The Conservative government presented its 2016 Budget on 16th March 2016. The following summary provides an overview of the main points set out in the Budget and accompanying notes.
From 6 April 2017, the government will introduce a brand new option for savers who are under age 40. Branded as the Lifetime ISA, this will give eligible savers the opportunity to save flexibly over the long term for a home and for retirement in one account. It’s also intended as a flexible alternative to pensions for the self-employed. Here’s some of the proposed detail:
• A Lifetime ISA can be opened by anyone between the ages of 18 and 40.
• The maximum contribution a person can make is £4,000 per year to benefit from the government bonus.
• Savings made before a person’s 50th birthday will receive an added 25% bonus from the government. So, if the maximum contribution of £4,000 is made in a tax year, the government will add in a further £1,000 at the end of the tax year. The ISA manager will claim the bonus and add it into the Lifetime ISA account.
• Any savings made into a Lifetime ISA are counted as part of the overall ISA limit (which is increasing from £15,240 to £20,000 from 6 April 2017). Additionally, where savings are used for a first home:
• Any Lifetime ISA savings and the government bonus can be used towards a deposit on a first home worth up to £450,000 in the UK. This can be done at any time after 12 months of opening an account.
• Two first time buyers can benefit from the government bonus from their own Lifetime ISA if they are buying together.
• There will be rules to set out how ‘Help to Buy’ ISAs and Lifetime ISAs will interact in terms of the government bonus and transfers into a Lifetime ISA account.
Where savings are used for retirement:
• After a person reaches the age of 60, any withdrawals made from their Lifetime ISA will be tax-free. Any withdrawal made can be used for any purpose – it’s not restricted to just providing retirement benefits.
• If savings are withdrawn before age 60 (other than to help buy a first home), the government bonus will be lost as will any interest or growth obtained on this. There will also be a 5% early withdrawal charge.
Funds can be withdrawn in full before age 60 if someone is in terminal ill-health. The government has also said they will consider whether Lifetime ISA funds plus the government bonus can be withdrawn in full for other specific life events in addition to buying a first home. They will also look at whether there should be flexibility to borrow funds without incurring a charge if the borrowed funds are fully repaid (they quote this as being possible in the USA with some 401K retirement plans).
Further information on Lifetime ISA’s can be found in the following two government documents:
Final details of the rules relating to Lifetime ISAs will be issued by the government later in 2016.
Annual and lifetime allowances
No further changes have been announced to the annual and lifetime allowances for pensions despite prior rumour to the contrary. This means that the tapered annual allowance for high earners will be introduced from 6 April 2016 and that the lifetime allowance will reduce from £1.25m to £1m from the same date.
To help people view and keep track of all of their pension savings in one place, the government will ensure the pensions industry develops and launches a new digital interface, referred to as the ‘pensions dashboard’, by 2019.
The government has again re-iterated their concern about the growth of salary sacrifice schemes, quoting that requests to HMRC for approval of such arrangements have increased by more than 30% in the past six years. As a result, the government are considering limiting the range of benefits that attract tax and national insurance savings through salary sacrifice schemes. However, they have stated that pension saving, childcare and health-related benefits such as Cycle to Work should continue as is.
Pensions tax relief
The government has published a summary of responses to their consultation document titled ‘Strengthening the incentive to save: a consultation on pensions tax relief’. The summary highlights the responses to the eight specific questions raised in the consultation and cites that 450 replies were received across various categories of respondent.
Technical pension tax rule changes
A number of technical changes will be made, via the Finance Bill 2016, to ensure the pensions flexibility rules introduced in April 2015 are working as intended.
Employer-arranged pension advice
Implementing a recommendation made under the Financial Advice Market Review, the government will increase the existing £150 Income Tax and National Insurance relief for employer-arranged pension advice to £500.
Pensions advice allowance
A further recommendation made under the Financial Advice Market Review will be consulted upon before its introduction. A new Pensions Advice Allowance will allow people under the age of 55 to withdraw up to £500 tax free from their defined contribution pension savings and use this towards the cost of financial advice. The age at which this allowance becomes accessible will be decided as part of the consultation.
Maintaining the tax advantages of a deceased’s ISA during the estate administration period
The government is proposing to consult with ISA providers and there will be further details emerging in 2016 about how these measures are going to be introduced, together with legislation.
Help to save scheme
This is to be launched for people on low incomes. To be eligible, individuals have to be in receipt of universal tax credit with minimum weekly household earnings equivalent of 16 hours at the National Living Wage, or those in receipt of working tax credit. Where an individual saves £50 per month, they’ll benefit from a 50% bonus (£600) from the government after 2 years. They can then continue to save for another two years and receive a similar bonus. There are no restrictions on what the cash can be used for.
Insurance premium tax
The rate will increase from 9.5% to 10% with effect from 1 October 2016.
Automatic deduction of income tax on savings income
The tax rules will be changed so that interest from OEICs, authorised unit trusts and investment trust companies can be paid without deduction of tax from April 2017.
The main rate of corporation tax is reducing to 17% for the financial year beginning 1 April 2020.
The personal allowance is increasing to £11,500 for 2017/18. The higher rate threshold will be £45,000 in 2017/18.
Capital gains tax
Basic rate taxpayers will suffer capital gains tax at 10% (currently 18%) and higher rate/additional rate taxpayers at 20% (currently 28%) from 6 April 2016. There is an exception though in relation to properties that don’t qualify for principal private residence relief, where the rates of applicable CGT will continue to be 18% and 28% respectively. The intention behind this is to encourage savers to choose to invest in stocks and shares rather than property.
Entrepreneur’s relief will be extended to external investors who invest in unlisted trading companies. The individual investor will benefit from a CGT rate of 10% on gains accruing on the disposal of ordinary shares in an unlisted trading company. The shares have to have been newly issued to the claimant and acquired for new consideration after 16 March 2016. They also have to have been owned for a period of at least three years starting from 6 April 2016 to qualify for this relief. There will be a lifetime cap of £10 million of qualifying gains. The investment must be made for a genuine commercial purpose and not for tax avoidance if this relief is to apply.
Modernising tax collection
From 2018 businesses, the self-employed and landlords, who are keeping their records digitally and providing regular updates to HMRC, can choose to pay tax as they go. There will be a consultation on these measures in 2016.
Stamp duty land tax on additional properties
From 1 April 2016, an additional 3% SDLT will be payable on the purchase of second homes and buy to let properties valued over £40,000. Purchasers will have 36 months rather than 18 months to claim a refund, if due to the move there is a period where they own two residences or they don’t own a main residence. The higher rates of SDLT will apply equally to individuals and corporate investors and there is no exemption for significant investors.
From April 2018, class 2 national insurance contributions will be abolished for the self-employed. Class 4 NICs will be reformed.