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InFocus

Plenty of changes on the way in pensions and more

DYLAN JENKINS summarises the latest Budget which sees, among other things, a shake-up of investment taxation, changes to personal allowances and various changes affecting pensions

GEORGE Osborne delivered his seventh Budget on Wednesday 8th July. While this “Emergency Budget” contained few surprises with regard to economics, there were some interesting developments with regard to taxation.

Our view on the changes and key points for your immediate consideration are presented below.

1. Investment taxation shake-up

From April 2016, the taxation of dividend income will be reformed. The dividend tax credit will be abolished, and instead there will be a new tax-free allowance of £5,000 per annum, with higher tax rates on dividends above this level.

Basic rate taxpayers will pay 7.5%, higher rate taxpayers 32.5% and additional rate taxpayers 38.1%. At this early stage, the details are not completely clear but it looks like those with dividend income of £5,000 or less will be no worse off, and could be better off, but those with more significant portfolios will pay more tax.

There will still be no further tax to pay on dividends from investments held within ISAs and pensions, so this change makes the use of ISAs and pensions to shelter investments from tax all the more important.

2. Buy-to-let mortgage interest tax relief

Mortgage interest tax relief will be limited to just the basic rate (20%) in the future, which will hit wealthier landlords who pay the higher rates of tax. This goes some way to levelling the tax playing field between investment property and shares. Buy-to-let should be treated as a business and hopefully tenants won’t suffer increases in rents as a result.

3. Personal allowances for income tax

The personal allowance was originally scheduled to increase to £10,800 from 6th April 2016 and to £11,000 from 6th April 2017 with the increases in the point at which higher rate tax is paid rising to £42,700 and £43,300 respectively.

The Chancellor announced that the increase to £11,000 will in fact be brought forward to 6th April 2016 and the increase will be to £11,200 from 6th April 2017, with higher rate tax applying to taxable incomes over £43,000 and £43,600 respectively.

4. Increase in the Inheritance Tax threshold

As widely heralded, an Inheritance Tax threshold for a family home will be introduced from 6th April 2017. A family home allowance of £100,000 from 2017/18 (rising to £175,000 in 2020/21) will be added to the standard individual threshold of £325,000, eventually raising the threshold to £500,000 where a family home is being passed on.

There is no Inheritance Tax on transfers to spouses or civil partners, so no Inheritance Tax applies on death where assets are passed on to the surviving spouse/civil partner. The “unused” Inheritance Tax threshold on that first death can be passed on to the survivor, thereby doubling the threshold available on their death.

Properties worth up to £1 million (from 2020/21) could therefore be passed on to children without Inheritance Tax being due on the property.

5. Reduction in annual allowance for pension contributions

Again as predicted, the annual allowance for those with taxable income over £150,000 will reduce by £1 for each £2 of income over £150,000, with a maximum reduction down to £10,000. A £10,000 annual allowance will therefore apply to all taxable incomes over £210,000. This will apply from 6th April 2016.

In advance of the introduction of this tapered annual allowance, transitional rules have been introduced immediately to align all pension input periods with the tax year. Savings already made will be protected from retrospective tax charges.

6. Consultation on pensions tax relief

The Chancellor has published a consultation on the future for pension tax relief. This consultation document makes clear that the result of this could have radical implications on the pensions industry and retirement planning landscape.

For many individuals, perhaps the biggest Budget announcement of all was the publication of a Green Paper on additional pension reforms. This could result in pensions becoming more like Individual Savings Accounts (ISAs), with no tax relief on contributions, tax-free investment growth and no income tax to pay on withdrawals.

Only time will tell whether the Government is prepared to enact such a radical reform to the pension tax system and what this will mean for retirement planning.

7. Taxation of lump sums death benefits on pension funds

Currently where someone dies aged 75 or over, tax on lump sum death benefits is 45% for deaths before 5th April 2016.

The Budget confirms that for deaths after 5th April 2016, tax on these lump sums will be at the recipient’s marginal rate of tax. Where the recipient is a trust or company and so doesn’t have a marginal rate, the 45% charge will continue to apply.

8. Lifetime allowance for pension funds

The Chancellor confirmed that the lifetime allowance will reduce from £1.25 million to £1 million from 6th April 2016. Transitional protection will be introduced to ensure the change is not retrospective. This will be similar to previous tax years in which the pensions Lifetime Allowance was reduced.

9. Potential review of salary exchange as a method of pension contribution

Before the Budget there was speculation the Government was thinking about radically altering or even completely removing the ability to fund employer pension contributions through salary exchange arrangements. However, what they have said is that at this time they will actively monitor the growth of these arrangements and their effect on tax receipts.

So overall, there are plenty of changes that will no doubt affect individuals from all walks of life. If you would like to see whether you would be better off under the new Budget and the changes outlined above then I would refer you to the BBC’s excellent Budget calculator. This can be found at http://www.bbc.co.uk/news/business-17442946.

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