Our roundup of the Budget 2016
Following the Chancellor's Budget Statement this afternoon we thought you might be interested to read the Budget roundup produced by our Financial Planning team.
The first full Budget after a general election has traditionally been the time for chancellors to impose tough new measures on the economy, especially with a background of a predicted slowing global economy, productivity growth down, and a materially weaker economic outlook.
Yet we were saved massive austerity measures, and controversial change, perhaps due to the “Brexit” vote in June this year and the possible leadership election to follow.
Instead, measures affecting personal finances included:
- Increasing the ISA allowance to £20,000 from April 2017
- Reducing Capital Gains Tax from April 2016
- Introducing a new ‘Lifetime ISA’ from April 2017
- Increasing the personal allowance and higher-rate tax band from April 2017
- As widely reported, there were no changes to pensions announced.
In the following paragraphs we look at the key Budget announcements.
INDIVIDUAL SAVINGS ACCOUNTS (ISAs)
The ISA allowance
From 6 April 2017 the annual ISA allowance will increase from £15,240 to £20,000 for all eligible savers.
The new ‘Lifetime ISA’
In addition to increasing the ISA allowance, the Government announced a new long-term savings account for younger savers called the ‘Lifetime ISA’.
From 6 April 2017 any adult under the age of 40 will be able to save up to £4,000 each year into the Lifetime ISA and receive a 25% bonus from the Government – the equivalent to a top-up of £1 for every £4 saved. The government bonus will be applied at the end of each tax year.
Contributions attracting this bonus can be made up until age 50 and, like the current ISA rules, any savings will grow free of tax on both interest and growth.
The savings (along with the government bonus) can be withdrawn by first-time buyers to purchase a home up to a value of £450,000 from 12 months after opening the account. Otherwise, the savings, along with the government bonus, can be withdrawn from age 60.
Withdrawals will be allowed at other times and for other reasons but the government bonus, and any interest or growth earnt on it, will be lost and a 5% charge will be applied. The Government will consult on whether withdrawals (including the bonus) will be permitted upon other life events.
CAPITAL GAINS TAX
One of the areas where George Osborne did announce major reform is in how Capital Gains Tax is levied and assessed for UK investors. In order to stimulate further investment into businesses, the higher rate of Capital Gains Tax has been reduced to 20% (down from 28%) and the basic rate of Capital Gains Tax has been reduced to 10% (down from 18%).
However, there will also be an 8% “surcharge” on gains on residential property (other than your main home, which is still exempt). This means that gains on property will continue to suffer tax at 18% or 28%. These new tax rates will apply from 6 April 2016.
In addition to the above, the Chancellor is also extending Entrepreneur’s Relief to long-term investors in unlisted companies. This will mean that investors will only pay a Capital Gains Tax rate of 10% on investments in unlisted companies, providing they have held the shares for at least three years from 6 April 2016. This applies for all new share issues after 17 March 2016 and is subject to a lifetime limit of £10 million.
The Budget also introduced a lifetime cap of £100,000 on tax-free gains achieved through Employee Shareholder Status.
INCOME TAX AND THE PERSONAL ALLOWANCE
The Personal Allowance for Income Tax will increase to £11,000 from 6 April 2016 (as previously announced), then increase to £11,500 from April 2017.
The higher-rate (40%) threshold, which will be £43,000 from April 2016, will increase to £45,000 from April 2017. The Government claims there will be 585,000 fewer higher-rate taxpayers in 2017/18 than at the start of the parliament.
Class 2 National Insurance contributions, paid by the self-employed to qualify for the State Pension, will be abolished from April 2018. The Government will publish details of a new mechanism for the self-employed to qualify for benefits such as the State Pension.
After much highly publicised discussion concerning the tax relief applicable to pension plans, including the potential removal of the 25% tax-free lump sum, in today’s Budget the Chancellor confirmed that there will be no changes to the lump sum or to current pension tax relief rules.
The Budget papers also confirmed that the Lifetime Allowance will reduce to £1 million from 6 April 2016.
There are, however, technical amendments to support 2015’s pensions freedom reforms and to consolidate pension flexibilities. These include:
- Realigning the tax treatment of serious ill health lump sums with lump sum death benefits, so that they can be paid tax-free for those under the age of 75 and taxable at the recipient’s marginal rate for those aged 75 and over.
- Removing an anomaly for those receiving dependant’s drawdown. They can now continue to take income after they cease to be classed as a dependant (after the age of 23).
The Chancellor reaffirmed his plans for the introduction of higher rates of Stamp Duty for those who own additional residential properties. However, the original intention – that there would be an 18 month period in which to claim a refund from the higher rates due either to a gap in the ownership of a main residence or a period of overlap – has been overturned. There will now be 36 months’ leeway in which to make such a claim.
As expected there were no changes to Inheritance Tax announced in the Budget.
Ben Seager-Scott, Director of our Investment Office, has also produced a macroeconomic review of the Budget 2016.
Overall this was a benign Budget with few of the adverse changes we might have expected given the economic background. Will there be more pain to come in the Autumn Statement?
We hope you found this update helpful. If you do have any questions please contact us on 020 7189 2400, request a call back or email firstname.lastname@example.org – we would be happy to help.
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. The above article is based on our interpretation of the Budget 2016 and related legislation; it is not intended as advice, and the impact of any changes to tax rates or allowances will depend on your personal circumstances.