There were no significant tax or pensions changes in the Spring Budget that will have any immediate impact. This means our advisers can plan for the tax year ahead with confidence and clarity.
Future Budgets will move from the Spring to autumn, 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.
So what are the key points and what do you need to know:
A fairer tax system
As part of a drive to make the tax system fairer, two main changes will come into effect from April 2018.
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. Director’s over the age of 55 can now have full unrestricted access to their pension savings.
Increase in NICs for the self-employed
The 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 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 to the self-employed contributions will go some way to paying for this.
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 test will be introduced from July. 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 at first base.
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.
Qualifying recognised overseas pensions schemes (QROPS) clampdown gets overseas pension transfers back to basics
A new 25% tax charge will be introduced to pension transfers made on some (QROPS. Transfers effectively restrict penalty-free movement of tax-relieved UK pension funds overseas. Exceptions will be made to the charge, allowing transfers to be made tax free where people have a genuine need to transfer their pension, where:
- both the individual and the pension scheme are in countries within the European Economic Area (EEA) or
- if outside the EEA, both the individual and the pension scheme are in the same country, or
- the QROPS is an occupational pension scheme provided by the individual’s employer
But 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. And 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.
Rates, allowances and what we already knew
Here’s a reminder of what we already knew was coming in 2017/18:
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 and the individual capital gains tax allowance will increase to £11,300.
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.
IHT residence nil rate band
From April, you could be entitled to an extra £100,000 IHT nil rate band where the family home passes to direct descendants on death
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 DC 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 capped drawdown and haven’t exceeded the cap, will keep the full £40,000 allowance.
£20k 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.
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 consider accelerated pension funding ahead of any rate cut to reduce profits which would otherwise be taxed at the higher rate.