The Gazette 1974

New Deal for Self-Employed

By J. H. BARRETT, A.C.I.I.

The enactment of the Finance Act, 1974, has consid- erably improved the form of retirement provision avail- able to persons in non-pensionable employment. Here- tofore, self-employed persons tended to neglect the obligation to make adequate provision for retirement since if their enterprise was a success it was often felt that such provision was unnecessary. In recent years we have witnessed a pattern of rapid inflation to the extent that it must now be accepted that the level of retire- ment benefit which is likely to be required in future to safeguard your standard of living would place an inhibiting burden on most developing practices. The generous tax concessions now available will emphasise that it makes good business sense regularly to transfer earnings, tax free, to a retirement annuity fund parti- cularly when burdened by a high tax liability! What is a retirement annuity? The retirement annuity is a medium whereby a per- son in non-pensionable employment may fund for a retirement income by setting aside regular contributions from earnings with the aid of various tax incentives. The retirement annuity in its present form was first introduced to this country following the enactment of the Finance Act, 1958, and its main features at the present time could be summarised as follows : —Individual earnings may be transferred tax free to the fund thereby earning a tax discount equivalent to the rate payable on the top slice of taxable income. —The earnings of the fund may be accumulated tax free by concession, thereby enhancing the retirement benefit released. —It is not necessary to retire from practice before opting for benefit. —Section 63, Finance Act, 1974, allows 25 per cent of the retirement pension to be exchanged for a tax free cash gratuity on retirement. —Retirement benefits would normally be available at any age between 60 and 70, but for cases of ill-health an earier retirement age is permitted. —On death prior to retirement all premiums paid will be refunded with or without interest depending on the contract selected. Tax relief on pension contributions Section 63, Finance Act, 1974, reconfirms that pre- mium contributions can be treated as a deductible expense for tax purposes but doubles the present contri- bution thresholds. The maximum contribution which will rank for relief in any tax year will vary according to the date of birth. The following table indicates the maximum contribution now allowable which is in every case the lesser of the two figures shown in columns A and B.

A—Maximum % of "Net Relevant Earnings"

B— Overriding Maximum Contributions

Year of Birth

£2000 £1900 £1800 £1700 £1600 £1500

1909 or earlier 1910 or 1911 1912 or 1913 1914 or 1915 1916 or 1917 1918 or later

20% 19% 18% 17% 16% 15%

Definition of relevant earnings Relevant earnings are defined as being (in relation to any individual) any income of his, chargeable to tax for the year of assessment in which the contribution is made, being : (a) income arising in respect of remuneration from an office or employment of profit held by him other than a pensionable office or employment; or (b) income from any property which is attached to or forms part of the emoluments of any such office or employment of profit held by him; or (c) income which is immediately derived by him from the carrying on or exercise by him of his profession or vocation either as an individual or, in the case of a partnership, as a partner personally acting therein; But does not include any remuneration as a proprietary director of an investment company. The relevant earnings of a married person do not include the income of a spouse notwithstanding that the income chargeable to tax is treated as his income. Net relevant earnings The net relevant earnings could be briefly described as being the total taxable income in any particular year of assessment less the amount of any deductions falling to be made from the relevant earnings in computing the total assessable income for that year. Safeguard against fluctuating incomes Provision is made whereby should a person's net rele- vant earnings reduce during the currency of his policy so that the contributions paid in any year becomes greater than the amount for which he may claim tax relief, any part of the contribution which does not qualify for relief in any particular year owing to an insufficiency of earnings may be carried forward to qualify for relief as soon as net relevant earnings are high enough to justify relief. Method of funding When this contract was first introduced in 1958 the maximum contribution permitted for persons in the normal age group was £500 per year or 10 per cent of 211