The Chancellor’s Autumn Statement didn’t contain any major tax or pensions shake ups that have any immediate impact for clients. Key decisions on pension tax relief reform and second hand annuity markets have been postponed. This means we can plan ahead for 2016/17 with confidence and clarity.
The key points for advisers from yesterday’s statement were:
Pensions – welcome breathing spaces
Double blow for buy to let owners
Deeds of variation unchanged
Rates and allowances
Pension tax relief review – outcome in March
The Chancellor has confirmed that the Government’s response to this summer’s consultation on reform of pension tax relief will be published as part of next year’s Budget (expected in March 2016). This sets a clear timeframe for those concerned they may lose out from any reforms to make the most of the current rules.
Pension IHT exemption to be confirmed
The law will be changed to remove any doubt over the IHT exemption for remaining drawdown funds on death. This change will be backdated to 6 April 2011.
Second hand annuity market – more news in December
Individuals will be allowed to sell their annuity income stream, with details promised next month and legislation scheduled for 2017.
Auto-enrolment contribution step-up put back 6 months
In a welcome break for employers, the phased increases in minimum contributions under auto-enrolment will be delayed by over 6 months. This means the increases scheduled for October 2017 and 2018 will now be delayed until April 2018 and 2019 respectively.
Salary sacrifice under scrutiny
Continuing concerns over the growth of salary sacrifice arrangements mean that the Government is gathering evidence to decide whether action is needed to reduce this cost to the Exchequer.
New ‘single-tier’ State pension starting figure confirmed as £155.65 a week
The full rate of the new ‘single tier’ State pension for those reaching State Pension Age from April 2016 has been confirmed as £155.65 a week. This gives future pensioners more clarity over what income they can expect from the State, making it easier to plan their private saving to top this up to meet their aspirations.
Basic State pension to go up by 2.9% from April
Existing State pensioners will see the basic State pension increase by £3.35, to £119.30 a week, from April – an inflation-busting rise of almost 2.9%.
Buy to let market
There was a double blow for buy to let owners. The first piece of bad news is the introduction of an increased rate of Stamp Duty Land Tax (SDLT) payable on the purchase of second properties worth more £40,000 from April 2016. An additional 3% will be payable on top of the standard SDLT residential rates.
And in moves to bring tax reporting in to the digital age, CGT payable on second homes will need to be paid within 30 days of a disposal from April 2019. This could bring forward the payment of tax by almost 22 months for some sales.
Of course, these measures are in addition to the proposals to restrict mortgage interest relief on buy to lets to just basic rate, which were announced in the Summer Budget.
IHT: Deeds of Variation
Deeds of variation can be used to alter how an individual’s wealth is distributed after their death. Following a consultation, the government will not be restricting their use at the current time. This means that families can still benefit from the flexibility that a deed of variation can bring.
However, the government will continue to monitor this area, so the ideal position continues to be to get planning right before death. Regular reviews and professional advice remain essential for your clients in this area.
Individual tax allowances and bands 2016/17
Personal allowance / Higher rate thresholds
These will remain at the levels announced in the Summer Budget:
Personal Allowance increases to £11,000 (from £10,600);
Higher rate threshold increases to £43,000 (from £42,385).
A basic rate taxpayer will be better off by £80. Higher rate taxpayers will be better off by £203.
New dividend allowance
Also confirmed is the new tax free dividend allowance of £5,000. Dividends in excess of this allowance (and any unused personal allowance) will be taxed at the following rates, depending on which tax band they fall in:
Basic rate: 7.5%;
Higher rate: 32.5%;
Additional rate: 38.1%.
Correspondingly, the system of dividend tax credits will be abolished from April 2016.
This means that from April 2016, a basic rate taxpayer could have tax free income of up to £17,000 a year when added to the personal allowance of £11,000 and the new ‘personal savings allowance’ announced in the Spring Budget of £1,000. Higher rate taxpayers could have up to £16,500 (as the personal savings allowance is restricted to £500 for these individuals).
Certain individuals may also have savings income falling into the £5,000 savings rate ‘band’, currently taxed at 0%. This band continues unchanged next year, meaning that some individuals may have tax free income of up to £22,000, depending on the sources of their income.
ISA annual subscription limits
These will remain unchanged from this year at £15,240 for an ISA, and £4,080 for a Junior ISA.
The limits normally increase in line with CPI, measured each year in September. In September 2015, inflation was flat, which is why there will be no increase in the limits for 2016/17.
Confirmation of allowances and tax bands means that taxpayers can plan ahead with some certainty. Savings can be accumulated and spending needs in retirement met in a tax efficient way, securing the greatest inheritance for their loved ones.
This can be done by:
Limiting the effects of tax on future investment returns by making full use of tax privileged investment wrappers.
Minimising the tax payable on withdrawing funds by maximising the use of available allowances.
Future proofing their retirement strategy to ensure that avoidable future tax charges are not stored up.
Here’s a reminder of what is coming in 2016/17 and what you may need to do before April;
LTA cut to £1M
The pension lifetime allowance is to cut from £1.25M to £1M with new protection options for those expecting to caught.
AA cut for higher earners
The standard £40k AA will be reduced by £1 for every £2 of ‘income’ clients have over £110k in a tax year, until their allowance drops to £10k.
£5k Dividend Allowance
A new allowance will see the first £5k of dividends paid tax free. The changes also new rates of tax for dividends in excess of the allowance and an end to the notional 10% tax credit.
Personal Savings Allowance
Also from April 2016 the first £1k of interest will be tax free (£500 for higher rate taxpayers). Interest will also be paid gross so that non-taxpayers no longer have to reclaim tax deducted at source. Additional rate tax payers will not benefit from this new allowance.
Replacing ISA withdrawals
ISA savers will be able to dip into their savings and replace them without it affecting 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.