Unpacking the 2016 Budget…

So, Wednesday was the long awaited sixth Budget from Mr Osborne. He didn’t make the changes to pension tax relief that we had been expecting and largely left pensions alone – for now. As you know, the main change from the last Budget was the restriction on pension contributions for higher earners and this has not changed.

I have summarised the points from this Budget which I think are most relevant to you.

LIFETIME ISA (LISA)

A new Lifetime ISA (LISA) is being made available to savers aged between 18 and 40 from April 2017. Contributions will be limited to £4,000 with the government boosting savings to £5,000 each year but this will stop when the account holder reaches age 50.

Funds can be accessed tax free after the age of 60, or they can be accessed at any age if the proceeds will be used to buy a first home.

Other withdrawals will be allowed, but the Government bonus, and the growth on it, will be lost.

If you, or your children, have started saving into an existing ‘help to buy ISA’ these can be transferred to the new LISA. You won’t be able to contribute to both.

Any savings made into a Lifetime ISA are counted as part of the overall ISA limit. This is planned to be raised from the current limit of £15,240 to £20,000 in April 2017 so no changes right now on that.

PENSIONS TAX CONSULTATION

The Government has published a summary of responses to the consultation ‘Strengthening the incentive to save: a consultation on pensions tax relief’. We are awaiting the Government’s decision on the next steps to take, if any.

INCOME TAX

There will be an increase in the higher rate tax threshold from £42,385 to £45,000 from April 2016.

PERSONAL ALLOWANCE

The personal allowance (this is the amount of income you don’t pay tax on) is increasing to £11,000 in 2016/17 and then to £11,500 in 2017/18.

CAPITAL GAINS TAX

From 6th April 2016, Capital Gains Tax rates of 18% and 28% for basic and higher rate taxpayers will be reduced to 10% and 20% respectively. However, for landlords or second property owners, the 18% and 28% tax rates will continue. The intention behind this is to encourage savers to choose to invest in stocks and shares rather than property.

NATIONAL INSURANCE

From April 2018, class 2 national insurance contributions (NICs) will be abolished for the self-employed. Class 4 NICs will be also reformed. In order to maintain certain state benefits, the self-employed will have to maintain a level of Class 4 NICs.

OTHER BUDGET CHANGES

The Chancellor has introduced a Sugar Levy (paid by the drinks companies) on soft drinks, after a lot of pressure from the medical community (and Jamie Oliver!) to act on obesity. The aim will be to raise £520 million a year which will be used to increase the funding for sport in school.

Fuel Duty was also frozen for the sixth consecutive year saving about £75 for the average driver.

DO I NEED TO DO ANYTHING AS A RESULT OF THE BUDGET?

With many elements announced not coming in until April 2017, and with 11 working days until tax-year end, what do you need to be thinking about now?

• Make your ISA contribution of £15,240 each and £4,080 for the kids.
• If your spouse is not working, make a contribution to a pension on their behalf of £2,880 (£3,600 including the tax relief).
• Make sure you have considered any changes that need to be made to your pension provision if you are earning over £150,000.  The Annual Allowance is being reduced for anyone earning over £150,000, and if you earn over £210,000, the most you can contribute to a pension (including employer contributions) will be £10,000.
• If you are going to be affected by the reduced Annual Allowance (we have detailed this in previous communication but let us know if you need a reminder) then you should look to fully fund your pension before the 5th April to take advantage of the tax relief you may still have available.

I hope this is helpful and please do give us a call if you have any questions.