Amidst the posturing, the puns and the gibes about people with two kitchens, George Osborne provided savers and spenders with a mixed bag in the last Budget of this Parliament.
On the whole, the changes announced were small, compared with the bombshells that have been dropped in some recent budgets, but some are very significant.
The Chancellor resisted calls for a cut to the Annual Allowance, which currently allows savers to put £40,000 a year into their pension and receive full tax relief. However, he cut the Lifetime Allowance on pensions from £1.25 million to just £1m – a step that will affect many with fairly modest pension expectations.
There is some comfort for current pension savers – the Lifetime Allowance will be index linked from 2018, but as the National Association of Pension Funds points out, this is the third cut to the allowance in three successive budgets.
Pension savers have until 6 April 2016 to apply for protection against the new Lifetime Allowance limit of £1m. The downside is they will no longer accrue any further contributions after this date, although they will escape a tax charge of 55 per cent on savings over £1m.
The Chancellor confirmed that pensioners who have already bought annuities will be able to sell them in the second-hand annuity market to providers without punitive 55 per cent tax charges. Instead they will be taxed at their marginal rate. This freedom will come in from April 2016. However, there must be serious questions as to whether this will be in the best interest of clients due to tax charges and availability of providers wanting to enter this market. To us, it seems it will definitely be a ‘buyer’s market’ – if one exists at all.
The first £1000 of interest on savings will be tax-free for basic rate taxpayers, while the first £500 will be tax free for higher rate taxpayers from April next year. Essentially this means that 95 per cent of the population will pay no tax on savings income. “Savers have paid tax on their income when they earned the money, so allowing them to earn interest on it free of tax makes sense,” says independent expert Dr Ros Altmann, who described the Budget as a “savings revolution”.
Isa savings will become more flexible as The government says you will be able to put your Isa allowance into an Isa, then later withdraw it and put it back in again during the same tax year without losing your allowance.
However, it is not yet clear how this will work practically. Critics have focused on the limitations, it only extends to withdrawals and reinvestments in the year of subscription, but people with short term cash issues are likely to welcome the flexibility.
The Help to Buy Isa (BISA, perhaps?) will be introduced to help first-time buyers save for a new home. The top line rate looks attractive, but the devil is in the detail. Savers will be able to invest £200 a month, with an initial £1,000 when the account is opened and the Government will provide a tax free bonus of 25 percent of the amount saved in the Help to Buy ISA, up to a cap of £3,000 on total savings of £12,000.
The bonus (although not necessarily the total savings) must be used to purchase a first home in the UK worth £450,000 or less in London or £250,000 or less outside London.
Patricia Mock, at Deloitte, says, that the restrictions make the BISA look less attractive. “Because of the fairly low savings permitted, it would take 4 ½ years to build up sufficient savings to get the maximum bonus,” she points out. It also seems clear that you cannot have a cash Isa and Help to Buy Isa in the same tax year.
The tax-free personal allowance is rising to £10,600 in April and it will now increase further to £10,800 in April 2016 and to £11,000 in April 2017. This represents a tax saving of £160 per year for a basic rate tax payer.
The threshold at which higher earners start paying 40 per cent income tax will rise by £315 in 2016/17 and by £600 in 2017/18 to reach £43,300. This, combined with the increase in the personal allowance, represents a further saving of £224 for higher rate taxpayers in 2015/16.
Paper tax returns will be replaced by digital ‘real time’ accounts by 2020. Taxpayers will set up a digital tax account into which they can submit tax information on a regular basis, linking into their accounting software and bank accounts.
The Chancellor announced that Class 2 National Insurance contributions would be abolished. This is a charge of £2.75 a week for self-employed workers whose profits are more than £5,885 a year, and will save them £143 a year. This will happen in the next parliament and Class 4 NICs, which are also paid by the self-employed, will be reformed. It will consult on the detail and timings later in 2015.
The Government will crack down on use of ‘deeds of variation’ to avoid inheritance tax. A deed of variation changes a will after someone’s death and enables the beneficiaries of a deceased’s estate to alter the distribution of that estate. The Chancellor said the inquiry will draw on a “wide range of views” and report on its findings by the autumn.
In short, this year’s Budget was relatively gimmick free, unless you count the traditional ‘penny off a pint’. Whether or not the rabbits he did pull from his hat are enough to win the election is another matter. Only time will tell.
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