27 February 2008
From 6 April 2008 the basic rate of income tax will be reduced from 22 per cent to 20 per cent. As a result gross contributions will remain unaltered, meaning that net contributions will have to increase to offset the reduced tax credit from the Government. So how will this affect the current situation?
- All pension quotations will reflect the existing 22 per cent tax rate up until 6 April 2008. An insert will be added to quotations in February/March making this clear.
- The basic rate of income tax used for quotations will change to 20 per cent over the weekend of 5 April 2008.
- Payments received on or after 6 April 2008 will be processed at the new 20 per cent tax rate. Requests for payment from this date will be based on the new tax rate. In general, if a payment due before 6 April 2008 is received on or after 6 April 2008 it will receive less credit than would otherwise have been the case.
- Winterthur will be writing to all clients informing them of the tax change and that a new net premium will be payable from 6 April 2008 onwards.
Questions and Answers
1. Why are net contributions going to increase?
As announced in the March 2007 budget, with effect from 6 April 2008 the basic rate of income tax will reduce from 22p to 20p in the £1.
This will reduce tax relief on pension contributions for basic rate tax payers. To maintain the level of gross contribution to a plan, clients will need to increase the amount they contribute after the deduction of basic rate tax.
2. How will the tax change affect higher rate tax payers?
For basic rate tax payers, to maintain the level of gross contributions to their plan, this will result in an increase in contributions after the deduction of basic rate tax.
For higher rate tax payers, the same is true. However, higher rate tax payers will be able to reclaim more tax relief through their tax returns.
3. When will the tax rate change?
Tax relief on pension contributions is determined by the date that contributions are received by Winterthur. The reduction in the basic rate of income tax will be taking effect from 6 April 2008. However the 5 April 2008 is a non-banking day. As a result, the cut off date for payments to receive higher tax relief (at 22p in the £1) is 4 April 2008.
The exception to the above is direct debit payments that would have normally been collected on 5 April 2008 – had it been a banking day. These contributions will be collected on 7 April 2008 but will attract tax relief at the higher rate of 22p in the £1. This concession has been granted by HMRC for direct debit payments only.
4. What does the tax rate change mean to Winterthur clients’ pensions?
Whilst the net contribution that the client is making will change, the gross contribution will remain the same. For example, if the gross contribution is £100 per month, the net premium is currently £78. From 6 April 2008 the net premium will increase to £80.
5. What does the client need to do?
If the client currently pays by Direct Debit, they will not need to do anything as Winterthur will automatically adjust the premium contribution collected.
If the client pays by Standing Order they will receive a new Standing Order form from Winterthur. This should be completed and returned in the pre-paid envelope provided.
If the client wishes to now pay by Direct Debit, the Direct Debit mandate form should be completed and returned in the pre-paid envelope provided.
6. What if the client does not want to pay the increased net contribution?
This change is a Government led tax change - it is not a Winterthur led change. The original plan would have been taken out on the understanding that the contribution was calculated on a gross contribution rate with the net contribution rate taking into consideration basic rate tax relief. It is the basic tax rate that has changed. If the net contribution rate is not increased to take this into account, then future projections of the pension value will need to be re-forecast.
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For further information:
Louise Donald, Project Manager, +44 (0) 1256 798011
Notes to Editors
Winterthur Life UK Ltd
An AXA UK company, Winterthur Life UK Limited is a specialist producer of wealth management solutions to the nigh net worth marketplace. .
Winterthur Life UK Limited provides focused investment and retirement solutions and support services predominantly distributed through quality IFAs as part of AXA Life's AXA & Winterthur Wealth Management business proposition.
The company is recognised as having an innovative approach to financial products and its products feature simple, transparent charging with access to a wide range of carefully selected investment funds and fund managers via its Tailored Selection fund platform. Winterthur is also differentiated in the market through its focus on service excellence, which was reflected in the company winning Company of the Year and two Five Star service awards at the Financial Adviser Service Awards 2007.
www.winterthur-life.co.uk
AXA
AXA UK is a part of the AXA Group. AXA Group is a worldwide leader in Financial Protection.
AXA's operations are diverse geographically, with major operations in Western Europe, North America and the Asia/Pacific area. For full year 2006, IFRS revenues amounted to €79 billion and IFRS underlying earnings amounted to €4,010 million.
The AXA ordinary share is listed and trades under the symbol AXA on the Paris Stock Exchange. The AXA American Depository Share is also listed on the NYSE under the ticker symbol AXA.
Our previous company performance is not a guide to how we may perform in the future.
Any opinions expressed in this media communication are made as at the date of this publication but are subject to change without notice.
