affect them positively or negatively. This change would be of benefit to the pension scheme on long terms basis based on the fairness of tax treatment for the basic taxpayers who would benefit £170 while the higher rate tax payers by £42.50, giving an estimate of 23.6 million taxpayers gaining from the reductions which would be discussed below.

2.0 Three Key Issues Addressed

The Pre-Budget Review of 2012 presented by Chancellor of the Exchequer to the Parliament has proposed some changes in three key issues:

Personal Allowance Increase
The largest giveaway is the substantial increase in the personal income tax allowance for those aged under 65.The allowance, which was increased from £8105 to £9,205 for the 2013-2014 period bringing the government closer to their long-term commitment of increasing personal allowances to £10,000 (HMRC 2013). However the reduction to the higher rate threshold is the point at which the higher marginal income tax rate starts to be paid which acts to limit the gain to higher rate tax payers, the change would cosy £4 billion in 2013-14. Considering the increase in April 2011 and April 2012, this means that about 1.5 million fewer individuals will pay income tax in 2013-14 rather than the government using the uprating defaults that it inherited (). The increase in personal allowances will reduce income tax for low and middle-income earners, the government hope this will act as an incentive for people to enter employment thus increasing household disposable incomes. The Increase is estimated to remove 840,000 individuals out of income tax entirely (HMRC 2013). George Osborne states that ‘People working full-time on the minimum wage; will have seen their income tax bill cut in half’ (Moneywise 2012). The basic tax rate will remain at the current rate of 20% however the rate at which the basic rate is applied will be decreased from £34,370 to £32,345 to reflect this change. The cost of this change to the personal allowance with associated reductions to the higher-rate threshold to £9 billion per year (IFS 2012). The government has strategies in relation to income tax for low earners. Despite the considerable increase in personal income tax allowance is still a give away to most income tax payer aged under 65, not just on low incomes. It does not mean that the strategy cannot be improved. A simple way of improving the target of governments policy of reducing tax for lower earners would have raised the threshold for paying national insurance as well rather than fixating on income tax.

Annual Investment Allowance Increase
Annual investment allowance is a system whereby a tax relief is been taken from taxable profits. This change that was brought into effect January 1st 2013 for a period of 2 years has being increased from £25,000 - £250,000. Over the years AIA has been changed dating back to 2008 were it was £50,000 and later changed to £100,000 until April 2012 when the current government decided to cut it to £25,000. This has been a considerable impact from the pre budget were HMRC appraised that around 90,000 businesses spend over £25,000 a year on qualifying plant and machinery. This was used to motivate small and medium business to invest in order to promote growth within the economy (HMRC 2013). The effect of this increase in cost would be used in the business for normal budget. With this the government expects business to grab this opportunity to increase their capital expenditure (HMRC 2013). The Chancellor has given entrepreneurs an opportunity to spend carelessly from the beginning of the year rather than paying attention on austerity (Tax journal 2013).

Pension Savings Allowance Decrease
This measure helps the government plan for a tax relief that is fair, affordable and sustainable. The reduction to both lifetime and annual allowances is a way by which the government aims to reduce deficit and protect public finances from cost of the relief and limits the amount of relief going to higher earners. Keeping in view the long-term benefits, the Chancellor has proposed a reduction, from £1.5 million to £1.25 million in government’s contribution towards pension contributions, from the year 2014-15. Hence the annual Pension Savings Allowance shall be reduced from £50,000 to £40,000 (HMRC 2012). In order to further target future growth chancellor George Osborne has announced his plans to reduce the amount of government borrowings thus reducing the budgeted deficit attempting to stabilize the economy. The government decision to reduce the pension saving allowance could have been as a result derived from the Office for National Statistics that pensioners’ income has risen for over a decade. Once an individual exceeds the lifetime allowance amount, income tax will have to be paid at the annual allowance charge, which is based on the excess of the amount, which is linked to the individual marginal rate of tax. The government also announced that a fixed protection regime would be offered to individuals to prevent retrospective tax charge arising as a result of the reduction. The charges are applied in two ways: lump sums which are charged at a rate of 55% and taxable pension which is charged at a rate of 25%. The maximum tax-free lump sum that an individual can normally have is 25% of their pension rights subject to an overall maximum of 25% of the standard lifetime allowance. There would be an introduction of a transitional protection regime whereby individuals who think they have rights in excess of £1.25 million by the time they take their pension benefits and would have to notify HMRC before 5th April 2014 if they wish to rely on the fixed protection. Individuals with such protection will be entitled to a personal lifetime allowance greater than £1.5 million.

3.0 Key Issue Proposed

Pension Savings Allowance Decrease
Mr. George Osborne, Chancellor of the Exchequer, during his speech at the parliament on December 5, 2012 along with the current budget forecasts for the year 2013-14 as finalized by the Office for Budget Responsibility (OBR). During the year, the government aims to improve growth of the economy by tackling its borrowings. To further achieve the growth policy of the society the government aims to reduce budget deficit and restore economic stability according to Office for Budget Responsibility. (2012). There as been a measure proposed by the Chancellor and OBR to control measures for the economy on three basis which are: Protection, Growth and Fairness.

Protection There are certain areas of the economy that are been affected by external factor for example the credit crisis. Also the increasing level of inflation and cost are affecting the growth of the society that could be considered to be an internal factor. According to the OBR protective measures are been put into place to reduce the effect of inflation on the economy (2012).

Growth
There has been a tough challenge and competition from emerging countries such as china. As a result of this the government is trying to strategies on how to strengthen the economy for stable growth to be able to with stand its challenging been faced from developing countries.

Fairness
The aim of the government is to reduce its deficit and promote fairness among people of the society. There is a plan been proposed to support pensioners that could bring about a system that is affordable and growth oriented, as per hm-treasury.gov.uk, (2012).

It was also announced plans made by the Office of Tax Simplification (OTS) in reviewing employees’ benefits and expenses which could be seen as an important significance cause the government during the 2011 budget review announced that government spending would continue to decrease which then lead to the adoption of a measure that could help support growth and reward work. With this the rich can also contribute and help the government maintain a steady standard of living. It was proposed that funding businesses with an additional £5.5 billion on infrastructure investment could help boost the economy thereby creating employment and increasing growth. The government is trying to reduce tax evasion according to Latham and Prowle, (2012).
However the government could reduce its borrowing by stopping pension benefit allowance. Although this could result into some pensioners paying tax which could be of benefit on the long run. According to last census carried out in 2011, it was revealed that pensioners are on the rise in the last century. The ratio of pensioners has gone up from 1 in 20 in 1911 to 1 in 6 in 2011. According to Lehndorff (ed.), (2012), the figures arrived at from the Office for National Statistics (ONS) states that the income of pensioners has been on the rise. Because of this, the government decided to reduce the annual allowance for pension from £50,000 to £40,000 thereby cutting it by £10,000 during the budget review that is to take effect from 2013-14. Nevertheless, this could also be described using principles of tax system that should be: fair to all, certainty, efficiency, convenience, simplicity, and flexibility.
The government claims that simplicity can be achieved if the Office of Tax Simplification is provided with more authority and control and effectively administer the timeframe for implementing such measures. Simplicity was not really in use back then cause the tax system was simple to use and manage. The idea of simplicity can be linked to certainty and convenience, which became popular in the twentieth century. The reason for making a tax system simple is that the more complex a tax system is the more difficult it becomes for everyone both the tax payer and tax administrators to operate and use. It could be argued that when a tax system is too complicated it givens room for tax avoidance. The issue of simplicity was proposed during brown tenure but was implemented during the coalition government in 2010 that also created OTS. In 2012 reports included proposal to simplify small business taxation, pensioner taxation. In other to achieve simplicity with the tax system, policy makers must be able to identify the causes and removed.
A flexible tax is one that allows changes to be made as the economic environment changes. With a flexible tax in place could help stabilize the economic to achieve its goal. The key aim of the government is to reduce the fluctuations in economic activities caused by economic cycles that are seen to be good on the long run.
There are two separate aspects to efficiency derived from Adam Smith’s canons of taxation, which are economic and administrative efficiency. A tax system is seen to be economically efficient if it does not distort the economic and commercial decisions that are made by individuals. This could be referred to, as fiscal neutrality, which means taxes, should not interfere with the working market. For example, planning for retirement. An individual who invests funds in an approved pension fund obtain tax relief on contributions and the pension fund itself is exempt from income.
The issue of convenience refers to how people pay their taxes and engage with the tax system. For example people prefer tax been deducted at source cause it would be easy rather than having to start computing the tax after receiving payment.
The government claims that certainty could be achieved if it makes it clear to the people its objective and how they intend to implement the strategies. With this the treasury committee could be empowered to review the role of parliament in authorizing changes. This could help reduce disagreement and uncertainty over who is to pay tax and when tax is to be paid. To be able to achieve certainty, the consequences of any tax or financial transaction should be stated before being undertaken. There could also be a problem of interpreting the rules because rules changes from time to time because of this certainty is not really assured.
Apart from this classification of allowance receivers, every person working in a country is entitled to a pension Allowance, which is the income received from retirement after making a certain payment into an approved pension scheme. This includes all the payment made by an individual throughout the time the person was working or during the tax year and includes interest incomes from all sources, irrespective of the person’s status, as per Giudice, Kuenzel & Springbett (ed.), (2012). The impact of this allowance varies from category to category, as shown below.

Government
The effect of this changes on government earnings would be insignificant as the change made to pension allowance is just for a short period of time which is 2013-14 before been reverted back £50,000 in 2014-15. Nevertheless this decrease would allow government to save up to about £0.9 billion that can be used to boost growth and improve the economy at large. Most of the time higher rate taxpayers are usually the ones to utilize the pension savings allowance. By reducing the allowance it would reduce the amount of money to be claimed back because it top taxpayers always utilize the pension savings allowance. With the money government would realize from the decrease it could be used to reduce it budget deficit. The government can use this money to either increase economy activity or to put towards paying the budget deficit. The changes in the pension relief could lead to an increase in tax paid by those affected and also individuals’ income could affect.

Employees
There would be additional burden for pension schemes and employers to provide information and guidance to individuals also updating their systems to reduce the allowance. The decrease in the limit of pension allowance proposed would not allow high-income earners to net their salary with pension contribution in other to get better tax treatment. The pension of top employees would be capped over a certain limit whereby employees would have to make sure the required contributions are made themselves rather than the employer.
On the other hand employees want to know what is going on in other countries that were affected by the recession. As a result government were unable to give out pensions as there were no fund to do so, because of this employees would be scared to have a pension scheme in other to secure their future.

Employers
The effect of this measure on administrative cost for employers, business pension providers shall be insignificant since changes has also been made to the taxation of Employer-Financed Retirement Benefit Scheme were colleague have served up to 2 years or payments been made to an entity is not an individual. These could be seen as a way of putting in place anti-avoidance measures. Despite the fact government has encouraged big firms to open a pension scheme for its staffs that they are made to use. By doing this it would encourage workers to use their pension schemes as well as allowing them to know its importance.

Families
This impact could see up to 140,000 individuals being affected by the reduction in the annual allowance. The reduction in lifetime allowance could affect about 360,000 people who could have rich through wealth between the new and old lifetime allowance in future years when they retire and about 30,000 individuals are expected to have pension assets worth between £1.25 million and £1.5 million in 2014-15. Presently we have about 1.3 million people over the age of 65 still working which is increasing because they do not want to retire thereby opening a private pension scheme and this would boost income for them.

Corporations
The changes in annual pension saving allowance will affect large corporations, because most workers are given job based on incentives from the company and in most cases the company usually offers pension schemes. Companies prefer this method cause it reduces the amount of tax to be paid by workers which makes it mouth watering. As a result of this reductions made corporations would have to look for other ways of motivating their workers. Furthermore, the change would make workers that are going to be affected re negotiate with the company for improved contracts. Additionally workers manually depositing money into a pension scheme will have to be advised appropriately.

Small Businesses
The impact on small firms or businesses is the same problem that occurs with larger corporations because it restricts the amount of UK tax relief available to individuals on their pension savings. The policy, which was a formal consultation in 2010 that was widely discussed with business, individuals throughout the development process. The implementation of this change particularly with any tools and guidance or help that can be offered, will be discussed with interested parties cause it would not be appropriate for the policy to apply differently according to the size of the firm within in which affected workers operate. However there are some small businesses that specialize in certain aspects within an industry, often it is the case that these workers are highly experienced and are much older. As workers become older it becomes more important to take advantage of pension schemes.

HMRC data does not allow identification of groups sharing protected characteristics within in the affected population. Nevertheless, the nature of the change means that those to be affected will be the higher incomer earners so they are less likely to be from ethnic minority groups, women or the disabled. The change would have greater effect on those later in life and closer to retirement than those in other age groups. These changes to the Pension Savings Allowance clearly show intent from the government to reduce the incentive to save, in doing so they hope that people will put this capital into day-to-day expenditure. In turn this capital will be put back into the economy, as in recent years the economy has been hit hard by a ‘double dip recession’. With these excess funds could be used by individual to encourage investment of assets that could help fuel the economy.

4.0 Conclusion

To conclude, it is assumed that the transformations in personal allowance and annual investment allowance are important to the economy and its growth. Especially, the purpose of presenting a pre budget review is to apprise its citizen and corporate world about its financial capabilities. Increase in personal allowance will give workers an increase in disposable income, with this it could help stimulate the expenditures in the economy. The government is also making strategic approach in tackling tax avoidance with the General Anti-Abuse Rule (GAAR). With the increase in annual investment this could be a bold step by the government to encourage investors for smaller companies. This measure would also hopefully allow more people to set-up their own companies rather than conforming to those of larger ones, thereby creating more jobs and opportunities.

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5.0 References

Giudice, G., Kuenzel, R. and Springbett, T. (ed.). 2012. UK Economy: The Crisis in Perspective. Routledge, Abingdon.

hm-treasury.gov.uk. 2012. Autumn Statement 2012. Retrieved on July 22, 2013 from http://www.hm-treasury.gov.uk/as2012_index.htm hmrc.gov.uk. 2012. Income Tax Personal Allowance. Retrieved on July 22, 2013 from http://www.hmrc.gov.uk/budget2012/tiin-2044.pdf Latham, R. and Prowle, M. 2012. Public Services and Financial Austerity: Getting Out of the Hole? Palgrave Macmillan, Hampshire.

Lehndorff, S. (ed.). 2012. A triumph of failed ideas: European models of capitalism in the crisis. ETUI, Brussels.

Office for Budget Responsibility. 2012. Economic and fiscal outlook March 2012. The Stationery Office, London.

http://www.hmrc.gov.uk/pensionschemes/understanding-aa.htm http://www.bbc.co.uk/news/business-20610964 2013. [ONLINE] Available at: http://www.hmrc.gov.uk/tiin/2012/tiin1278.pdf. [Accessed 24 July 2013].
2013. [ONLINE] Available at: http://www.taxjournal.com/tj/articles/autumn-statement-ten-fold-increase-annual-investment-allowance-05122012. [Accessed 24 July 2013].
SMEs and the Annual Investment Allowance increase | Bdaily Business News. 2013. SMEs and the Annual Investment Allowance increase | Bdaily Business News. [ONLINE] Available at: http://bdaily.co.uk/finance/07-02-2013/smes-and-the-annual-investment-allowance-increase/. [Accessed 04 March 2013].
. 2013. . [ONLINE] Available at: http://www.hmrc.gov.uk/budget2012/tiin-2044.pdf. [Accessed 26 July 2013].
The Institute For Fiscal Studies - A £10,000 personal allowance: who would benefit, and would it boost the economy?. 2013. The Institute For Fiscal Studies - A £10,000 personal allowance: who would benefit, and would it boost the economy?. [ONLINE] Available at: http://www.ifs.org.uk/publications/6045. [Accessed 26 July 2013]. http://www.moneymarketing.co.uk/pensions/david-miliband-limit-pension-tax-relief-to-26k/1064023.article 7.0 Bibliography
1. Giudice, G., Kuenzel, R. and Springbett, T. (ed.). 2012. UK Economy: The Crisis in Perspective. Routledge, Abingdon.
a. This source was located online.
b. This is a good, credible source as it was published by a known publisher the book was very useful.
c. I learnt that every person working qualifies for a pension allowance irrespective of the person status. 2. hm-treasury.gov.uk. 2012. Autumn Statement 2012. Retrieved on July 22, 2013 from http://www.hm-treasury.gov.uk/as2012_index.htm a. This source was located online.
b. This source is very credible as it is from the Treasury, so should be correct.
c. I learnt the plans the government has for the economy and boost growth.

3. hmrc.gov.uk. 2012. Income Tax Personal Allowance. Retrieved on July 22, 2013 from http://www.hmrc.gov.uk/budget2012/tiin-2044.pdf a. This source was located online.
b. This is taken from HMRC website which gives it a high credibility.
c. informations about personal allowance were made available with the possible impact it would have on people. 4. Latham, R. and Prowle, M. 2012. Public Services and Financial Austerity: Getting Out of the Hole? Palgrave Macmillan, Hampshire.
a. The source was located from the book.
b. Very credible as it was published by a good publisher and is a very recent publication.
c. The government is committed to tackling offshore tax evasion. 5. Lehndorff, S. (ed.). 2012. A triumph of failed ideas: European models of capitalism in the crisis. ETUI, Brussels.
a. This source was located online.
b. Steffen Lehndorff is the Head of Research of the Institute for Work and Skills and is a highly regarded author of academic sources.
c. based on the statistics provided that pensioners pay has increased over the years. 6. Office for Budget Responsibility. 2012. Economic and fiscal outlook March 2012. The Stationery Office, London.
a. This source was located online.
b. The Office for Budget Responsibility is a good, credible source as they work with and are partly funded by the government.
c. The updated budget forecasts for the year of 2013-14. Also, how the government is determined to reduce the budget deficit and restore economic stability in the country. 7. http://www.hmrc.gov.uk/pensionschemes/understanding-aa.htm
a. This source was located online.
b. This is taken from HMRC website which gives it a high credibility.
c. We took the annual allowance limit, and when people don’t have to pay the annual allowance charge.
8. http://www.bbc.co.uk/news/business-20610964
a. This source was located online from BBC news.
b. BBC news report which is credible, however it takes views from people who may not be well informed or have a hidden agenda. So we had to be careful on what we used.
c. The pensions tax relief press commentary. The lifetime allowance limit and how some professionals viewed the pensions tax relief cut.
9. 2013. [ONLINE] Available at: http://www.hmrc.gov.uk/tiin/2012/tiin1278.pdf. [Accessed 26 July 2013].
a. This source was located online from HMRC.
b. Highly credible as it presents the facts, very little opinion based commentary, which allows us to look at the figures and analyse the affects the annual investment allowance will have on different stakeholders.
c. The detailed proposal, current law and the summary of impacts the revision will have on different stakeholder groups.

10. 2013. [ONLINE] Available at: http://www.taxjournal.com/tj/articles/autumn-statement-ten-fold-increase-annual-investment-allowance-05122012. [Accessed 25 July 2013].
a. This was located online at Tax Journal.
b. The source was useful as it provided us with a following commentary from a professional, allowing us to flow on from our previous press commentaries.
c. Chris Sanger, head of tax policy at Ernst & Young and how he viewed this policy change.
11. SMEs and the Annual Investment Allowance increase | Bdaily Business News. 2013. SMEs and the Annual Investment Allowance increase | Bdaily Business News. [ONLINE] Available at: http://bdaily.co.uk/finance/07-02-2013/smes-and-the-annual-investment-allowance-increase/. [Accessed 25 July 2013].
a. This source was located online.
b. It is hard to judge the credibility of this website as it may be written as Tom Keighley (author) may not know anything about the subject. But he speaks to Ian Isaac at RBS, which is a good material.
c. We learned that the asset finance industry, and others such as EEF in the engineering industry, have been campaigning for some time around the need for further capital allowances, which had fallen to 25% and it was seen as a disincentive to invest in plant and machinery.
12. 2013. . [ONLINE] Available at: http://www.hmrc.gov.uk/budget2012/tiin-2044.pdf. [Accessed 26 July 2013].
a. Online from HMRC.
b. This source is highly credible as it comes from HMRC.
c. We used the income tax personal allowance for those aged under 65 and the basic and upper earnings limit for 2013-14. We also used the policy objective and the background to the measure.
13. The Institute For Fiscal Studies - A £10,000 personal allowance: who would benefit, and would it boost the economy?. 2013. The Institute For Fiscal Studies - A £10,000 personal allowance: who would benefit, and would it boost the economy?. [ONLINE] Available at: http://www.ifs.org.uk/publications/6045. [Accessed 26 July 2013].
a. This source was located online from the Institute of Fiscal Studies.
b. This source does not appear to be very credible as the author is relatively unknown and the article is not referenced. So it appears to be based on opinion of the author.
c. From this article we took the annual costs to the economy from the past five years.