Summer Budget Summary

So we have had the first Budget from the new majority Government, and there are some changes afoot!  I’ve summarised the points which we feel will affect you and also how we can help you plan to take advantage of the changes.

Let’s look at the main changes to pensions first.

PENSIONS

Reduction in Annual Allowance for high earners

So as expected, those earning over £150,000 pa will see some changes from the 2016/17 tax year.  The annual allowance of £40,000 is going to reduce by £1 for every £2 of income over £150,000 pa.  The maximum reduction is £30,000 so if you earn over £210,000 pa, the most you will be able to contribute (and receive your full rate of tax relief) will be £10,000 gross.

What should I do?

If you are going to be affected by this change, you should look to fund your pension as much as possible between now and then.  We will of course be in touch with individual recommendations but this really is a use it or lose it scenario.

Review of Pension Framework

In a bit of a surprise move, the Chancellor opened a review of the current pension framework to ensure that it remains fit for purpose and sustainable for a changing society.

We feel this is a welcome consultation and could mean a genuine ‘simplification’ of the whole system.

What should I do?

Nothing.  We will keep you posted on this one.

Other pension news

The proposed reduction in the Lifetime Allowance from £1.25m to £1m will go ahead as planned from 2016/17.  It will be indexed in line with inflation from 2018/19.

As promised, all pension lump sum death benefits paid after 6 April 2016 in relation to a death at age 75 or above, will be taxed as the recipients income, removing the current 45% rate applicable in the current tax year

What should I do?

Nothing. We have already sent quite a bit of communication around these changes and we are in the process of contacting individual clients who we think may be affected by the changes.

Let’s now turn our eye to Inheritance Tax.

INHERITANCE TAX

Family Home and the nil rate band – good news!

The Government are introducing a new nil rate band of up to £175,000 where the family home is passed to children or grandchildren. This is in addition to the current nil rate band of £325,000 which we know will remain at that level until at least the end of 2020/21.

Like the existing nil rate band, the new one can be transferred between spouses and civil partners.

This means a married couple could pass £1m to their children tax free on death, provided the family home is worth at least £350,000.  This is an inheritance tax saving of £140,000!

Family Home and the nil rate band – bad news!

The first bit of bad news is that the new band will not be available in full until 2020/21.

£100,000 will be available in 2017/18, £125,000 in 2018/19, £150,000 in 2019/20 and then £175,000 in 2020/21.  Thereafter it will rise with inflation.

The second, and more important bit of bad news is that anyone with a net estate of £2m or more will see the new nil rate band reduce until it is completely lost in some cases.  By 2020/21, if your net estate is over £2.35m, then there will be absolutely no benefit to you.

What should I do?

It’s important (for everyone) that your Will is up to date and reflects your wishes, but even more so if you think you may benefit from the new nil rate band.  Please do let us know if you would like a recommendation for a lawyer to help with this.

We’ve looked at changes to inheritance tax – what other tax changes have there been?

GENERAL TAX

Corporation Tax

Currently, Corporation tax is charged at 20% and this will be cut to 19% in 2017 and 18% in 2020.  It will give the UK the lowest rate of Corporation Tax in the G20 and to use the Chancellor’s words will mean “Britain is open for business”.

Individual Tax Allowances

Both the personal allowance and the higher rate income tax thresholds will increase over the next 2 years as follows:

2016/17

• Personal Allowance increases to £11,000
• Higher Rate Tax Threshold increases to £43,000

2018/19

• Personal Allowance increases to £11,200
• Higher Rate Tax Threshold increases to £43,600

New Dividend Tax Allowance

The current system of dividend tax credits is being abolished and from April 2016 will be replaced by a tax free allowance of £5,000. Dividends in excess of this will be taxed as follows:

Basic Rate                           7.5%
Higher rate                        32.5%
Additional rate                   38.1%

What does this mean?

So, from April 2016, a basic rate tax payer could receive tax free income of up to £17,000 pa when you add the personal tax allowance and the new personal savings allowance of £1,000. Higher rate tax payers could have up to £16,500 tax free as their savings allowance is reduced to £500.

Certain people may also have savings income which falls into the £5,000 savings rate band which is currently not taxed.  Assuming this doesn’t change, tax free income could be as much as £22,000.

What should I do?

It’s clear that taking advice around income strategies is more important than ever.  Making full use of these allowances is an obvious bit of planning and as you know, we champion the idea of building a diverse investment strategy. These changes really reinforce the importance of having different ‘pots’ from which you can draw income when you need it and we will continue to advise you accordingly.

ANYTHING ELSE?

There were some more announcements which were specific to certain people – for example from 2017 there are new rules around “non-dom’s” and their tax situation. If you think this will affect you then please do get in touch.

The Chancellor also confirmed the changes to withdrawals from Cash ISA’s from 2016 and details on the new ‘Help to Buy ISA’s’ which become available in December 2015.  If you would like further information on these please do let me know.

It’s clear that there are some quite fundamental changes following this Budget – nothing too surprising but it has certainly opened the door to some important planning requirements to ensure that you take advantage of all the benefits that the Budget can offer you.  We will continue to work with you with all of this in mind.

If you have any questions with regards to the above, please do not hesitate to contact us.