Spring Budget 2017 Update
Yesterday, Philip Hammond the Chancellor of the Exchequer, delivered the last Spring Budget (although as he joked, we’ve been told that before, by Norman Lamont in 1992).
There were no significant tax or pension changes in yesterday’s Budget that will have any immediate impact, allowing all to plan for the tax year ahead with confidence and clarity. This was the Chancellor’s intention of changing when the budget will be presented, with the Autumn Statement now abolished, with a toned-down statement on the economy delivered each March. This will give welcome breathing space between the announcement of Budget changes and their introduction.
Some of the key points from yesterday’s statement were:
A fairer tax system
Well, that is for you to decide, but as part of a drive to make the tax system fairer, two main changes will come into effect from April 2018
1. Reduction to the dividend allowance
The annual dividend allowance introduced last year will remain at £5,000 for the 2017/18 tax year, but will then drop to £2,000 from April 2018. In particular, this will hit small and medium sized business owners who take their profits as a dividend. Employer pension contributions will become an even more attractive way of extracting profits from a business. Where the director is over 55 they can now have full unrestricted access to their pension savings.
2. Increase in National Insurance Contributions (NICs) for the self-employed
Self-employed class 4 National Insurance contributions will increase from 9% to 10% from April 2018, with a further increase to 11% from April 2019. This will close the tax gap between the self-employed and employed.
This coincides with the removal of the flat rate class 2 NICs for the self-employed from April 2018. Self-employed individuals have been eligible for the same flat rate state pension as employees since April 2016, and so the increases will go some way to paying for this.Whether these measures are seen as fair, will depend on your point of view. Some are already stating this is a break in the government’s manifesto pledge and it remains to be seen how reaction continues to develop over the coming days.
Business owners and entrepreneurs will argue that they should receive a ‘tax dividend’ due to the risk they take in setting up in business on a self-employed basis. Indeed, many of these have been the lifeblood of the economy as we have arisen from the mire of 2008.
QROPS clampdown gets overseas pension transfers back to basics
What on earth is a QROPS? A QROPS (Qualifying recognised overseas pension scheme) is where a former UK resident transfers their pension overseas to a similar arrangement with comparable tax treatment to the UK, by agreement with HMRC.
A new 25% tax charge on some QROPS transfers effectively restricts penalty free movement of tax relieved UK pension funds overseas strictly to the ‘vanilla’ circumstances originally envisaged.
There’s no change for those seeking genuine pension portability by moving their pension savings overseas:
- to their employer’s occupational pension scheme; or
- to their country of residence; or
- within the EEA.
However, the tax clampdown, which applies to transfers requested after 8 March 2017, will hit those moving their pension to ‘third party’ jurisdictions to avoid UK tax. Anyone whose status changes within 5 years of a transfer, such that they fall outside the penalty free categories, faces a tax charge after the event reducing scope for ‘jurisdiction hopping’.
As well as recovering tax for the Exchequer, this should also help protect UK pension savers against overseas pension scammers.
Tax avoidance deterrents strengthened
As part of the Government’s objective to stop the loss of tax revenues through avoidance schemes, it confirmed that a financial penalty on the enablers of a scheme that fails the GAAR (General Anti Abuse Rule) test will be introduced from July 2017. Enablers include anyone involved in the design or promotion of a scheme and who may ultimately benefit from a client using the scheme, for example, by charging them a fee. The penalty could be as much as the amount of tax avoided.
The intention is clearly to deter anyone in the supply chain from getting involved in the first place, killing such schemes before conception. This is not a concern for mainstream tried and tested planning solutions, such as the use of trusts, which continue to be viable options for those wishing to undertake effective estate planning.
Social care: green paper and red light to ‘death tax’
Demographics continue to drive the search for innovative solutions for long term care funding.
The government will set out proposals for future funding of social care in a green paper to be published later this year. The Chancellor confirmed that a ‘death tax’ (a flat rate charge applicable to all estates) would not be among the measures considered.
State Pension
To ensure that the State Pension remains sustainable and fair across generations, the government is carrying out the first statutory review of State Pension age. The government will consider all the evidence – including an independent report by John Cridland, before publishing its review by 7 May 2017.
NS&I Investment Bond final rate
The Budget confirms that the rate on the NS&I Investment Bond announced in the Autumn Statement 2016, will offer rate of 2.2% over a term of 3 years and will be available for 12 months from April 2017. The Bond will be open to everyone aged 16 and over, subject to a minimum investment limit of £100 and a maximum investment limit of £3,000.
Rates & allowances and what we already knew
Here’s a reminder of what we already knew was coming in 2017/18 which you may need to consider:
2017/18 tax rates and bands confirmed
- The personal allowance for 2017/18 is confirmed as £11,500 and the higher rate threshold will rise to £45,000. Increases are planned to £12,500 and £50,000 respectively by 2020.
- The increase to the higher rate threshold will not apply in Scotland where the threshold will remain at £43,000.
- The individual capital gains tax allowance will increase to £11,300.
Inheritance Tax (IHT) residence nil rate band
- From April 2017, you may be entitled to an extra £100,000 IHT nil rate band where the family home passes to direct descendants on death.
Lifetime ISA introduction
- Under 40s will have a new savings option which can help them to get a foothold on the property ladder.
- Up to £4,000 a year can be paid into the Lifetime ISA and this will receive a 25% Government Bonus.
- Most first time house buyers can access their fund tax free prior to age 60.
£20,000 ISA allowance
- The ISA savings allowance is set to receive an above inflation increase. Savers will be able to enjoy an additional £4,760 of tax free savings.
Reduced Money Purchase Annual Allowance (MPAA)
- The MPAA is to be cut from £10,000 to £4,000 from April 2017. This only affects those who have accessed their Defined Contribution pension under the new pension flexibilities and wish to continue paying into their pension.
- Those only accessing their tax-free cash, or who were already in a capped drawdown arrangement and haven’t exceeded the cap, will keep the full £40,000 allowance.
Corporation Tax cut
- The rate of Corporation Tax will be cut from 20% to 19% from 1 April, with a further cut to 17% to follow in April 2020.
- Business owners may want to take advice about accelerated pension funding ahead of any rate cut to reduce profits which would otherwise by taxed at the higher rate.
Summary
There is a difference between Chancellor Hammond’s approach and that of his predecessor, George Osborne. Much of the austerity that had been embedded in Osborne’s plans has been removed and there is now more than £100bn of extra borrowing proposed over the next five years than there was in Osborne’s last budget.
For the Chancellor to borrow this extra money indicates that the economy has been performing better than expected.
The Office for Budget Responsibility has upgraded its growth forecast for the current year from 1.4% to 2.0%, which is positive.
Of course, there are challenges ahead economically – not least, the public debt burden which, despite recent improvements, remains significant – but the UK economy is relatively well-placed to deal with them and we should see this burden begin to diminish over the next five years.
If you wish to take a step in the right direction with planning your finances, please feel to call us on 01626 833225 or email us to find out more or to arrange an initial complimentary meeting.
Important Information
Please note that the above article does not constitute financial advice.
The views and opinions contained herein are those of Loughtons Independent Financial Advisers and may not necessarily represent views expressed or reflected in other economic communications, strategies or funds.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Loughtons Independent Financial Advisers does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Loughtons Independent Financial Advisers has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system.
Loughtons Independent Financial Advisers is a trading name of JPRS (South West) Limited. JPRS (South West) Limited is authorised and regulated by the Financial Conduct Authority.