Chancellor Osborne announced four major new steps in savings reforms, in his Budget 2015 speech, alongside pensions measures such as the lifetime allowance reduction.
“They are based on the principles that cutting taxes increases the return on savings, and that people should have freedom to choose how they use those savings”
- Personal savings allowance
- Flexible ISAs
- Help to Buy ISAs
- Income tax personal allowance
- Lifetime allowance for pension contributions
- Class 2 NICs
- Inheritance Tax
- Annual Tax Return
Personal savings allowance
- From 6 April 2016 the government will introduce a savings allowance to remove tax on up to £1000 of savings income for basic rate taxpayers, up to £500 for higher rate tax payers and nil for those earning over £150,000. The government says this will take 95% of savers out of savings tax altogether.
- HMRC will introduce automated coding out of savings income that remains taxable through the PAYE system from 2017 to 2018 with pilots starting in the autumn of this year.
- Taxpayers will be able to withdraw and replace money from their cash ISA in-year without it counting towards their annual ISA subscription limit. The rules will be changed this autumn after a technical consultation with ISA providers.
Help to Buy ISAs
- The introduction of Help to Buy ISAs will provide first time buyers with a maximum government bonus of £3,000 for those who save £12,000.
- Taxpayers who save up to £200 a month with a Help to Buy ISA will see their savings boosted by the government by 25% – £50 bonus for every £200 you save. Savers can thus receive a bonus of up to £300.
- Jim Meakin, head of tax at Baker Tilly, said it will be interesting to see what impact it has on the housing market without a significant increase in supply. “This new policy, combined with the imminent pensions liberation changes and the revised stamp duty system could help to provide upward pressure on house prices at a time when they have started to cool.”
Income tax personal allowance
- The personal allowance will be increased to £10,800 for 2016 to 2017 and £11,000 in 2017 to 2018. The basic rate limit will be increased to £31,900 for 2016 to 2017 and £32,300 for 2017 to 2018. Because of this, the higher rate threshold will be £42,700 in 2016 to 2017 and £43,300 in 2017 to 2018.
- From 2016 to 2017, there will be one income tax personal allowance regardless of age.
- The National Insurance upper earnings and upper profits limits will increase to stay in line with the higher rate threshold.
- The government will legislate from April 2016 to allow those already receiving income from an annuity to agree with their annuity provider to assign their income to a third party in exchange for a lump sum or an alternative retirement product.
- In addition, the government is consulting on creating a secondary annuity market, which will include the removal of the “unauthorised payment” tax charge of up to 55% (or 70%) that they say deters annuity holders from assigning annuities.
- But Graham Vidler, director of external affairs at the National Association of Pension Funds (NAPF) said it is unclear how savers will be protected.
“It’s vital this does not distract us from or undermine the ‘Freedom and Choice’ pension reforms due to begin in 19 working days. The government must make sure this doesn’t divert focus or resource from Pension Wise, damage the broader annuity market or slow down the development of a much-needed market in retirement solutions for those looking to make use of Freedom and Choice from next month.”
Lifetime allowance for pension contributions
- The government will reduce the lifetime allowance (LTA) for pension contributions to £1m from 6 April 2016. Transitional protection for pension rights already over £1m will be introduced alongside this.
- The lifetime allowance will be indexed annually in line with CPI from 6 April 2018. This will include the removal of the “unauthorised payment” tax charge of up to 55% (or even 70%) that deters annuity holders from assigning their annuity.
- Graham Vidler said he hoped that past performance is not an indication of future cuts.
“The LTA has been cut by £0.5m in the last three Budgets which if repeated would leave an LTA of £0.5m. This would only buy an income of around £10,000 per year.”
Class 2 NICs
- The government is also getting rid of Class 2 NICs in the next Parliament. It also has plans to reform Class 4 to introduce a new contributory benefit test. These changes will be consulted on later this year.
- Dawn Register, BDO tax partner, said proposed changes to NI will be subject to a consultation at the end of 2015 and there was “only a commitment to make changes in the next five years”.
“These changes are in reality still ‘tinkering’ with NICs and fall a long way short of a merger of income tax and NIC which many tax advisers would like to see as part of genuine simplification.”
- There is to be a review of inheritance tax avoidance through “deeds of variation”, which are legal documents that allow a person’s will to be changed after their death to redistribute their assets to significantly reduce the amount of inheritance tax payable.
- But David Kilshaw, head of private client tax at EY, said that deeds of variation are not just tax planning vehicles.
“They can ensure estates pass fairly as families’ wish where there is no will or where circumstances have changed significantly since the will was written. When somebody dies without a will, for example, a deed of variation may ensure a widow/widower can stay in their home. “Over two thirds of people don’t have a will – a deed of variation can be a lifeline for their heirs and it’s vital that any anti-avoidance measures don’t remove this.”
Annual Tax Return
- For businesses, HMRC and Companies House will be streamlining the process to register a new company and sign up for taxes by May 2017.
- By early 2016, all of the UK’s 5m small businesses and the first 10m individuals will have access to their own digital tax account.
- The Chancellor said the move will reduce the time it takes to deal with HMRC from an average 40 minutes a year to 10 minutes. The changes will mean receipts and documents won’t have to be collected by taxpayers throughout the year.
- According to David Gauke, financial secretary to the Treasury, this is one of the “biggest ever changes to the way that people manage and pay their taxes”.
- ACCA’s head of tax Chas Roy-Chowdhury said giving taxpayers a “holistic view” of the tax they pay is welcome news, but, it must be done properly.
- He said of the announcement:
“Is part of the government’s push to get the tax payer to do more as HMRC’s resources continue to be squeezed by 5% cuts year on year? A change of this magnitude must be properly planned to ensure there are no problems with the roll out.”
- However, whilst this could work well for someone in PAYE, it is doubtful that they can scrap tax returns for traders because of expense claims to offset profits. If they do try to do that, it will create unprecedented chaos and more work for them which they don’t want.
- AccountingWEB tax policy editor Rebecca Cave took a sceptical stance: “We know with RTI that when information it gets to HMRC it goes through a series of Chinese whispers and ends up different to what you submitted.
- “If that can go wrong with PAYE data, imagine what else could happen. They’ll put that in an electronic account and tax you on it without you signing anything. They do seem to be trying to run before they can walk, because we know it doesn’t work at the moment.”
If you would like more detailed information on any aspect of Personal Taxation, send me an e-mail and I’ll be pleased to advise further.