Category: UK Budget

Spring Budget 2017

The Rt Hon Philip Hammond MP

Spring Budget 2017

Chancellor Philip Hammond delivered his Budget speech on Wednesday 8th March 2017. It did not contain as many surprises or major changes as some of George Osborne’s Budgets in the last years, but there were a few (mostly unfavourable) points worth noting with respect to individuals and savers.

Self-Employed NICs to Rise

In spite of earlier promises by the Conservatives to not raise National Insurance Contributions (NICs), the Chancellor has announced an increase in Class 4 NICs. As a result, self-employed individuals can see their tax bill rising by several hundred pounds per year.
Currently, those who are self-employed pay two classes of NICs. Class 2 is a fixed amount (£2.80 per week in 2016-17; £2.85 in 2017-18). Class 4 is a percentage, currently 9% of profits between the Lower Profits Limit (£8,060 in 2016-17; £8,164 in 2017-18) and the Upper Profits Limit (£43,000 in 2016-17; £45,000 in 2017-18), and 2% of anything above the latter.

In April 2018 Class 2 will be abolished, as previously announced by George Osborne. This will reduce the tax bill by £146 per year. At the same time, as Philip Hammond announced today, Class 4 NICs will increase from the current 9% to 10% in April 2018 and again to 11% in April 2019. Above the Upper Profits Limit the rate will remain at 2%.

The combined result will be higher NICs for anyone earning above approximately £16,000. The increase will be greatest for those earning at or above the Upper Profits Limit, who will pay approximately £600 per year extra (the exact amounts will depend on the Lower and Upper Profits Limits, which rise every year proportionally to inflation).

Dividend Tax Allowance Cut to £2,000

Another negative surprise in the Budget is reduction of the dividend tax allowance from the current £5,000 to £2,000 per year, effective from April 2018.

Besides company owners, who are the main target of the measure, it will also affect those with larger share portfolios held outside a pension or ISA. Depending on average dividend yield, equity portfolios from about £50,000 net asset value could fall below the new reduced allowance.
Make sure you maximise the use of tax wrappers such as pensions or ISAs. If dividend tax is a concern, you may also want to consider shifting part of your equity holdings from dividend stocks to growth stocks and use the generous capital gains tax allowance to extract profits (of course, taxes are only one of the many things to consider when deciding investment strategy and portfolio structure).

Tighter Rules on Overseas Pensions

With immediate effect (from 9 March 2017) a new tax charge of 25% applies to transfers from UK pension schemes to QROPS (Qualifying Recognised Overseas Pension Schemes). The measure is aimed at those transferring their pensions overseas solely for tax optimisation purposes. Exceptions apply in cases where a “genuine need” exists, e.g. when you are moving to live and work in a different country and taking your pension pot with you.

Transfers to QROPS requested on or after 9 March 2017 will be taxed at a rate of 25% unless at least one of the following apply:

  • both the individual and the QROPS are in the same country after the transfer
  • the QROPS is in one country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA after the transfer
  • the QROPS is an occupational pension scheme sponsored by the individual’s employer
  • the QROPS is an overseas public service pension scheme as defined at regulation 3(1B) of S.I. 2006/206 and the individual is employed by one of the employer’s participating in the scheme
  • the QROPS is a pension scheme established by an international organisation as defined at regulation 2(4) of S.I. 2006/206 to provide benefits in respect of past service and the individual is employed by that international organisation

UK tax charges will apply to a tax-free transfer if, within five tax years, an individual becomes resident in another country so that the exemptions would not have applied to the transfer.

UK tax will be refunded if the individual made a taxable transfer and within five tax years one of the exemptions applies to the transfer.

Overall, the new measures will make transfers to overseas pension schemes more difficult and less advantageous in some cases. Careful consideration of all tax and other consequences of such move is as important as ever.

Tax Allowances and Thresholds

Besides the main points discussed above, the Budget also confirmed tax allowances and thresholds for the next year, most of them previously known. Some of the most important figures are listed below:

  • The personal allowance rises to £11,500 in 2017-18.
  • The higher rate threshold goes up to £45,000.
  • The Chancellor has reiterated the Government’s commitment to increase the above to £12,500 and £50,000, respectively, by 2020-21.
  • The annual ISA allowance jumps to £20,000 for 2017-18.
  • Capital Gains Tax allowance rises to £11,300.

We will discuss these in greater detail, as well as possible last minute actions, in our traditional tax year end planning checklist, due next week.

Conclusion

In spite of the unfavourable changes discussed above, the Budget speech has not changed the overall course of the Government’s financial and tax policies, which in light of the upcoming Brexit negotiations can be considered good news. Here you can find the full Budget speech.

Autumn Statement 2016: Things to Know

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.

Budget Statement 2016: Key Takeaways

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Budget Statement 2016: Key Takeaways

Chancellor George Osborne delivered his annual Budget speech yesterday. While there are winners and losers as usual, this year’s Budget can be considered quite favourable to middle income families and savers. The pension tax relief is safe (for now) and Capital Gains Tax goes down, among other things. Whilst the Budget contained a wide range of measure, our analysis concentrates on those aspects, which are most important to our clients, namely, taxes, pensions and investments. The full speech is available here.

Personal Allowance and Higher Rate Threshold Up

The Personal Allowance, which is the amount you can earn without having to pay Income Tax, will increase from the current £10,600 to £11,000 for the 2016-17 tax year and £11,500 for 2017-18 (up from the previously announced £11,200).

The higher rate threshold will rise from the current £42,385 to £43,000 for 2016-17 and £45,000 for 2017-18. It is estimated that about 585,000 taxpayers will fall out of the 40% tax bracket as a result.

Both of these are in line with the Government’s previous promises to increase the Personal Allowance to £12,500 and the higher rate threshold to £50,000 by April 2020.

Pension Tax Relief Remains

The fears of pension tax relief cuts or other radical changes to the existing pensions system have not materialised, at least for now. In light of the loud opposition to these plans, pointing out that such measures would discourage people from saving for retirement, the Chancellor has decided to not proceed at this point. The only reference in his speech was the following:

“Over the past year we’ve consulted widely on whether we should make compulsory changes to the pension tax system. But it was clear there is no consensus.”

Of course, this does not mean the issue is safely off the table forever. The Chancellor still needs to find ways to meet his goal of “surplus by 2019-20” and pensions certainly remain among the possible targets. For the 2016-17 tax year though, the allowance stays at £40,000 (for those earning under £150,000), with pension tax relief equal to your marginal tax rate. As previously announced, the Lifetime Allowance falls to £1m effective from April 2016.

ISA Allowance £20,000 and New Lifetime ISA

While pensions have been subject to shrinking allowances in the last years, the trend has been the opposite with ISAs, apparently one of the Government’s preferred ways for people to save for retirement. This time the Chancellor has announced that the annual ISA allowance would jump to £20,000, although only from April 2017. For the 2016-17 tax year the allowance remains at £15,240, same as this year, as previously indicated.

A completely new type of ISA will be introduced in April 2017, called Lifetime ISA. Young savers will be able to contribute up to £4,000 a year and receive a 25% bonus from the Government. That is extra £1 for every £4 saved, a maximum of £1,000 per year. You must be under 40 when opening the account; you will be entitled to the bonus every year up to the age of 50, but only if you have opened an account before 40 (therefore those reaching 40 before 6 April 2017 will miss out). Furthermore, to qualify for the bonus the money must only be used either to save for retirement or to buy a home. If you withdraw cash before the age of 60 and use it for purposes other than buying a home, you will lose the bonus (including any returns on it) and pay a 5% penalty.

The Lifetime ISA is intended as an alternative to pensions for young workers (“many of whom haven’t had such a good deal from the pension system”) and will most likely further develop in the next years. With its home ownership objective it will replace the previously announced Help to Buy ISA, which remains in place until 2019 and can be transferred to the new ISA after April 2017.

Capital Gains Tax Down (Excluding Property)

Shares and other investments sold outside an ISA or pension scheme are subject to Capital Gains Tax when the annual CGT allowance (currently £11,100) is exceeded. As another welcome change to investors, the rates of CGT will drop from 18% to 10% (basic rate) and from 28% to 20% (higher rate).

Importantly, these reductions won’t apply to capital gains from property sales, which will continue to be taxed at the existing rates. This is consistent with the Government’s recent actions against Buy to Let and intended to “ensure that CGT provides an incentive to invest in companies over property”.

Other Changes

The following are some of the other announcements from this year’s Budget speech.

  • From April 2017 there will be two new tax-free allowances (£1,000 each) to support micro-entrepreneurs and the “sharing economy”. The first will apply to property income (such as when renting out your home), the other to trading income (such as when occasionally selling goods and services online).
  • Corporation Tax will decrease further than previously announced, to 17% from April 2020.
  • Contrary to expectations, fuel duty will continue to be frozen for sixth year in a row.
  • From April 2018 there will be a new levy on soft drinks with high sugar content. The proceeds will help finance more PE and sport in schools.
  • Last but not least, Armed Forces veterans in need of social care will be able to keep their war pensions, rather than use them to pay for care.

Conclusion

For the time being, pensions remain the primary way to save for retirement and their tax and other advantages are hard to beat by the alternatives, even with the reduced CGT. Their major downsides are the reduced Lifetime Allowance and Annual Allowance for high earners, effective from 6 April. Of course, further changes may come in the next months and years.

With 25% bonus from the Government, the new Lifetime ISA offers attractive net returns, as long as you meet the conditions. It is only £4,000 per year, but that could add up and compound over time. Even if you are too old to qualify yourself, make sure your children know and take advantage of it when it starts to be available in April 2017.

Lastly, if you are likely to exceed the CGT allowance, consider deferring the sale until 6 April where possible. Not only you will have a new allowance to use, but also CGT rates will be lower by 8 percentage points if you exceed it.

Tax Year End Planning Checklist

The end of the tax year is approaching again; therefore it’s time to think about maximising allowances, minimising taxes and taking all the other steps to ensure your tax position will be as favourable as possible going forward. Although there are still almost two months left, it’s better to start now rather than leave it all to the last days, for some of the necessary steps can take some time to process.

When going through the checklist below, you may find this page useful. It contains all the key thresholds, rates and allowances for 2015-16 as well as 2016-17.

Income Tax and National Insurance

If possible, delaying an invoice (if you are self employed), salary, bonus or dividend payment (if you have a company) until 6 April can save, or defer, a considerable amount of taxes. Company owners should also find the right mix of salary and dividends to minimise taxes. Don’t forget to include all of them when making the decision – personal income tax, both employee’s and employer’s NI, corporation tax and dividend tax.

The key figures are:

  • £5,824 = Lower Earnings Limit – minimum to qualify for State Pension and other benefits
  • £8,060 = Primary Threshold – employee’s NI (12%) kicks in
  • £8,112 = Secondary Threshold – employer’s NI (13.8%) kicks in
  • £10,600 = Personal Allowance – basic rate income tax (20%) kicks in
  • £31,786 = higher rate income tax (40%) kicks in

Many company owners choose to pay themselves a salary equal to the Primary or Secondary Threshold, in order to avoid paying NI, and take the rest in dividends. However, if your company is eligible for the Employment Allowance (first £2,000 of employer’s NI free), it could make sense to pay yourself up to the Personal Allowance (£10,600) in salary. Of course, your other income, family situation and other circumstances could alter the figures and must always be considered.

Pension Contributions

Making pension contributions can save you a lot of money in taxes, as long as you stay within your annual allowance, which is £40,000 for the 2015-16 tax year. At the moment, pension contributions are subject to tax relief at your marginal tax rate, which makes them particularly attractive to higher and additional rate taxpayers.

Normally you need to make the contributions before the tax year end (5 April), but this time it is recommended to act before the Budget Statement, which is due on 16 March.

There is high risk that Chancellor George Osborne will announce important changes which may affect the tax relief. The exact outcome is not known, but experts have been speculating about a flat rate replacing the marginal tax rate (this would effectively reduce or eliminate the tax relief for higher and additional rate taxpayers). The Chancellor has also mentioned the idea of cancelling the pension tax relief altogether and using a completely new mechanism for taxing pensions in the future, perhaps similar to ISAs (after-tax money in and tax-free money out).

It is not clear if this will eventually materialise and when any changes would come into effect. However, pension tax relief has clearly been one of the Chancellor’s primary targets in the effort to reduce the deficit and raise tax revenue. In light of the uncertainty, the safest approach is to make pension contributions before 16 March to avoid potential disappointment.

Note that if you didn’t use your full allowance in the three previous tax years, you might still be able to get that money in, on top of this year’s £40,000. The previous three years’ allowances were £50,000, £50,000 and £40,000, respectively. One condition is that your total contribution must not exceed your earned income for the current tax year. Another thing to watch out for is the lifetime allowance (currently £1.25m, but falling to £1m in April), as exceeding that could be costly when you retire.

NISAs

If you have the cash, you should always use your annual NISA allowance to the maximum. A NISA is a tax wrapper which allows you to build savings and investments without incurring taxes on income and capital gains going forward. The allowance is £15,240 for 2015-16 and it is use it or lose it – if you don’t deposit the money by 5 April, this year’s allowance is gone forever. You may also want to use your partner’s and your children’s allowances (£4,080 per child under the so called “Junior ISA”).

If you have existing cash ISA accounts, now is also a good time to review them and check the interest rates. Banks like to lure savers with attractive rates, only to slash them after 12 months or some other period. In such case you may want to transfer the funds elsewhere. There are two things to keep in mind:

  • Always transfer from ISA to another ISA directly. If you do it via your regular bank account, once you have withdrawn the money, it loses the ISA status (and withdrawals do not increase your annual allowance – that will only change the next tax year).
  • Each tax year you can only deposit money to one cash ISA account and one stocks and shares ISA account.

Capital Gains Tax

You can often save on capital gains tax even outside ISAs. There is an annual CGT allowance, which makes the first £11,100 (for 2015-16) of capital gains tax-free. You need to realise these by the tax year end; otherwise the current year’s allowance is lost forever.

Depending on the investments you are holding, whether there are unrealised gains or losses and whether you want to sell any of them, the decisions to make can become quite complicated, but may save you a lot in taxes. A potentially large CGT bill can be reduced (by crystallising losses) or deferred (if you wait with the sale until 6 April). On the other hand, if you are well within your CGT allowance you can crystallise gains to reduce future taxes.

Always keep in mind that tax issues are an integral part of any investment strategy (and tactics), as taxes can affect net return substantially. At the same time, don’t forget to consider transaction costs.

Inheritance Tax

If your estate is likely to exceed the IHT threshold (£325,000 for individuals or £650,000 for couples), you may want to take steps to reduce it. Estate planning can obviously become very complex, but the easiest thing you can do is make gifts to your beneficiaries. These are subject to annual allowance of £3,000. If you didn’t use the allowance last year, it can still be used now (making it £6,000 in total), but after the tax year end it is lost. As long as you live for seven years after the gift, it is out of your estate.

Other Considerations

The above are the most common points which apply to most people. Depending on your circumstances, there may be other opportunities, further allowances and other things to do before the tax year end. In any case, it is best to discuss your entire financial and tax position with your adviser, as some actions might have unexpected consequences. Don’t forget the key date is 5 April, with the exception of pension contributions where it is safer to act before 16 March this year. Also remember that some actions will require longer time to process and don’t leave everything to the last days.