Following months of speculation and a plethora of media hype, it’s business as usual for pensions. The Chancellor has taken pension tax relief off the table with no imminent changes, for now anyway. However, it was far from boring, as some had anticipated. Parents like me may have been feeling a tad guilty for ever allowing their children sugary drinks. The news stands following the announcement of a new sugar tax were filled with stories about childhood obesity and positing blame for the state of our healthcare on drinks manufacturers. It seems unlikely however that this new levy will curb our growing sweet tooth.
With some good news for younger investors, the Chancellor introduced a new lifetime ISA (or LISA) savings vehicle for under 40s from April 2017. This is a complementary option to the savings landscape and combined with cuts in Capital gains tax (CGT) rates, further boosts income tax thresholds and a tidying-up of pension anomalies.
We are advising our clients to focus on the run-up to the tax year-end and their pension saving; using the higher 2015/16 annual allowance, and carrying this forward, to make the most of higher rates of tax relief. Investors should also consider their Lifetime allowance by planning in earnest for the imminent lifetime allowance cut (including final funding for those clients using fixed protection 2016 to lock into a £1.25M allowance).
Salary sacrifice is here to stay: The Government has confirmed that salary sacrifice will continue to be a tax- and National Insurance-efficient option to fund a pension (as well as other mainstream employee benefits, such as childcare or health-related provision). Its use for other employee benefits may, however, be cut back.
Workplace pension advice allowance going up: To encourage employers to boost employee access to professional advice on their pensions, the tax and NI free allowance for employer-arranged advice will increase from £150 to £500 per employee from April 2017.
Pension dashboard coming soon: To help pension planning, a new online pensions facility which shows a single view of an individual’s total pension savings, will be launched by 2019. Quadrant Group clients are already well ahead of this innovation, as part of our planning service.
Under 23 drawdown anomaly fixed: The current rule that requires minor dependants’ drawdown to stop at age 23 will be scrapped, giving these dependants the same flexibility as other minor beneficiaries to continue drawdown after 23.
A fairer deal for the seriously ill: Pension tax rules will be relaxed so that serious ill-health lump sums can be paid even where funds have already been accessed under the scheme. And, for payments after age 75, they’ll be taxed as income rather than at a flat rate of 45%.
Lifetime ISA (LISA) – a new savings option
The Chancellor unveiled plans to introduce a new Lifetime ISA (LISA) from April 2017. This is a complimentary savings scheme for younger savers, not a replacement for traditional pension saving. Higher rate tax payers will continue to enjoy tax relief at 40% on pension savings of up to £40,000 a year, keeping pensions as their number one long term savings plan. Indeed, the under 40’s will be able to use both and add up to £45,000 per annum to their retirement funds.
The Government aims to encourage long term saving with the inclusion of a ‘buy four get one free’ bonus, but with the ability for first time buyers to use savings to get a foothold on the property ladder.
How it works on the way in:
The new LISA will only be available to the under 40s and will include a 25% Government top up at the end of each tax year. It won’t be possible to pay as much into the LISA as you can into your pension. Contributions will be limited to £4,000 each year which will be topped up to £5,000 and savers will stop receiving their top up once they reach age 50.
LISA contributions will count towards the total ISA savings limit which will increase to £20,000 in 2017/18.
How it works on the way out:
Funds can be accessed tax-free after the age of 60. But to help first time buyers, funds may be withdrawn tax-free to cover the cost of a deposit on their first home. Anyone already saving in a help to buy ISA will be able to transfer their existing savings to the new LISA.
Accessing savings before age 60 for other reasons will be allowed but the Government Bonus, and the growth on it, will be lost. There will also a 5% tax charge applied on the amount withdrawn.
As with other ISA schemes, the LISA will form part of the estate for IHT.
Capital Gains Tax – CGT falls in 2016/17 – Good News for investors but not for landlords…
Investors who own mutual fund or shares can benefit from a CGT cut from 6 April 2016. The new rates are:
- 10% where an individual is not a higher rate tax payer
- 20% where the investor is a higher rate taxpayer, or the gain takes them into the higher rate band.
Trustees and legal personal representatives also win, as their tax rate on trust and estate gains falls to 20%.
However, landlords or second property owners will continue to pay 18% or 28% on any gains when they come to sell.
Income Tax and National Insurance
In April 2017, the Personal Allowance will rise from £11,000 to £11,500 and the higher rate threshold will increase from £43,000 to £45,000. These two changes will see the take home pay of higher rate taxpayers increase by £500 each year, while for basic rate taxpayers the increase will be £100 each year.
Together with the new dividend and savings allowances available from April 2016, advice will be key to ensuring that your savings in the right place to produce a tax-efficient income when you need it.
Class 2 National Insurance
From April 2018, self-employed individuals will no longer have to pay Class 2 NICs, currently £2.80 per week. They will still have to pay Class 4 NICs, which will be reformed to allow them to build up an entitlement to State Pension and other contributory benefits.
As an encouragement to UK business, the Corporation Tax rate will be further cut to 17% from 2020.
The current rate is 20%.
Recap of key tax allowances for 2016/17
|Income Tax Allowances|
|Savings Rate Band||£5,000|
|Personal Savings Allowance||£1000 (£500 for HRT)|
|Income Tax Bands and Rates|
|Basic rate band||£11,000 – £43,000||20%||7.5%|
|Higher rate band||£43,000 – £150,000||40%||32.5%|
|Additional rate band||£150,000 +||45%||38.1%|
|Capital Gains Tax|
|Tax Rate||10% or 20%|
|Nil Rate Band||£325,000|
The Chancellor’s decision to hold back from further pension reforms has been welcomed. Many argue that investors are still coming to terms with the previous two Budgets, which, despite their positive contribution to flexibility and fairness, have made decisions and planning more complex. With increased choices for individuals around contribution levels, the timing and quantum of pension withdrawals and their use as tax-efficient intergenerational asset transfer opportunities, taking good financial advice and employing Lifetime Cash Flow Modelling is essential to making informed decisions. At Quadrant Group, we help clients to make the most of their tax position, keeping pace with government changes and regulations. Our aim is to make your financial planning as rewarding and stress-free as possible.
If you have any questions about how this budget might affect your wealth or would simply like to review your current investments, please do get in touch.
This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections.