George Osborne’s eighth Budget fortunately didn’t send some of the shock waves experienced with previous Budgets. There are always rumours leading up to a Budget but this year there were even stronger rumours than normal concerning the expected changes in tax relief on pension contributions. In the end, these were nothing more than speculation and pensions have actually seen little change other than a few snippets of clarity in areas of pension flexibility.
The Chancellor’s key message was that this Budget was for the ‘next generation’, which was a term used 18 times in his speech according to the BBC. ‘Northern Powerhouse’ had six mentions which was two more than ‘long-term economic plan’.
With regard to personal finance the key messages were as follows:
The government has an objective to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 by the end of this parliament.
The Budget included the announcement that the personal allowance for 2017/18 will increase to £11,500, and the basic rate limit will increase to £33,500 giving a higher rate threshold of £45,000.
As already announced, the dividend tax credit will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from 6th April 2016. Dividends that exceed this allowance will be taxed as follows:
Basic rate band – 7.5%
Higher rate band – 32.5%
Additional rate band – 38.1%
Capital Gains Tax Rates
For individuals, trusts and personal representatives who pay Capital Gains Tax (CGT) the rates of CGT will reduce from 6th April 2016. The 18% rate of CGT will reduce to 10% and the 28% rate to 20%, except in relation to gains accruing on the disposal of residential property (that do not qualify for private residence relief), and carried interest. The reduced rates apply to relevant gains accruing on or after 6th April 2016.
The government wants to create a strong enterprise and investment culture. Cutting the rates of CGT for most assets is intended to support companies to access the capital they need to expand and create jobs. Retaining the 28% and 18% rates for residential property is intended to provide an incentive for individuals to invest in companies over property.
Higher Rates Of Stamp Duty Land Tax (SDLT) On Purchases Of Additional Residential Properties
The introduction of higher rates of Stamp Duty Land Tax (SDLT) on purchases of additional residential properties is designed to try and redress the balance between those who are struggling to buy their first property and those who are able to invest in additional properties. The higher rates will be 3 percentage points above the current SDLT rates, and will take effect on and after 1st April 2016.
Rent A Room Relief Increase
As previously announced, from 6th April 2016 the level of Rent a Room relief, which provides for tax-free income that can be received from renting out a room or rooms in an individual’s only or main residential property, will increase from £4,250 to £7,500 per year. It also increases the level if an individual rents out rooms in a guest house, bed and breakfast or similar, providing that it is their main residence.
From 6th April 2017 the ISA limit will increase to £20,000.
The Lifetime ISA will be available from 6th April 2017 for savers aged between 18 and 40. Any savings made into the plan before age 50 is attained will attract a 25% bonus from the government – provided the funds are used to either purchase a first home or withdrawn after 60 i.e. for retirement. As with all ISAs, funds can be withdrawn without a tax charge.
The maximum contribution will be £4,000 a year with the total maximum contribution to the plan over a lifetime being £128,000 – a government bonus of £32,000 can then be added provided the funds are withdrawn for either of the above events.
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 a Cash ISA, a Stocks and Shares ISA and an Innovative Finance ISA in one tax year provided they remain within the £20,000 pa limit.
Contributions may continue after age 50 BUT the government bonus will only be applied to contributions made up to the saver’s 50th birthday, i.e. 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.
It will also be possible to transfer funds from other ISAs to the Lifetime ISA (this includes from the Help to Buy ISA).
Savers can withdraw their funds at any time 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). The government is also considering whether other specific lifetime events may allow funds to be withdrawn without the loss of the bonus.
A further area of consideration is around whether the saver can ‘borrow’ funds but then fully repay them to benefit from the maximum bonus in the future.
More details on these areas and the final rules are expected in the Autumn following consultation with the industry.
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 amongst young people who have been auto enrolled increases as they reach the point where they need to contribute to their pension.
Help To Save Scheme
The Chancellor has announced a savings scheme to help the lower paid to save, by providing a 50% government bonus on up to £50 of monthly savings. The scheme will start in April 2018 following consultation and will be open to 3.5 million adults in receipt of Universal Credit with minimum weekly household earnings equivalent to 16 hours at the National Living Wage, or those in receipt of Working Tax Credit.
The bonus will be paid after two years with an option to save for a further two years, meaning that people can save up to £2,400 and benefit from a maximum government bonus of £1,200. Funds can be used in any way the saver wishes.
As with the Lifetime ISA, there are concerns that this measure could lead to higher levels of opt outs under auto enrolment.
Replacing ISA Withdrawals (Cash ISA or cash element of Stocks & Shares ISA)
As previously announced, the ability to make withdrawals from a cash ISA (or the cash element of a stocks and shares ISA) and replace them within the same tax year without affecting annual subscription limits will go ahead from 6th April 2016.
Any ISA investor could potentially benefit now that transfers between cash and stocks & shares ISAs are possible in either direction, i.e. a stocks and shares ISA could be transferred to a cash ISA first before making the withdrawal.
Help To Buy ISA (Can be rolled over into a Lifetime ISA from April 2017)
The Help to Buy ISA became available from 1st December 2015. Gives 25% tax relief on savings up to £12,000 (i.e. £3,000 Government contribution if £12,000 saved). The tax relief is only given when the first home is bought. It’s a cash ISA so an investor can’t invest in another cash ISA in the same tax year as a Help to Buy ISA. The maximum single initial premium is £1,000 plus maximum regular savings of £200 per month. Property values can’t exceed £250,000 (£450,000 in London).