Spring Budget: tax and pensions updates

01 May 2016, at 1:00am

Dylan Jenkins details the Chancellor’s so-called ‘Budget for the next generation’, with several changes that affect all of us and others regarding pensions

GEORGE OSBORNE RECENTLY DELIVERED HIS FIRST FULL BUDGET of the current Parliament. In his own words he described this as a Budget for the next generation, with a repeated theme of “act now, so we don’t pay later”.

In this article I will detail the changes resulting from this Budget and how they may affect you and your finances. 

Overall there were no great surprises or shocks in the recent Budget and happily no more changes to the current pension legislation other than a few small amendments to the pension tax rules, to ensure that they operate as intended following the introduction of pension flexibility in April 2015.

There was good news for investors as Capital Gains Tax (CGT) rates will fall, but not for landlords. Investors who own funds or shares will bene t from a CGT cut from 6th April this year, and the new rates are 10% where an individual is not a higher rate tax payer or 20% where the investor is a higher rate tax payer or the gain takes them into the higher rate band.

Trustees and legal personal representatives also see their tax rate fall to 20%. However, landlords or second property owners will continue to pay 18% or 28% on any gains when they come to sell. 

This measure, together with the higher rates of Stamp Duty that had already been announced on purchases of additional residential properties, is designed to try to redress the balance between those who are struggling to buy their first property and those who are able to invest in additional properties. The rates of Stamp Duty will be 3% above the current rates, and will take effect from 1st April 2016.

There were also some welcome announcements about ISAs. Although the ISA limit will remain at the current level of £15,240 for the 2016/2017 tax year, from April 2017 it will increase to £20,000. 

There will also be a new Lifetime ISA (LISA) available from April 2017 for savers aged between 18 and 40. Any savings made into the plan before age 50 will attract a 25% bonus from the government – provided the funds are used either to purchase a first home or not withdrawn until after 60 (i.e. for retirement).

Contributions may continue after age 50 but the government bonus will only be applied to contributions made before the saver’s 50th birthday. The bonus will be added to the fund at 50 but will be lost if the funds are withdrawn before the saver’s 60th birthday or before their first time property purchase.

The maximum contribution will be £4,000 per year with the total maximum contribution to the plan over a lifetime being £128,000.

Contributions to the Lifetime ISA must be within the overall ISA limit (£20,000 from 2017/18). Individuals can contribute into a Lifetime ISA alongside other ISAs in one tax year provided they remain within the £20,000 annual limit.

Savers can withdraw their funds at any time tax-free but will not receive the government bonus and will incur a 5% charge if the withdrawal is not for the purchase of their first property or after they turn 60 (unless they are diagnosed with terminal ill health as per current pensions legislation).

This appears to be one of the pension changes the Chancellor had been looking to make, eased in under ISA rules and initially to run alongside the current pension system.

For young savers with one eye on a potential property purchase, this may be the preferred option to the more traditional route of pension saving. It will be interesting to see whether similar flexibilities are offered to pension plans in the coming years and also whether the opt-out rate among young people from Workplace Pensions increases.

But this is a complementary 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-40s will be able to use both and add up to £45,000 per year to their retirement funds.

In more good news for employers and employees, the Government has confirmed that salary sacrifice will continue to be a tax-efficient and NI- efficient option for funding 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.

From April 2018, self-employed individuals will no longer have to pay Class 2 National Insurance contributions, which are currently £2.80 per week. They will still have to pay Class 4 NI, which will be reformed to allow them to build up an entitlement to State Pension.

As an encouragement to UK business the Corporation Tax rate will be further cut to 17% from 2020, from its current rate of 20%.

And as a reminder of what we already knew was coming in 2016/17, the pension lifetime allowance is to be cut from £1.25 million to £1 million, with new protection options for those expecting to be caught.

In addition, the standard £40,000 Annual Allowance for pension contributions will be reduced by £1 for every £2 of “income” you have over £150,000 in a tax year, until the allowance drops to £10,000.

A reminder about personal savings and dividend allowances 

While this was not a new development in the recent Budget, it is worth remembering that from 6th April 2016 savers are no longer subject to the 20% tax deduction on interest on savings accounts in banks or building societies.

There will be a new Personal Savings Allowance (PSA), which will allow savers to earn interest of up to £1,000 per year tax-free. Higher rate tax payers will only have a PSA of £500 and additional rate tax payers will not have any PSA.

Banks will no longer deduct tax at source so, if you exceed your PSA, you will have to pay tax on the interest over the allowance: 20% if you are a basic rate tax payer or 40% if you are a higher rate tax payer. Banks will notify HMRC that you have exceeded your allowance and the tax will usually be collected by altering your tax coding.

Those who receive dividend income will also face a new tax regime, with dividends below £5,000 becoming tax-free. Above this level, basic-rate tax payers will pay 7.5%, while those in the higher rate will pay 32.5% and additional rate tax payers 38.1%.

Many investors will not exceed the limit but shareholding directors who take a large amount of income as dividends will see the impact of this affect their tax liability.

HMRC will need to be notified if dividend income exceeds £5,000 as – unlike the PSA – banks or investment firms will not do this.