Budget Update March 2016
I remember the days when a budget told you the changes for the following tax year – now we seem to work at least a year ahead. Better for planning, but you can forget what was announced last year. Sometimes we get something changed before it even happens. So this update is split: what is happening from April 2016; then later events.
Main Changes April 2016
- Personal allowance increases to £11,000. The threshold for when this reduces remains at £100k.
- Basic rate tax band increases to £32,000 but the additional rate threshold remains at £150,000.
- Personal Savings Allowance starts: £1,000 for basic rate, £500 for higher rate, nil for additional rate, tax payers.
Capital Gains Tax
- Allowance is unchanged at £11,100 but the rates are reduced to 10% up to basic rate limit and 20% above.
- This decrease is offset with residential property by an 8% surcharge.
- Allowance unchanged at £15,240 per tax year. More importantly, from April 2016 you can take funds from your ISA and replace them in the same tax year without using your ISA allowance. BEWARE: this only applies to the cash element of any ISA – not stocks and shares. The trick is to move the funds from Stocks and Shares ISA to a Cash ISA before taking the withdrawal, if you want to take advantage of this.
- Help to buy ISA: these came in during 2015 but will be withdrawn in April 2017 when the new Lifetime ISA starts.
- The new Innovative Finance ISA starts in April 2016. This new ISA will allow savers to use some (or all) of their annual ISA investment allowance to lend funds through the growing Peer-to-Peer lending market, whilst receiving tax-free interest and capital gains.
- Dividend tax credits abolished but there is a new £5,000 tax free dividend allowance. After that it depends on your income tax band: basic rate is 7.5%, higher rate is 32.5% and additional rate is 38.1%.
- Annual Allowance for High Earners: the standard £40k will be cut by £1 for every £2 of ‘adjusted income’ over £150k in a tax year until it reaches £10,000 at £210k. The maximum annual allowance reduction is £30k, giving those with income of £210k or above an annual allowance of £10k.
- Pension Lifetime Allowance reduces to £1 million.
- Lump Sums on Death after age 75: these will now be taxed as the recipient’s income rather than a flat 45%.
- The nil rate band remains at £325k. This has not changed since 2009 and will remain frozen until at least 6 April 2021.
- A new property nil rate band is coming but it does not start until April 2017 and can only be used by children or grandchildren in respect of the family home.
- Look to maximise any allowances. This is getting more and more complicated. If it is done efficiently you can have income of £22,000 and no income tax liability, without using capital gains allowance, tax free dividends from VCTs, tax free withdrawals from ISA or tax deferred withdrawals from Investment Bonds. For example, compare two couples with a combined income of £50,000: it is possible that one couple could pay £9,200 income tax, the other nil.
- For many, pension plans will form a decreasing part of their retirement planning. There are now lots of alternatives to consider.
- Getting it right takes time and cannot be done at the last minute. It is about a strategy and a plan.
New Announcements – Forthcoming Attractions for 2017
- Lifetime ISA (LISA). This follows as part of a general review of “pensions”. Many people have proposed a merging of ISA and pensions into a single arrangement called PISA. That’s not happening (yet) but in the meantime we are going to see a quiet revolution and LISA.
- This is all about tax relief. On pensions you get the tax relief at the start and the benefits are taxable. With ISAs you get the tax relief at the end with tax free withdrawals.
- The new LISA gives you both. The government adds 25% to the contributions (effectively basic rate tax relief) and the proceeds are tax free.
- LISAs are available to those under age 40, subject to conditions being met they can be used for a house deposit on your first home or withdrawn after age 60. If you withdraw funds for any other purpose you have to repay the tax relief (and any growth on it) plus a 5% penalty.
- Maximum £4,000 per annum (which is £5,000 with the tax relief added).
- This is clearly the way things will move in the future. It seems likely that pension limits will be frozen so they gradually phase out over time. ISA/LISA limits may well be increased.
- ISA Limit will increase to £20,000 (LISA is included within this so you could do £4,000 LISA and £16,000 ISA).
- Only a few minor changes. The main one announced previously was the plan to allow people to sell their annuities. This is fraught with problems and, while it is intended to be available from April 2017, personally I would not rely on it being available. If it is, it will need very careful thought before proceeding.
- Personal Allowance and higher rate threshold will increase. Again, the threshold for losing Personal Allowance and additional rate are unchanged.
- National Insurance contributions will reduce as they will no longer need to pay Class 2 (£2.80 per week).
- More allowances, more tax shelters. More need for strategy and a plan.