Budget 2015 Report

The final Budget statement of this Parliament was delivered by Chancellor George Osborne yesterday. It has been heralded as a Budget for savers and includes new ISA flexibilities and a rise in the personal allowance; with the exception of the reduction in the Pension Lifetime Allowance.

Below we outline some of the key aspects of the latest Budget and examine the impact they might have.

UK Economy

The economy grew 2.6% in 2014 – faster than any other advanced economy. The Office for Budget Responsibility (OBR) has revised up its 2015 growth forecast to 2.5% (up from 2.4% at the Autumn Statement in December 2014 and 2.3% from a year ago).

Inflation 

Falling world food and oil prices mean that that the OBR has revised down its inflation forecast to 0.2% for 2015, with the Chancellor confirming that the consumer price index inflation target remains at 2%.

Personal Allowance

The threshold above which an individual pays tax at the higher rate will increase from £41,865 to £42,385 for 2015/16 (2016/17 – £42,700, 2017/18 – £43,300).

This is the first increase in the personal allowance that higher rate taxpayers will actually benefit from in full, as the higher rate threshold has been squeezed in earlier years, so that the benefit of increases in the personal allowance were confined to basic rate tax payers.

Pensions Lifetime Allowance

At present there is a lifetime limit on the value of pension funds held by any individual of £1.25m.

From April 2016 the lifetime allowance will be reduced to £1m and will then be indexed by reference to CPI from 6 April 2018 onwards. Transitional protection for pension rights over £1m will be introduced alongside the reduction in lifetime allowance to ensure the change is not retroactive.

The additional tax charges that arise, where the lifetime allowance, is exceeded serve to discourage individuals from making excessive pension contributions and thereby restrict the amount of tax relief claimed by these individuals.

While no changes were announced to the annual contribution limits, this reduction of the lifetime allowance will further restrict the scope for individuals to claim tax relief for contributions to pension schemes.

Annuities

The government will legislate from April 2016 to allow people who are already receiving income from an annuity to agree with their annuity provider to assign their annuity income to a third party in exchange for a lump sum or an alternative retirement product.

This will include the removal of the “unauthorised payment” tax charge of up to 55% (or even 70%) that deters holders from currently assigning their annuity.

Individuals will, upon agreement with their annuity provider, have the opportunity to assign their annuity to a third party in return for a lump sum. Individuals can take this lump sum directly, or transfer the lump sum to an alternative retirement income product, drawing income down over a number of years and being taxed at their marginal rate.

To ensure consistency of treatment, the government proposes to apply the £10,000 annual allowance to individuals who assign their annuity to a third party.

This will apply in the following circumstances:

• To individuals who receive their payment in the form of a cash lump sum; this will apply from the date that they receive the cash payment.
• To individuals who use their payment to reinvest in a flexi-access drawdown fund; this will apply from the date that they first draw down from this fund.
• To individuals who use their payment to purchase a flexible annuity; this will apply when the first payment is made under the flexible annuity.

Tax Returns

The ‘end of the tax return’ was announced with the expectation that by early 2016 all of the UK’s five million small businesses and the first ten million individuals will have access to their own digital tax account.

At present individuals and businesses file annual tax returns. However, this is a fundamental change to the self-assessment tax landscape. The proposals raise significant concerns over the timing of tax payments, taxpayer privacy and HMRC’s increased ability to access more information than required.

IHT

Despite all the speculation on IHT the only new announcement was that there will be a review of the use of Deeds of Variation for IHT avoidance, with a report being published by the autumn.

ISA Flexibility

Currently, individuals can invest up to £15,000 in a tax free ISA. However, if any part of the amount invested in a tax year is withdrawn, that part of the limit is wasted and cannot be subsequently reinvested later in the tax year.

Individuals with non-savings income that do not exceed the personal allowance, currently pay income tax at 10% on the first £2,790 of savings income. From 5 April, the starting rate for savings income will increase to £5,000 and the rate of tax will be reduced to 0%.

This means that an individual will not have to pay tax on interest income if their total taxable income is less than £15,600 (£5,000 plus personal allowance of £10,600).

Subject to further consultation, changes will be made in Autumn 2015 to allow individuals to withdraw money from their cash ISA and re-deposit it in the same year without the second deposit counting toward their annual ISA subscription limit.

Furthermore, in 2016, a new savings allowance will be introduced. This will remove tax on up to £1,000 of savings income for basic rate taxpayers and up to £500 for higher rate tax payers. No allowance will be provided to additional rate taxpayers.

Help to Buy ISA

Savers have been rewarded with ISA flexibility, a new tax free saving allowance and a Help to Buy ISA. Currently, there is no tax efficient savings product specifically designed for first time house buyers.

The government intends to introduce an ISA specifically aimed at first time buyers where the government will contribute towards the ‘savings pot’ accumulated by the individuals. The new accounts need to be opened within four years from the start date of the scheme, which is anticipated to be in Autumn 2015. Once an account is opened there is no limit on how long the saving can be made.

Subject to conditions, where first time buyers choose to save through a Help to Buy ISA, they will receive a government bonus representing 25% of the amount saved up to a maximum of £3,000 on £12,000 of savings. The bonus will be paid when the property is actually bought. Accounts are limited to one per person, rather than one per home, so individuals buying a home together can both receive bonuses.

The main conditions to the Help to Buy ISA are:

• The ISA is available to those aged 16 and over;
• There is no minimum monthly deposit but the maximum monthly saving is £200 per month;
• It is possible, in addition to the monthly £200, to make an initial deposit into the account of £1,000;
• The funds are available on property to be used as a residence by the buyers (not buy-to-let);
• The property has to be situated in the UK with a value not exceeding £450,000 for London properties and £250,000 for properties outside London;
• Individuals cannot have an ordinary ISA plus a Help to Buy ISA at the same time.

For those looking to buy their first home, the introduction of the Help to Buy ISA will be a useful way to save for a deposit while obtaining a tax free bonus from the government representing 25% of the amount saved.