George Osborne’s Autumn Budget Statement did not contain any major shocks this time around ( a relief for us advisers for a change), but there is still plenty to take on board. The following summary is reproduced with kind permission of Scottish Widows:
Whilst only minor changes affecting the financial services industry were announced in the Autumn Statement the key changes for 2016/2017 set out by The Chancellor previously will still apply. The details and opportunities for financial planning advice are outlined below.
There will be a six month delay in the scheduled increases in the minimum contributions rates for automatic enrolment. This will bring the increases in line with the tax year. The first increase will apply from 6 April 2018. The second increase will apply from 6 April 2019.
- The standard annual allowance in 2016/2017 will be £40,000.
- The money purchase annual allowance in 2016/2017 will be £10,000.
- The annual allowance for high earners will be reduced to between £10,000 and £40,000 (see below)
Higher earners tapered annual allowance
- The reduced annual allowance will affect those with both ‘adjusted income’ of more than £150,000 and ‘net income’ of more than £110,000.
- ‘Adjusted income’ includes employer and employee pension contributions (except those made under the ‘relief at source’ basis). ‘Net income’ excludes pension contributions, unless paid under a salary sacrifice agreement, set up on or after 9 July 2015. This is to prevent tax avoidance. Where adjusted income and net income exceed the respective thresholds, the taxpayer’s annual allowance will be reduced by £1 for every £2 of adjusted income in excess of £150,000. The maximum reduction is £30,000, which would result in an annual allowance of £10,000. The level of adjusted income at which the maximum reduction in the annual allowance is reached, is £210,000.
Pension input periods
- All pension input periods will be aligned with the tax year from 2016/2017, with no option to vary the period. All pension input periods closed on 8 July 2015 (the pre-alignment period). A further pension input period runs from 9 July 2015 to 5 April 2016 (the post alignment period). This change was to ensure no tax charges arise against those who had fully funded their pensions in advance of the change. The total annual allowance for the pre-alignment period is £80,000, up to £40,000 of which is available to carry forward into the post alignment period.
- Carry forward from the 3 previous tax years will be available as normal. However when using carry forward from 2016/2017 onward it will be based on the tapered annual allowance rather than the standard annual allowance.
- The money purchase annual allowance of £10,000 will still be available, however, taxpayers who are affected by both the money purchase annual allowance and the tapered annual allowance will retain the £10,000 money purchase annual allowance but will suffer a reduced annual allowance for funding non-money purchase schemes.
Lifetime allowance (LTA)
- The LTA will reduce to £1 million for 2016/2017 and 2017/2018. There will be a new round of transitional protection; Fixed Protection 2016 and Individual Protection 2016. These will work in the same way as Fixed Protection 2014 and Individual Protection 2014. Those applying for Fixed Protection need to cease contributions/benefit accrual by 5 April 2016. The application process isn’t expected to be available until July 2016.
- The LTA will then be index-linked in line with the consumer prices index (CPI) from 2018/2019.
- As a reminder, those who want to apply for Individual Protection 2014 must do so online by 5 April 2017.
- Other than for higher earners as noted above, there’s no change to the rate of tax relief for member contributions, which will continue to be based on the individual’s highest marginal rate.
Pension tax relief reform
- The Government is considering the responses to the consultation of the reform of pensions tax relief. It will publish its response in the 2016 Budget.
Extension of Freedom and Choice agenda to existing annuitants
- The ability to sell annuities in payment is being deferred for a year, from April 2016 to 2017. The Government will set out its plans for the secondary annuities market in December 2015.
Lump sum death benefits
- Lump sum death benefits paid following the death of a member aged 75 or over will change from being taxed at the flat rate of 45% to the beneficiary’s marginal rate of income tax from 6 April 2016.
- Whilst there were no changes to salary exchange the Government remains concerned about the growth of these arrangements and so the cost to the taxpayer. The Government restated that it will actively monitor the growth of schemes and the impact on tax receipts.
- Those who had paid less than £80,000 in their pension input period ending on 8 July 2015 can make further contributions without exceeding the annual allowance. The maximum contribution that can be made without an annual allowance tax charge arising, is the amount of the unused £80,000 annual allowance for the pre-alignment period, up to a maximum of £40,000 plus carry forward from 2012/2013, 2013/2014 and 2014/2015.
- Higher rate taxpayers still benefit from higher rate relief on contributions of at least £40,000 in 2015/2016. With further potential restrictions to tax relief being considered, those with sufficient funds could consider funding sooner rather than later while full tax relief is still available.
- The reduction in the Lifetime Allowance to £1 million from 6 April 2016 will greatly widen the scope of those within the restrictions. While the introduction of index-linking from April 2018 is welcome, it’s far short of a return to the £1.8 million LTA in place in 2011/2012 which itself was originally intended to rise in line with inflation. The next round of pension protection will help mitigate the impact for some clients. Those clients with significant funds and no previous protection should consider applying for Fixed Protection 2016 and/or Individual Protection 2016 or Individual Protection 2014.
- The delay in the implementation of the secondary annuity market to 2017 is welcome as it gives more time for providers and advisers to ensure they are fully prepared for any changes.
- From April 2016, the current 10% dividend tax credit will be abolished. It will be replaced with a new £5,000 a year dividend tax allowance.
- The new rates of tax on dividend income above the allowance will be:
- 7.5% for basic rate taxpayers
- 32.5% for higher rate taxpayers
- 38.1% for additional rate taxpayers.
- The Government’s stated intention is for these reforms to reduce the incentive to incorporate and remunerate through dividends. The tapered annual allowance for those with incomes including pension contributions of over £150,000 will also apply from April 2016. There will be considerably less scope to use dividends and employer pension contributions to maximise tax efficient director’s remuneration in future. Companies with undistributed profits should consider taking advantage of the last chance to make the most of these strategies before the end of the current tax year.
- Higher rate and additional rate taxpayers with modest dividend income from share/OEIC portfolios will welcome the change, with a potential saving of up to £1,250 a year from 2016/2017 for a higher rate tax payer, compared to now.
Personal allowance and higher rate threshold
- In 2016/2017 the income tax personal allowance will see another substantial increase of £400 to £11,000. A further increase to £11,200 was announced for 2017/2018.
- The basic rate band increases to £32,000 for 2016/2017. Those entitled to the full standard personal allowance will pay 40% tax on income above £43,000. The threshold for higher rate income tax increases by £615 for 2016/2017.
- The basic rate limit will increase to £32,400 for 2017/2018. Together with the planned increases in the personal allowance, this means the higher rate threshold will be £43,600 for 2017/2018. These are the next steps in the Chancellor’s stated aim of increasing the higher rate threshold to £50,000.
- From 1 April 2016 higher rates of stamp duty will be charged on further purchases of residential property i.e. second homes or buy to let properties. The additional rate will be 3% above the standard rate and will apply to properties worth more than £40,000. It is not expected to apply to corporates or funds making significant investments in residential property. The Government will consult on the policy detail,
- The tax relief on mortgage interest will be restricted to basic rate for mortgages on ‘buy to let’ residential properties. The restriction will be phased in over 4 years from April 2017.
- ‘Rent a room’ relief will be increased from £4,250 to £7,500 from April 2016. The relief had been frozen since 1997.
- From April 2019, if capital gains tax (CGT) arises from a disposal of residential property the taxpayer must pay it within 30 days of completion. Under the current system tax is due between 10 and 22 months after disposal.
- Higher rate taxpayers will welcome the further increases in the higher rate threshold, however, the rates from 2016/2017 and 2017/2018 are still a long way off the Chancellor’s stated aim of a £50,000 higher rate threshold. In the meantime pension contributions benefiting from higher rate relief remain an attractive savings option.
- A further substantial increase in the personal allowance means that higher earners can achieve even greater benefit by using pension contributions to reduce adjusted net income above £100,000. For someone with gross income of £122,000 a pension contribution of £22,000 will cost just £8,800 in 2016/2017, attracting tax relief of 60%.
- A further blow to the buy to let market. The 3% increase in stamp duty coupled with the reduction in the tax relief on mortgage interest will significantly increase the costs, along with bringing forward the CGT payment date by up to 21 months. It may also prove difficult to work out the correct taxable gain and the amount payable within 30 days of completion, particularly where valuations and complex calculations are required.
TAX EFFICIENT INVESTMENTS
- The ISA limits will remain unchanged for 2016/2017. The main ISA limit will remain at £15,240 and the limit for Junior ISAs and Child Trust Funds will be £4,080.
- The ‘Help to Buy’ ISA will be available from 1 December 2015. This new product will enable first time buyers to save up to £200 per month towards a first home, with an initial one-off deposit of £1,000. The Government will boost savings by 25% up to a maximum of £3,000, which will be paid when a property is purchased.
- New flexible ISA rules will be introduced from 6 April 2016. The rules will allow investors to pay withdrawals from a cash ISA back in to the account before the end of the tax year, without reducing their subscription limit further. The change will also cover cash held in stocks and shares ISAs.
Personal savings allowance
- From 6 April 2016, a tax-free savings allowance of £1,000 will be available to those with taxable income of less than£43,000 i.e. basic-rate payers and below. Higher rate taxpayers benefit from a £500 tax-free allowance. Those earning over £150,000 are not entitled to an allowance.
- Some savers and investors will be disappointed in the freezing of the ISA allowance, however they have received substantial increases in recent years
- The personal savings allowance provides more incentive for savers with even higher rate taxpayers benefiting from an allowance. However, it’s most generous for low earners who will potentially pay no tax on their savings where total taxable income is less than £17,000 in 2016/2017, after taking into account the £5,000 savings band.
- New flexible ISA rules allowing cash withdrawals to be returned to an ISA by the end of the tax year will help to maximise the benefits by removing an effective penalty on those who are forced to access their savings temporarily.
INHERITANCE TAX (IHT) AND TRUSTS
- The Government aims to reduce the number of estates paying IHT by introducing an additional nil-rate band from April 2017. This will apply where the main residence passes on death to direct descendants such as children and grandchildren. This will be worth up to £100,000 in 2017/2018, £125,000 in 2018/2019, £150,000 in 2019/2020 and £175,000 in 2020/2021 with CPI indexation applying thereafter. As with the existing nil-rate band, any unused nil-rate band will be able to be claimed on the death of their surviving spouse or civil partner. Those with net estates worth more than £2 million will see the additional nil-rate band scaled back by £1 for every £2 over this threshold. Further guidance on the downsizing provisions was published in October 2015 with legislation on this aspect in Finance Bill 2016.
- The IHT nil-rate band is currently frozen at £325,000 until 5 April 2018 and this will continue to apply until April 2021.
- Following the review of deeds of variation no changes will be made. The Government will continue to monitor their use.
Drawdown funds and IHT
- The Government will introduce legislation to clarify that no IHT applies on unused drawdown funds remaining on death. The legislation will be backdated to April 2011.
- The changes to IHT remove the family home from the IHT net for all but the wealthiest homeowners although the maximum benefit of £1m won’t be available until tax year 2020/2021 due to phasing of the allowance.
- Those with larger estates will still need advice on steps they can take to mitigate IHT.
- From April 2017 foreign domiciles who have been long term resident in the UK – more than 15 of the past 20 tax years will be deemed to be UK domiciled for taxation purposes. This will mean they will no longer be able to utilise the remittance basis of taxation and will be subject to tax on a worldwide basis on their income and gains. They will also be deemed domicile for IHT purposes – bringing forward the point at which IHT applies to their worldwide assets from the current period of 17 out of the past 20 years ending in the year of transfer.
- It will no longer be possible for individuals born in the UK to UK domiciled parents to leave the UK, claim non-domicile status then return to the UK and continue to claim non-domicile status for tax purposes.
- The Government also intends to introduce new rules from April 2017 to ensure IHT is payable on all UK residential property owned by non-domiciles regardless of their residence status.
- The corporation tax rate will be cut from 20% to 19% in 2017 and then to 18% in 2020.
- For accounting periods starting on or after 1 April 2017, corporation tax payment dates will be brought forward for companies with annual taxable profits of £20 million or more. This threshold will be divided by the number of companies in a group. These companies will pay corporation tax in quarterly instalments in the third, sixth, ninth and twelfth months of their accounting period.
- The permanent level of the Annual Investment Allowance (AIA) will increase from £25,000 to £200,000 for all qualifying investment in plant and machinery made on or after 1 January 2016.
- Companies may consider making employer pension contributions before the lower rates of corporation tax reduce the effective rate of tax relief available.
- The £2,000 National Insurance employment allowance, which reduces the overall cost of employer National Insurance Contributions (NICs) for employers will increase from £2,000 to £3,000 from April 2016. From the same date, companies where the sole employee is the director will no longer be able to claim this allowance.
- The Government will actively monitor the growth in salary exchange (also known as salary sacrifice) schemes used to reduce the amount of employee and employer NICs.
- As automatic enrolment continues to roll out, employers and employees are looking for ways to reduce the net cost of pension contributions. Salary exchange arrangements, where an employee opts to give up salary in exchange for a higher employer pension contribution, still offer NICs savings for both employees and employers.
STATE BENEFITS, TAX CREDITS AND THE MINIMUM WAGE
- The basic State Pension increases in line with the triple lock by £3.35 to £119.30 a week for 2016/2017.
- The Pension Credit Standard Minimum Guarantee increases by £4.40 to £155.60 a week for a single person and by £6.70 to £237.55 a week for couples for 2016/2017. The Savings Credit threshold will increase to £133.82 for a single pensioner, reducing the single rate of the Savings Credit maximum to £13.07. It will increase to £212.97 for couples, reducing the couple rate of the Savings Credit maximum to £14.75.
- The new single tier State Pension for people who reach state pension age from April 2016 will start at £155.65 a week for those entitled to the full rate.
- The proposed cuts to tax credits have been withdrawn and the current system remains in place, although these ‘in work’ benefits will be gradually replaced as Universal Credit rolls out. The Universal Credit rollout schedule currently starts in 2016 with completion due by 2021.
- From April 2016, payment of Housing Benefit and Pension Credit will stop for claimants who travel outside the UK for longer than 4 consecutive weeks.
Social care reforms
- As previously announced, the ‘Dilnot’ reforms to social care funding in England are on hold until 2020. (Scotland, Wales and Northern Ireland all have their own social care funding arrangements.)
National minimum wage
- The current rates shown below apply since 1 October 2015, with the previous rates shown in brackets:
- £6.70 (£6.50) per hour – main rate for workers aged 21 and over.
- £5.30 (£5.13) per hour – workers aged 18 to 20.
- £3.87 (£3.79) per hour – workers aged under 18 and above school leaving age.
- £3.30 (£2.73) per hour – apprentice rate for apprentices under 19 or 19+ and in their first year.
- From April 2016, those aged 25 and over will benefit from an increased rate of £7.20 an hour, branded as the National Living Wage.
- Remember the minimum wage when planning with salary / dividend / pension profit extraction and salary exchange / sacrifice.
** Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given. This information is based on announcements made in the July 2015 Budget and November 2015 Autumn Statement which may change before becoming law.
– Scottish Widows