Budget 2016
You’ll have read all about sugar tax etc…so here are the pertinent points relating savings, investments, pensions and taxation:
It’s business as usual for pension saving as the Chancellor confirmed there will be no imminent changes to pension tax relief. And the introduction of the new LISA saving vehicle from April 2017 adds another attractive complementary option to the saving landscape for the U40’s.
Taken together with cuts in CGT rates, further boosts in income tax thresholds and some welcome tidying-up of pension anomalies, it’s been a good Budget for savers.
In the run-up to tax year end to consider:
- Pension saving: Using the higher 2015/16 annual allowance, and carry forward, to make the most of higher rates of tax relief.
- Lifetime allowance: Planning in earnest for the imminent lifetime allowance cut.
Other pension news
- Salary sacrifice is here to stay: In more good news for employers and employees, the Government has confirmed that salary sacrifice will continue to be a tax and NI efficient option to fund a pension.
LISA – a new savings option
The Chancellor unveiled plans to introduce a new Lifetime ISA (LISA) from April 2017. But this is a complimentary 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 40’s will be able to use both and add up to £45,000 pa to their retirement funds.
How it works on the way in The new LISA will only be available to the under 40s and will include a 25% Government top up at the end of each tax year. It won’t be possible to pay as much into the LISA as you can into your pension. Contributions will be limited to £4,000 each year which will be topped up to £5,000. And savers will stop receiving their top up once they reach age 50.
LISA contributions will count towards the total ISA savings limit which will increase to £20,000 in 2017/18.
How it works on the way out Funds can be accessed tax free after the age of 60. But to help first time buyers, funds may be withdrawn tax free to cover the cost of a deposit on their first home. And anyone already saving in a help to buy ISA will be able to transfer their existing savings to the new LISA.
Accessing savings before age 60 for other reasons will be allowed but the Government Bonus, and the growth on it, will be lost. There will also a 5% tax charge applied on the amount withdrawn.
As with other ISA schemes, the LISA will form part of the estate for IHT.
Good news for investors as CGT falls in 2016/17 – but not for landlords…
Investors who own mutual fund or shares can benefit from a CGT cut from 6 April 2016. The new rates are:
- 10% where an individual is not a higher rate tax payer
- 20% where the investor is a higher rate taxpayer, or the gain takes them into the higher rate band.
Trustees and legal personal representatives also win, as their tax rate on trust and estate gains falls to 20%.
However, landlords or second property owners will continue to pay 18% or 28% on any gains when they come to sell.
Income tax
In April 2017, the Personal Allowance will rise from £11,000 to £11,500 and the higher rate threshold will increase from £43,000 to £45,000.
Together with the new dividend and savings allowances available from April 2016, advice will be key to ensuring that you have your savings in the right place to produce a tax efficient income when you need it.
Class 2 National Insurance From April 2018, self-employed individuals will no longer have to pay Class 2 NICs, currently £2.80 per week.
They will still have to pay Class 4 NICs, which will be reformed to allow them to build up an entitlement to State Pension and other contributory benefits.
Corporation Tax As an encouragement to UK business, the Corporation Tax rate will be further cut to 17% from 2020. The current rate is 20%.
Here’s a reminder of what we already knew was coming in 2016/17:
- LTA cut to £1M The pension lifetime allowance is to cut from £1.25M to £1M with new protection options for those expecting to caught.
- Annual Allowance cut for higher earners The standard £40k AA will be reduced by £1 for every £2 of ‘income’ you earn over £150k in a tax year, until your allowance drops to £10k.
- £5k Dividend Allowance A new allowance will see the first £5k of dividends paid tax free. The changes also new rates of tax for dividends in excess of the allowance and an end to the notional 10% tax credit.
- Personal Savings Allowance Also from April 2016 the first £1000 of interest will be tax free (£500 for higher rate taxpayers). Interest will also be paid gross so that non-taxpayers no longer have to reclaim tax deducted at source. Additional rate tax payers will not benefit from this new allowance.
- Recap of key tax allowances for 2016/17
| Income Tax Allowances | |||
| Personal allowance | £11,000 | ||
| Dividend allowance | £5,000 | ||
| Savings rate band | £5,000 | ||
| Personal savings allowance | £1,000 (£500 for HRT) | ||
| Income tax bands and rates | |||
| Income | Dividends | ||
| Basic rate band | £11,000 – £43,000 | 20% | 7.5% |
| Higher rate band | £43,000 – £150,000 | 40% | 32.5% |
| Additional rate band | £150,000 + | 45% | 38.1% |
| Capital Gains Tax | |||
| Annual exemption | £11,100 | ||
| Inheritance Tax | |||
| Nil rate band | £325,000 | ||
| ISA | |||
| ISA | £15,240 | ||
| Junior ISA | £4,080 | ||