Financial Planning

Spring Budget 2017: Planning Ahead with Clarity

This article was originally published on Quadrant Group’s website. Quadrant Group was acquired by Progeny in March 2017.

Spring Budget 2017: Philip Hammond holds up red briefcase

When Chancellor Philip Hammond stepped up to the despatch box on Wednesday to deliver his first Spring Budget, he’d already announced that it was to be his last, with the financial set-piece poised to move to the Autumn from now on. With the UK potentially just weeks away from triggering Article 50 and firing the starting pistol on the Brexit negotiations, it was always likely to be a ‘steady as she goes’ approach.

The Chancellor had already sought to downplay any spectacular pre-Budget expectations by assuring us there would be “no spending spree”, in the annual tradition of teasing the media with soundbites the weekend before the Budget. And so it proved. It was an upbeat Budget, albeit cautious, with no significant tax or pension changes. However, there were a few items that long-term investors should be aware of.

Reduction of Tax-Free Dividend Allowance

Director-shareholders of private companies (who hold shares outside of a tax-efficient ISA) will have tax-free dividend allowance reduced from £5000 to £2000 from April 2018. This is likely to be understandably unpopular with business owners and investors.

Business Rates Support

The Chancellor pledged £435m for firms affected by increases in business rates, including a £300m hardship fund for the small businesses that were worst affected. Any businesses coming out of small business rate relief will not see their bill increase by more than £50 per month, and increases after this will be capped.

National Insurance for Self-Employed Workers to Increase

The main rate of Class 4 National Insurance contributions (NICs) is to increase from the current rate of 9% to 10% in April 2018 and then to 11% in April 2019, at an average cost of 60p per week to those affected. The Chancellor’s aim was to address the difference in NICs between those who are self-employed and those in employment, which he claims “is no longer justified.” This move is drawing some criticism as it contradicts the 2015 election promise of “no increases in VAT, Income Tax or National Insurance”. No further changes to income tax, VAT or other National Insurance classes were announced.

New Tax Charge on QROPS Transfers

A new tax charge, the ‘overseas transfer charge,’ has been announced, with legislation to be introduced in the Finance Bill 2017-18.  This will apply to certain transfers to and from qualifying recognised overseas pension schemes (QROPS). The new tax charge will mean that transfers to QROPS requested by members on or after 9 March 2017 are taxed at a rate of 25%, at the point of transfer.

However, there are a number of exemptions: if the individual is resident in the same country or resident in a country within the European Economic Area (EEA) and the QROPS is established in a country within the EEA (they need not be the same country); if the QROPS is an occupational pension scheme; if the QROPS is an ‘overseas public service pension scheme’; or if the QROPS is a pension scheme established by an ‘international organisation’ to provide benefits in respect of past service as an employee.

Previously Announced Upcoming Changes

While the lack of significant tax or pension changes in the Budget was welcome news, there is already a raft of significant tax changes lined up to take effect at the beginning of the new financial year on 6 April. These include:

  • Reduction of the money purchase annual allowance (MPAA): The Chancellor confirmed that the proposed reduction of the MPAA from £10,000 to £4,000 would go ahead from 6 April 2017. The reduced MPAA will apply to anyone who has triggered the MPAA before 6 April 2017 (including anyone who had a flexible drawdown before 6 April 2015), and anyone who triggers the MPAA on or after 6 April 2017. There is no change to how the MPAA will operate.
  • Inheritance tax changes: Also phasing in will be the first stage of a change which will eventually allow some couples to pass on a tax-free £1m inheritance. The ‘family home allowance’ allows £100,000 per person when passing on a main residence, in addition to the £325,000 per person inheritance allowance. This amounts to a £425,000 allowance each as long as it includes the family home and goes to children or grandchildren. The new allowance will increase by £25,000 per year until it reaches £175,000 in 2020, totalling a £500,000 allowance per person, or £1m for a couple.
  • Reductions in offsetting buy-to-let mortgage interest: From April, buy-to-let landlords won’t be able to offset their full mortgage interest amount against the rent they collect. A phased introduction of the new rules will mean that in the tax year 2017/18 only 75% will be deductible, steadily reducing to zero by 2020.
  • Increase to the personal allowance: The personal allowance will move from £11,000 to £11,500 (and to £12,500 by 2020) and the higher rate threshold will rise from £43,000 to £45,000. However, the personal allowance starts reducing once you earn over £100,000, reducing to zero for those earning £123,000 or more. The level at which high earners will start to pay additional rate tax of 45% remains unchanged at £150,000.
  • Increase to the ISA allowance: The ISA allowance increases from its current £15,240 to £20,000 annually from April.
  • Introduction of the ‘LISA’: The Lifetime ISA (or ‘LISA’) is a blend of the Help to Buy ISA and a pension. It will allow savers between 18 and 40 to put in £4,000 per year and benefit from a 25% top-up from the government. Strict stipulations on access to the money (it can only be withdrawn penalty-free from age 60, or solely for use as a deposit on a first property) have meant it has received a lukewarm reception from providers.

Planning Ahead with Clarity

The Chancellor’s most notable soundbite was that the UK “needed to get back to living within our means.” Personal debt in the UK has continued to grow, and we will need a tighter grip on the purse strings to move towards a healthier economy.

Carefully controlling your spending is often a lower priority for high earners, but there are universal benefits to being aware of your expenditure. Knowing your monthly and yearly outgoings, as well as what you plan to spend later in life, is a vital part of establishing a full picture of your financial situation. Our recent post, Bring Back Good Old Fashioned ‘Pocket Money’, challenges all of us to have weekly / monthly household budgets.

Whether you’re the Chancellor of the Exchequer or simply (but no less importantly) the steward of your own family’s finances, a budget is fundamental to planning a successful financial future. Looking after your pennies can have a much greater impact on your overall wealth position in the long-term than the Chancellors latest budget.

To find out how Quadrant Group could help you plan for your financial future, or for more information on any of the above, please feel free to 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.

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Author Andrew Pereira

Director, Progeny Wealth

Andrew has been working with families, high-net-worth clients and business owners for well over 20 years.

Learn more about Andrew Pereira

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