Well summer is here and the Chancellor delivered his first post-election Budget on 8th July 2015. Save & Invest has prepared a summary of the main changes that we feel may impact on our clients and their financial planning strategies.
As always, we invite clients to get in touch to discuss any of these issues with their Save & Invest financial adviser.
Income Tax Rates
The personal allowance, the threshold at which income becomes liable to basic rate tax, will be set at £11,000 for the 2016/17 tax year (£10,600 for 2015/16)
The threshold at which income becomes liable to higher rate tax will be £43,000 for the 2016/17 tax year (£42,385 for 2015/16). The threshold for paying additional rate tax at £150,000 remains unchanged, as do the tax rates for basic (20%), higher (40%) and additional (45%).
Income Tax on Dividends
From April 2016, the dividend tax credit of 10% will be removed. All taxpayers will be able to claim a tax-free Dividend Allowance of £5,000pa. Any dividend income received outside ISA or pension above this Allowance will be taxable at the following rates:
Basic Rate: 7.5%
Higher Rate: 32.5%
Additional Rate: 38.1%
For those with significant share portfolios or for directors remunerated predominantly via dividends, this change may mean a significant increase to income tax payable on dividends and you should consult your financial adviser.
Tapered Annual Allowance for Higher Earners
From 6 April 2016 the current Annual Allowance of £40,000 for pension contributions will be tapered for individuals with “adjusted income” of over £150,000, which will now include any salary sacrifice arrangements.
The rate of reduction will be £1 in the Allowance for every £2 the adjusted income exceeds £150,000 with a maximum reduction of £30,000.
This change will reduce the capacity for higher earners to save tax-efficiently to a pension. Anyone with expected net income over £110,000 in the 2016/17 tax year will need to speak to their financial adviser about retirement planning as they could be caught by this new tapered allowance.
Annual Allowance and Pension Input Periods
Pension input periods for UK pension will be aligned to tax years, and it will not be possible to change these in future. For the 2015/16 tax year, all currently open pension input periods closed on 8th July and a new one will be available from 9th July 2015 to 5th April 2016.
To avoid an Annual Allowance tax charges arising on some clients who already save the maximum to pension each year, these clients may benefit from a “double” Annual Allowance for the 2015/16 tax year of £80,000. An urgent retirement planning review may be required for anyone whose pension is currently funded at, or near, the maximum Annual Allowance each year.
Help to Buy ISA
The new “Help to Buy” ISA will be available from 1 December 2015 for first time buyers. The Government will contribute £50 for every £200 that an individual saves for their deposit (the Government’s contribution is capped at £3,000). So, if someone puts in £12,000, the Government will add £3,000 - and if two people are buying together, they are each eligible so there is scope for their deposit to be boosted by up to £6,000.
Inheritance Tax and Additional Family Allowance
The nil rate band, which represents the value of an estate that can be passed on after death without giving rise to inheritance tax, will be fixed at £325,000 until 2020/21 tax year.
From April 2017, an additional allowance will be available to use against the value of assets (the family home or the equivalent value of assets if a person downsizes after 8 July 2015) where this is passed to direct family members (children or grandchildren) as follows:
This allowance will be transferrable to a surviving spouse or civil partner on first death. The allowance will be tapered for those whose estate value is at least worth £2M and not available for those whose estates exceed £2.35M.
Permanent Non- domicile Status
From April 2017 the “non-dom” status will be cease to be available for anyone who has been UK resident in the UK for 15 out of the past 20 years. These individuals will be “deemed” domiciled and taxed on their world-wide assets, and the remittance basis will no longer apply. Nor will it be possible to use offshore arrangements to avoid inheritance tax on UK residential property.
Pension Tax Reform
The Government has launched a consultation Green Paper to consider changes to the current pension tax system to incentivise individuals saving for retirement whilst also seeking to make the costs of continued government contributions more sustainable for the future.