Budget Statement Reflections

1. PENSIONS

 

Annual Allowance

 

§  The standard annual allowance in 2016/2017 will be £40,000.

 

§  The money purchase annual allowance in 2016/2017 will be £10,000.

 

§  The annual allowance for high earners will be reduced to between £10,000 and £40,000 (see below).

 

 

Higher Earners Tapered Annual Allowance

 

§  As previously announced, a reduced annual allowance will apply to those with both 'adjusted income' of more than £150,000 and 'threshold income' of more than £110,000.

 

§  ‘Adjusted income’ includes taxable income plus employer pension contributions and employee contributions made by net pay arrangements. ‘Threshold income’ excludes pension contributions, unless paid under a salary sacrifice agreement, set up on or after 9 July 2015. Where adjusted income and net income exceed the respective thresholds, the taxpayer's annual allowance will be reduced by £1 for every £2 of adjusted income in excess of £150,000. The maximum reduction is £30,000, which would result in an annual allowance of £10,000. The level of adjusted income at which the maximum reduction in the annual allowance is reached, is £210,000.

 

 

Pension Input Period

 

§  All pension input periods will be aligned with the tax year from 2016/2017, with no option to vary the period.

 

§  Carry forward from the 3 previous tax years will be available as normal. However, when using carry forward from 2016/2017 onward, it will be based on the tapered annual allowance rather than the standard annual allowance.

 

 

 

Lifetime Allowance (LTA)

 

§  As previously announced the LTA will reduce to £1 million for 2016/2017 and 2017/2018. Fixed Protection 2016 and Individual Protection 2016 are available. There will be an online application process from July 2016. There is an interim process from 6 April for those wishing to benefit from either form of protection and take benefits before July. Those applying for Fixed Protection 2016 need to cease contributions/benefit accrual by 5 April 2016. Those applying for Individual Protection 2016 will need a fund value of more than £1 million as at 5 April 2016.

 

§  The LTA will then be index-linked in line with the consumer prices index (CPI) from 2018/2019.

 

§  Those who want to apply for Individual Protection 2014 must do so online by 5 April 2017.

 

 

 

Tax Relief

 

§  The Government concluded that no changes would be made to pension tax relief. The Chancellor stated that after consulting widely there was no consensus on how the tax regime should be reformed. This means all the current tax advantages and allowances for pensions remain in place.

 

 

 

 

2. TAX EFFICIENT INVESTMENTS

 

Lifetime ISA

 

§  One small Budget ‘rabbit’ was the announcement of the Lifetime ISA, which aims to address the dilemma for younger savers in deciding whether to save to get onto the property ladder or into a pension. Like an ISA, it takes a tax exempt approach but offers a 25% Government bonus to top up savings (equating to 20% basic rate tax relief). Like an ISA, only member contributions are permitted.

 

§  Full details will be developed in consultation with the financial services sector but the Government has set out detailed proposals. Adults aged under 40 will be able to open a Lifetime ISA from April 2017. They'll be able to save up to £4,000 a year from age 18 to 50, and receive a 25% Government bonus added at the end of the tax year. So over a lifetime it will be possible to contribute a maximum of £128,000 and benefit from a maximum bonus of £32,000. Contributions to a Lifetime ISA will count towards the increased £20,000 ISA limit for 2017/2018.

 

§  Savers will be able to withdraw funds including a Government bonus after 12 months to use towards the purchase of a first home valued at up to £450,000. They'll also be able to withdraw funds including the bonus for any reason from age 60.

 

§  Savers will also be able to access their funds at any time for other purposes, but will have to return the bonus with any interest or growth on the bonus to the Government and pay a 5% charge. The Government will consult on whether to allow penalty free loans, using an approach drawn from the US 401K system.

 

§  It will be possible to access the funds penalty free in the event of terminal ill health.

 

§  The inheritance tax treatment will be the same as for ISAs.

 

Help To Buy ISA

 

§  Help to Buy ISAs (available since December 2015) will remain open to new savers up to 30 November 2019 and for new contributions until 2029. This product enables first time buyers to save up to £200 per month towards a first home, with an initial one-off deposit of £1,000. The Government boosts savings by 25% up to a maximum of £3,000, which will be paid when a property is purchased.

 

§  While it will be possible to open both types of ISA, it will only be possible to use the Government bonus from one account towards buying a first home.

 

§  It will be possible to transfer Help to Buy ISA funds into a Lifetime ISA during the 2017/2018 tax year only.

 

ISA

 

§  The main ISA limit will remain at £15,240 for 2016/2017, but will now increase to £20,000 for 2017/2018. The limit for Junior ISAs and Child Trust Funds will remain at £4,080 for 2016/2017.

 

§  New flexible ISA rules come into effect from 6 April 2016. The rules allow investors to pay withdrawals from a Cash ISA back into the account before the end of the tax year, without reducing their subscription limit further. Offering this flexibility is optional for ISA providers. This also covers:

-       Cash held in stocks and shares ISAs

-       Innovative finance ISAs

-       Withdrawals from Help to Buy ISAs if an intended house purchase didn't proceed

 

Personal Savings Allowance

 

§  As previously announced, a tax-free savings allowance of £1,000 is available from 6 April 2016 to those with taxable income of less than £43,000 i.e. basic-rate payers and below. Higher rate taxpayers benefit from a £500 tax-free allowance. Those earning over £150,000 are not entitled to an allowance.

 

 

 

 

3. DIVIDENDS

 

§  As announced in the Summer Budget 2015, the current 10% dividend tax credit will be abolished from April 2016. It will be replaced with a new £5,000 a year dividend allowance.

 

§  The new rates of tax on dividend income above the allowance will be:

 

7.5% for basic rate taxpayers

 

32.5% for higher rate taxpayers

 

38.1% for additional rate taxpayers.

 

 

 

 

4. TAX

 

INCOME TAX

§  In 2016/2017 the income tax personal allowance will increase by £400 to £11,000.

 

§  A further £500 increase in the income tax personal allowance to £11,500 was announced from 2017/2018.

 

§  The basic rate income tax band increases to £32,000 from 2016/2017. Those entitled to the full standard personal allowance will, therefore, pay 40% tax on income above £43,000. This amounts to a £615 increase in the higher rate income tax threshold.

 

§  The basic rate band will increase to £33,500 from 2017/2018.

 

§  Together with the planned increases in the personal allowance, this means the higher rate income tax threshold will be £45,000 from 2017/2018. These are the next steps in the Chancellor's stated aim of increasing the personal allowance to £12,500 and the higher rate income tax threshold to £50,000.

 

 

CAPITAL GAINS TAX (CGT)

 

§  The capital gains tax annual exempt amount will remain at £11,100 in 2016/2017.

 

§  The capital gains tax rates will decrease to 10% and 20% for basic and higher rate taxpayers, respectively, from 6 April 2016.

 

§  These rates will not apply to disposals of residential properties that do not qualify for private residence relief, which will continue to be taxed at 18% and/or 28%.

 

 

 

INHERITANCE TAX (IHT) & TRUSTS

 

§  As previously announced, the Government aims to reduce the number of estates paying IHT by introducing a residence nil-rate band from April 2017. This will apply where the main residence passes on death to direct descendants such as children and grandchildren. This will be worth up to £100,000 in 2017/2018, £125,000 in 2018/2019, £150,000 in 2019/2020 and £175,000 in 2020/2021 and will then increase in line with CPI indexation. As with the existing nil-rate band, executors will be able to claim any unused residence nil-rate band on the death of a surviving spouse or civil partner, provided the second spouse dies on or after 6 April 2017. Those with net estates worth more than £2 million will see the additional nil-rate band scaled back by £1 for every £2 over this threshold. Draft legislation was published in December 2015 for inclusion in Finance Bill 2016, covering additional provisions applying where someone downsizes or ceases to own a home on or after 8 July 2015.

 

§  The IHT nil-rate band is currently frozen at £325,000 until 5 April 2021.

 

 

CORPORATION TAX

 

§  A further reduction to the corporation tax rate to 17% rather than the previously announced rate of 18% will apply from 2020. The current rate of 20% is due to reduce to 19% in 2017.

 

 

 

 

NATIONAL INSURANCE

 

§  From April 2018, Class 2 NICs will be abolished.

 

§  The Government will reform Class 4 NICs so that the self-employed can continue to build entitlement to the state pension and other contributory benefits.

 

§  From April 2018, termination payments above £30,000 will become subject to employer NICs but will remain exempt from employee NICs.

 

§  The national insurance employment allowance, which reduces the overall cost of employer national insurance contributions (NICs) increases from £2,000 to £3,000 from April 2016.

 

§  While the Government is known to be monitoring the use of salary exchange (also known as salary sacrifice) to gain NICs and income tax advantages, the Budget specifically mentioned that arrangements providing pension saving should continue to benefit from relief.

 

 

 

 

5. OTHER

 

National Living Wage & National Minimum Wage

 

§  The new National Living Wage (NLW) comes into effect from 1 April 2016 for workers aged 25 and above at a rate of £7.20 per hour.

 

§  The Government will increase the National Minimum Wage (NMW) rates from October 2016 as follows. The previous rate is displayed in brackets.

 

§  £6.95 (£6.70) per hour - main rate for workers aged 21 to 24.

 

§  £5.55 (£5.30) per hour – for workers aged 18 to 20.

 

§  £4.00 (£3.87) per hour - workers aged 16-17.

 

§  £3.40 (£3.30) per hour – apprentices aged under 19 or first year apprentices aged 19+.

 

§  The Government will align the dates the NLW and NMW are reviewed so that both are amended in April each year, commencing April 2017.

 

 

 

Property Letting

 

§  From 1 April 2016, higher rates of stamp duty will be charged on further purchases of residential property i.e. second homes or buy to let properties. The additional rate will be 3% above the standard rate and will apply to properties worth £40,000 or more. The higher rates will apply to corporate investors as well as individuals

 

§  The tax relief on mortgage interest for landlords will be restricted to basic rate for mortgages on 'buy to let' residential properties. The restriction will be phased in over 4 years from April 2017.

 

§  ‘Rent a room’ relief will be increased from £4,250 to £7,500 from 2016/2017. The relief had been frozen since 1997

Disclaimer

Every care has been taken to ensure that this information is correct and in accordance with law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. This information is based on announcements made in the March 2016 Budget which may change before becoming law.