Budget 2016 – The Key Financial Planning Takeaways

It’s business as usual for pension saving as the Chancellor confirmed there will be no imminent changes to pension tax relief. The introduction of the new Lifetime ISA (LISA) savings vehicle from April 2017 adds another attractive, complementary option to the saving landscape. Taken together with cuts in Capital Gains Tax (CGT) rates, further boosts in income tax thresholds, and some welcome tidying-up of pension anomalies, it’s been a good Budget for savers.

Pensions…no news is good news

In the run-up to tax year end, here’s what to focus on:

• Pension saving: Use 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 (including final funding for those clients using fixed protection 2016 to lock into a £1.25M allowance)

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 National Insurance) efficient option to fund a pension (as well as other mainstream employee benefits, such as childcare or health-related provision). Its use for other employee benefits may, however, be cut back.
• Workplace pension advice allowance going up: To encourage employers to boost employee access to professional advice on their pensions, the tax and NI free allowance for employer-arranged advice will increase from £150 to £500 per employee from April 2017.
• “Pension Dashboard” coming soon: To help pension planning, a new digital pension dashboard, giving a single view of an individual’s total pension savings, will be launched by 2019.
• Under 23 drawdown anomaly fixed: The current rule that requires minor dependents’ drawdown to stop at age 23 will be scrapped, giving these dependents the same flexibility as other minor beneficiaries to continue drawdown after 23.
• A fairer deal for the seriously ill: Pension tax rules will be relaxed so that serious ill-health lump sums can be paid even where funds have already been accessed under the scheme. Moreover, for payments after age 75, they’ll be taxed as income rather than at a flat rate of 45%.

LISA – a new savings option

The Chancellor unveiled plans to introduce a new Lifetime ISA (LISA) from April 2017. This will be a complimentary savings scheme for younger savers and not a replacement for traditional pension saving. Higher-rate taxpayers 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.

The Government aims to encourage long-term saving with the inclusion of a ‘buy four get one free’ bonus, but with the ability for first time buyers to use savings to get a foothold on the property ladder.

How it works on the way in

The new LISA will only be available to the under 40’s 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 tax year which will be topped up to £5,000. 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. To help first time buyers though, funds may be withdrawn tax-free to cover the cost of a deposit on their first home. 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 be 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 funds or shares can benefit from a CGT cut from 6^th April 2016. The new rates are:

• 10% (down from 18%) where an individual is not a higher rate taxpayer.
• 20% (down from 28%) 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, the buy to let market continues to receive unfavorable treatment, 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. These two changes will see the take home pay of higher rate taxpayers increase by £500 each year, while for basic rate taxpayers the increase will be £100 each year. Together with the new dividend and savings allowances available from April 2016, advice will be key to ensuring that clients have their savings in the right place to produce a tax-efficient income when they need it.

Class 2 National Insurance

From April 2018, self-employed individuals will no longer have to pay Class 2 National Insurance Contributions (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 know is coming in 2016/17: 

• LTA cut to £1M The pension lifetime allowance is to be cut from £1.25M to £1M with new protection options available for those expecting to be caught.
• Annual Allowance (AA) cut for higher earners The standard £40,000 AA will be reduced by £1 for every £2 of ‘income’ individuals have over £150k in the tax-year, until their allowance drops to £10k. This is a complicated area of planning and there are different scenarios for employee and employer contributions, so professional advice remains key.
• £5,000 Dividend Allowance A new allowance will see the first £5,000 of dividends paid tax-free. There will also be changes to tax-rates for dividends in excess of the allowance alongside an end to the notional 10% tax credit. To understand what impact this will have on your clients and your advice read our recent blog here.
• Personal Savings Allowance Also from April 2016 the first £1k 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 taxpayers will not benefit from this new allowance.

Overall, a very positive budget for savers, with lots of areas for planning and discussion. As always, contact your support team here at DB Wood if you have any queries and, of course, we will be in touch in the usual way to cover any relevant matters at your next review.