As regular readers of our blog will know, until recently we were expecting the Chancellor to announce significant changes to pensions at the Budget, but thanks to a last minute change of heart, pensions escaped without any significant tinkering for which we are grateful. It’s likely George will return to pension legislation in the future, but for now at least tax relief and pension lump sums remain unchanged.
George Osborne did however announce one major new idea by unveiling the lifetime ISA which is intended to help young people save flexibly for the long-term on the back of concerns that people in their 20s and 30s found pensions too complicated and inflexible.
From April 2017, those between 18 and 40 will receive an added 25% bonus from the government on any savings they put in before their 50th birthday. For example, investing £75 will see a credit of £25 paid by the Government and £100 invested. That is a higher Government contribution than contributing £75 to a pension which would, for a basic rate tax payer, would receive a Government top up of £18.75 making £93.75 in total.
You can save as little or as much as you want to each month up to £4,000 a year, which does mean the total is much lower than a pension which for most earners is £40,000 a year (a completely unaffordable amount to save for the majority of course).
At 60th birthday the Lifetime ISA can be taken out tax-free. Withdrawals prior to age 60 are allowed but the Government would reclaim their contributions plus any growth and levy a 5% charge.
Capital gains tax
From April 2016 the higher rate of capital gains tax will be cut from 28% to 20% and the basic rate from 18% to 10%. This is a significant change for those individuals with an investment portfolio that isn’t sheltered in an ISA but the reduced rate will not apply to residential property, which will mean the hundreds of thousands of people with Buy to Let properties will not enjoy the lower rates.
From April 2017 the total amount you can save each year into all ISAs will increase from £15,240 to £20,000 which is a significant and unexpected increase and does demonstrate that the Government are trying to encourage people to save. However, not many families can afford to lock away £20,000 (or £40,000 for a couple) each year and in reality this will probably mainly be a benefit for wealthier individuals and allow them to shelter more of their assets from Capital Gains Tax for example.
The personal allowance, the amount you can earn before you pay any tax, is currently £10,600 and is set to rise to £11,000 from April 2016.
From April 2017, the allowance will be increased to £11,500, removing a further 1.3 million people out of income tax altogether. It seems a long time ago but it was in fact as recent as 2010-11 that the allowance was just £6,475.
Higher rate tax threshold
The point at which individuals pay the higher rate of income tax will increase from £42,385 to £43,000 in 2016 and to £45,000 in April 2017, a welcome increase as many individuals have started to pay 40% tax over the last few years but do not consider themselves wealthy due to the cost of living in the South East and London in particular.
Pension advice allowance
This was an interesting announcement as the government will consult on introducing a pension advice allowance which will allow people to withdraw £500 tax-free, before the age of 55, from their defined contribution pension to redeem against the cost of financial advice – the exact age at which people can do this will be determined by consultation.
For those with a ‘Self Invested Personal Pension’ (SIPP) this is more or less already possible because, for example, Gibson Lamb can agree a fee with the individual and submit the invoice to the SIPP provider, who will pay us from the pension fund. However, the option to effectively levy a fee at an ‘ordinary’ pension would allow more people to seek professional advice which, unsurprisingly, we think is a good thing!
Salary sacrifice stays
There were some rumours before the Budget that salary sacrifice, the option to ‘give up’ some of your salary which is then paid directly to your pension, would be abolished but the government made it clear it was here to stay, which is good because it encourages people to save into pension and removes the need for a lot of people to register for Self-Assessment to claim back higher rate tax relief.
However, the Government has said it will look at some of the more creative ways Salary Sacrifice is being used to ensure that the spirit of Salary Sacrifice isn’t being abused.
Consumer access to guidance
The government will restructure the statutory financial guidance providers: the Money Advice Service, The Pensions Advisory Service and Pension Wise to ensure consumers can access the help they need to make effective financial decisions. The government will look at a new pensions guidance body and a new, slimmed down money guidance body.
We can only hope they also re-consider how these bodies are funded as the levy Gibson Lamb pays towards the important services is not inconsiderable.
Abolition of class 2 NICs
Class 2 NICs for self-employed people will be scrapped from April 2018. Currently, self-employed people have to pay class 2 NICs at £2.80 per week if they make a profit of £5,965 or over per year. They also pay class 4 NICs if their profits are over £8,060 per year. From April 2018, they will only need to pay one type of national insurance on their profits, class 4 NICs.
As Clive and I are self-employed we think this is a very good idea even if the savings are modest!
The government has announced corporation tax will be cut to 17% in 2020, which will benefit over 1 million businesses. The tax had already been cut from 28% in 2010 to 20%.
This is one of those curious tax cuts that the Chancellor hopes will actually increase his tax revenue because by offering a very attractive rate, he is hoping large, multi-national businesses will elect to pay their tax in the UK rather than elsewhere.
Clearly it is a boost for smaller businesses as well, although it would be interesting to hear an accountants view on the impact for very small. family owned companies, bearing in mind previous changes to dividend tax rates has been quite detrimental when individuals pay themselves via dividends, as is usually the way when you own a business.
The Lifetime ISA is a welcome new idea because anything that encourages people to save is welcome, although with four different ISA products (cash ISA, Stocks and Shares ISA, Help to Buy ISA and Lifetime ISA) now available it could be very confusing for consumers and access to professional advice may be difficult given the relatively modest amounts involved.
The imposition of a 5% exit penalty seems at odds with modern practice in the Financial Services profession especially when the Government is considering legislating against exit penalties on pension products, despite those penalties being written into contracts taken out by consumer many years ago. We agree those penalties should be removed but, as we say, it does seem curious that a 5% charge will apply to the new ISA.
Increasing the tax allowances is good and the fact there was no major upheaval to pension legislation is a relief because there have been enough changes in recent times already.
We are, as always, happy to provide more information if required.