Low-key Budget buoyed by stronger-than-expected growth and tax receipts
As expected, today’s budget was relatively shock-free. The Chancellor used the Autumn Statement back in December to lay out most of the tax changes that will affect us from next month, and we’ll face another Budget later in the year as the main event switches from spring to autumn.
Whilst billed as a Budget to bolster the UK’s economic defences ahead of Brexit, it did contain several key announcements:
Tax-free dividend allowance cut from £5,000 to £2,000 from April 2018
The reduction of the tax-free dividend allowance takes account of the increased ISA allowance, as well as further increases to the tax-free personal allowance which is additional to the dividend allowance. Abolishing it altogether, could bring lots of people into self-assessment with tiny shareholdings having to pay a 7.5% tax charge.
Cost of care
The Chancellor announced a £2bn rescue package for the social care sector and a green paper consultation on funding to be published later this year.
Tax increase for self-employed
The Government wishes to address the differential tax treatment between employees and the self-employed for those earning the same amount. It could be argued that it makes sense, given the recently introduced single-tier state pension. A review will also look at the differences in other benefits, such as maternity leave and sick pay. Class 2 National Insurance contributions will be abolished from April 2018 and Class 4 NICs will rise by 1% to 10% from April 2018 and 11% from April 2019. Philip Hammond subsequently reversed the decision a week later.
25% tax charge for transfers from UK pensions to overseas pension schemes (QROPS)
For transfers after the 9 March, a 25% tax charge will be deducted before the transaction completes. Whilst it might look penal, it makes sense to claw back UK tax relief and plays to the government’s message about everyone paying their fair share of tax.
Overseas pensions are there to help those that are genuinely moving overseas and want the option to restructure their savings. It will stop the fraudulent schemes and advisers that are encouraging people with no intention of ever leaving the UK to try to avoid future UK taxes.
For savers, there’s already been plenty of good news announced
- ISA tax-free allowance is climbing to £20,000 from 6 April, meaning a couple can save £40,000 between them and pay no tax on the proceeds.
- Introduction of the Lifetime ISA for those under 40. You can save up to £4,000 a year (this sits within your overall ISA limit of £20,000) until you reach 50. If used for a house deposit or as a pension, you’ll receive a 25% bonus from the government.
- Increase in the qualifying limit to £1.5 million for social investment tax relief (SITR) qualifying investments.
- The promised NS&I three-year bond paying 2.2% will be available from April on savings up to £3,000.
But once again, the pension system gets a little less generous
- The amount permitted using ‘carry forward’ (using unused allowance) will reduce in April. The 2013/14 tax year will fall out of the three-year period. That’s important because the annual allowance in 2013/14 was £50,000. After that it fell to £40,000, its current level.
- The annual allowance “taper”, in place for the first time this year, creates a greater chance that savers earning over £150,000 will stray beyond the permitted limit.
- No change to Money Purchase Annual Allowance (MPAA), which will reduce from £10,000 to £4,000 if you have accessed pension freedoms, from April. This will make planning more tricky if your personal circumstances change in retirement.
- The State Pension top-up scheme closes on 5 April, although this hasn’t proved to be popular.
Inheritance Tax (IHT)
- The residence nil rate band comes into effect on 6 April 2017. Initially set at £100,000 it will increase in annual £25,000 increments to £175,000 by 6 April 2020.
Read the full budget speech here