As highlighted in our previous blog post, there were no significant tax or pension changes announced in the budget that we didn’t already know. The new timetable between a more ‘toned down’ statement on the economy in March and the budget in autumn will provide some welcome breathing space between proposed budget changes and their formal introduction.
The budget was a fairly neutral package overall, with forthcoming spending of £2.4 billion over the next two years balanced out by future fiscal tightening over a three year period beginning in 2019. The additional income is set to come from three main sources – a lower tax-free dividend allowance, increase in NI contributions from the self-employed and a clampdown on tax avoidance and evasion – all of which are explained in further detail below.
On a positive note, the Chancellor was able to unveil a stronger growth forecast of 2.0% (up from 1.4%) together with a reduction of £23billion in public sector borrowing over the next three years. As for financial markets, investors will be far more interested in two other announcements due this month, namely a rate rise from the US central bank and the triggering of Article 50.
Below is an overview of the key announcements and how they will affect individual investors and businesses:
Reduction to the Dividend Allowance
The £5,000 allowance that was introduced last year will remain in place for the 2017/2018 tax year but from April 2018 it will drop to £2,000 per annum. This is set to hit small to medium size business owners in particular, many of whom take their profits as a dividend, and will make employer pension contributions an even more attractive wat of extracting profits from a business.
Increase in NICs for the Self-Employed
The decision announced in 2016 to abolish Class 2 NICs was reaffirmed, with Class 4 becoming the new replacement for determining self-employed entitlement to benefits. Under the system, self-employed Class 4 NICs will increase from 9% to 10% from April 2018, with a further increase to 11% from April 2019. As self-employed individuals have been eligible for the same flat rate pension as employees since April 2016, these increases are viewed as a means to pay for that gap and bring the self-employed rate closer to the 12% currently paid by those who are employed.
Transfers of Qualifying Recognised Overseas Pension Schemes, or QROPS, are now subject to a new 25% tax, restricting penalty-free movement of tax-relieved UK pension funds overseas strictly to the standard circumstances envisaged.
While the clampdown will not affect those moving their pension savings overseas to their employer’s occupational pension scheme, their country or residence or within the EEA, it will hit those moving their pension to ‘third party’ jurisdictions to avoid UK tax. Furthermore, should an investor’s status change, so that they fall outside the penalty-free categories, within five years of a transfer, they can face a tax charge after the event, reducing the scope for ‘jurisdiction hopping’.
As further affirmation of their clampdown on tax avoidance, the Government also confirmed that anyone involved in schemes that fail the GAAR test will face a penalty that could be as much as the amount avoided.
What we already knew
• The 2017/2018 personal allowance is confirmed as £11,500 with the higher rate threshold increased to £45,000 (except Scotland where it is £43,000).
• From April, the IHT nil-rate band will rise by £100,000 where the family home passes to direct descendants upon death
• The new Lifetime ISA will be launched, enabling anyone under 40 to save up to £4,000 a year and receive a 25% government bonus. The money can be accessed without penalty for first-time buyers to purchase a new home but the bonus will have to be repaid if you withdraw the funds before the age of 60 for any other purpose.
• The ISA allowance is set to rise to £20,000, offering savers an additional £4,760 of tax free savings
• The Money Purchase Annual Allowance (MPAA) is to be cut from £10,000 to £4,000. This only affects those who have accessed their Defined Contribution pension under the new flexible drawdown rules and wish to continue paying into their pension. It does not affect those only accessing their tax-free cash or those already in capped drawdown who haven’t exceeded that cap.
• Corporation tax will be cut by 1% to 19% with a further 2% reduction to follow in April 2020.
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