20 Mar 2015
Analysis: Budget 2015 – an adviser’s perspective
Peter Mutch, Corporate Services Director, analyses the latest budget announcement by The Chancellor.
The Chancellor's final budget before the election didn't contain anything which will have an immediate impact for advisers or our clients. Pension freedom and choice will go ahead as expected, turning conventional wisdom on how to take retirement income on its head and placing advice firmly at the heart of successful use of the new flexibility. And further changes in the pipeline will be of interest from autumn 2015 onwards, although these will be in the gift of the new Government.
Pensions
- Annuities: From 2016/17, it is proposed that access to the new flexibility will be extended to annuitants by allowing them to sell their annuities - if their provider allows them to. The lump sum received can be held within the money purchase pension environment for flexible access, used to buy a flexible annuity or taken as a taxable lump sum. Consultation is already underway on the fine detail of these proposals. It remains to be seen whether this freedom will be extended to those already locked into a Defined Benefit pension income that doesn't best meet their needs.
- Allowances: Also from 2016/17, the pension lifetime allowance (LTA) will be cut to £1M. It's proposed that this allowance will be indexed in line with CPI from 2018/19, to help maintain its real value going forward. Government estimate this will affect around 4% of pension savers. A new transitional protection option will be introduced to allow savers already above the reduced £1M LTA to lock into a higher allowance. There are no plans to revisit the pension annual allowance.
Personal Allowances
The personal allowance and higher rate threshold for 2015/16 will remain at £10,600 and £42,385 respectively, as announced last December.
But there are promised increases to both in the next two tax years.
2016/17:
- Personal Allowance increases to £10,800
- Higher rate threshold increases to £42,700
Basic rate taxpayers will be better off by £40. Higher rate taxpayers will be £103 better off.
2017/18:
- Personal Allowance increases £11,000
- Higher rate threshold increases to £43,300
Basic rate taxpayers will be better off by a further £40. Higher rate taxpayers will be a further £160 better off.
Personal Savings Allowance
As announced last year, from April, the savings rate of income tax will drop to zero (from 10%) and the savings rate band will increase to £5,000 (from £2,880). This is a boost to those with low earnings but with a higher level of savings income, as savings income can be received tax free.
But those with higher levels of earning above £15,600 won't benefit from the savings rate band at all.
However, from April 2016 a proposed new ‘Personal Savings Allowance' will benefit both basic rate and higher rate taxpayers, irrespective of their level of earned income.
The allowance will be:
- Basic rate taxpayers: £1,000. So those with total income below £16,800 won't have to pay tax on any of their savings. Those with higher incomes, but less than £42,700, will still benefit from £1,000 of tax free savings.
- Higher rate taxpayers: £500. Those with total income above £42,700 will be limited to a tax free allowance of £500.
Additional rate taxpayers won't benefit from the new allowance.
In another positive note, savers will see interest paid gross, with no deduction of 20% tax at source by their bank or building society from April 2016.
Fully flexible ISAs
There are planned changes for ISAs on the horizon. From autumn 2015, savers with Cash ISAs will be able to dip into their savings and replace them without it counting towards their annual subscription limits. The new contributions would have to be paid within the same tax year as the withdrawal for it not to be counted. These new flexible funding rules are not intended to apply to stocks and shares ISA.
Help to Buy ISA
First time home buyers looking to save for their deposit could get tax relief on their savings under the proposed Help to Buy ISA from autumn 2015.
The scheme will provide 25% tax relief on savings up to £12,000. So someone saving the full £12,000 would see the government add a further £3,000 to their savings, giving them £15,000 towards the purchase of their first home. This tax relief isn't given at the point of saving in the same way as a pension contribution, but is instead added when the saver buys the home.
The new scheme will be a form of Cash ISA and, in line with current rules; it won't be possible to subscribe to two separate Cash ISAs (Cash & Help to Buy) in the same tax year.
Savings will be limited to a maximum single initial premium of £1,000 and regular savings of £200 each month. And to get the Government bonus, property values can be no more than £250,000 (£450,000 for properties in London).
IHT: Deeds of Variation in the spotlight
The flexibility a Deed of Variation may be under threat after the Chancellor announced a consultation on their use in IHT avoidance. The consultation is due to report its findings in Autumn 2015. It's another measure that scrutinises what clients do with their money after death following the measures tackling pilot trusts announced in the 2014 Autumn Statement and tweaked in the forthcoming Finance Bill.
Currently, a will can be changed after an individual's death, through a legal process known as a Deed of Variation. Often this is combined with the efficient use of exemptions or the nil rate band so the end result also gives an IHT saving. This can be used up to two years after death.
If you are thinking about using this flexibility with an inheritance, and are within the two year window, you may wish to consider acting now. This would give greater certainty about the tax position. This measure also highlights the need for clients' wills to be drafted during life with an eye on tax efficiency post death. After Autumn 2015, the useful ‘eraser' of a deed of variation may not be as effective as before.