Chancellor Philip Hammond has delivered his first Autumn Statement. Unlike most of his predecessor’s Budgets and Autumn Statements, it didn’t contain major pension or tax surprises and mostly confirmed the policies and trends previously announced by George Osborne, although there are a few new things worth knowing. The following are the key points with respect to your pension, investments and taxes.
Money Purchase Annual Allowance Down to £4,000
The most significant change concerning pensions is the Money Purchase Annual Allowance (MPAA) going down from the current £10,000 to £4,000, effective from April 2017.
The MPAA applies only to those who are over 55, have already taken cash from their pension using the new pension freedoms and are still contributing to their pension. For instance, when approaching retirement, you may decide to reduce working hours and start drawing from your pension to supplement your income, but keep contributing and benefit from employer’s contributions at the same time. Or you may return to work after a few years in retirement. Currently, you can contribute up to £10,000 per year under these circumstances and get a tax relief at your highest rate.
The intention behind the cut (same as the intention behind the very introduction of the MPAA in April 2015) is to prevent abuse of the new pension freedoms for “aggressive tax planning” or “pension recycling”, where taxpayers would withdraw cash from their pension and contribute it back, effectively enjoying an “inappropriate double tax relief” on the same amount. This, unlike the legitimate examples above, would be against the spirit of the pensions legislation.
Luckily, there are still ways to access your pension without triggering the MPAA in the first place. For example, you can take a tax-free lump sum without drawing income, buy a lifetime (non-flexible) annuity, or take up to three “small pots” capped at £10,000. Any of these will enable you to keep the standard Annual Allowance of £40,000.
The takeaway is: Before taking any cash from your pension, make sure you understand the consequences. Contact us for more details.
Salary Sacrifice Rules to Tighten, But Pensions Exempt
Salary sacrifice schemes allow employees to give up part of their salary in exchange for non-cash compensation, such as mobile phone subscriptions, gym memberships or health checks, provided by the employer and effectively paid for with the employee’s pre-tax income. Chancellor Hammond considers these tax perks “unfair” and has announced tightening of the rules. As a result, most will be taxed as standard cash income and no longer provide any tax or National Insurance savings.
Fortunately, pensions and pension advice won’t be affected, as well as childcare, the Cycle to Work scheme and ultra-low emission cars.
Unchanged or Previously Known Things
Besides the MPAA, the Autumn Statement does not change other pension allowances. The Annual Allowance remains at £40,000 and the Lifetime Allowance at £1m.
Income tax allowances and rate thresholds will grow as previously planned. The Personal Allowance, currently at £11,000, will increase to £11,500 in 2017-18. The Higher Rate Threshold will increase from the current £43,000 to £45,000 in 2017-18. Philip Hammond has reiterated the Government’s intention to increase these to £12,500 and £50,000, respectively, by 2020-21.
The Personal Savings Allowance remains at £1,000 for basic rate taxpayers, £500 for higher rate taxpayers.
The annual ISA Allowance will increase to £20,000 in 2017-18 as planned. The Chancellor did not mention Lifetime ISAs, which were first announced in the 2016 Budget and should be launched in April.
The triple lock will continue to apply to State Pension at least until 2020. Introduced in 2010, the triple lock guarantees State Pension to grow by the highest of inflation, average earnings growth and 2.5% per year.
Corporation Tax will decrease to 19% in April as previously announced. The Government still intends to cut it to 17% in 2020.
Autumn Statement 2016 in Full
The above are just the most significant points with respect to pensions, investments and taxes. You can find Philip Hammond’s full speech here.