Budget commentary 2015.

18th March 2015

Tax rates and allowances

For individuals, George Osborne has announced that the income tax personal allowance will increase to £10,800 from next year and £11,000 the year after.  The higher rate threshold will increase to £43,300 in 2017/18.  The aim is for a personal tax free allowance of £12,500 and the 40% tax threshold to rise to £50,000.

The Chancellor has also announced that from April next year the first £1,000 of the interest earned on all of your savings will be completely tax-free.  He says: “To ensure higher rate taxpayers enjoy the same benefits, but no more, their allowance will be set at £500”.

As announced by the Chancellor at Budget 2014, from 6 April 2015 the starting rate of tax for savings income (such as bank or building society interest) will be reduced from 10 per cent to nil, and the maximum amount of taxable savings income that can be eligible for this starting rate will be increased from £2,880 to £5,000.

This new tax free allowance is a welcomed move and emphases the need for good tax planning, particularly for married couples.

They have also introduced radical changes to the ISA rules making them far more flexible, allowing savers to withdraw and replace money in the same tax year without losing any of their tax advantage.

There’s also a Help-to-Buy ISA on the way, the Chancellor said: “For every £200 you save for your deposit, the government will top it up with £50 more. It’s as simple as this – we’ll work hand in hand to help you buy your first home.”

Jonathan Watts-Lay, Director, WEALTH at work comments, “A combination of measures for savers will really help create far more of a savings culture. Whether it is the new flexibility around ISAs which allows withdrawals and monies to be paid back in without losing the annual allowance or the ability to get £1,000 of interest on savings free of tax as a basic rate tax payer (£500 if a higher rate tax payer) – in essence, this will mean most savers will not pay tax on their savings. The Help to Buy ISA will also help develop the savings culture albeit this money will be used for a first home.

He continues; “People really have any opportunity to think about the best way to save now whether at the start of their working lives or heading towards retirement. When these saving measures are combined with the new pension flexibilities there is a real opportunity for all to plan their finances in a much more flexible way to meet their own needs and life-stage.”

Pension lifetime allowances

In an ongoing trend the pensions lifetime allowance, the amount people can save into a pension without incurring a tax charge, will reduce to £1m, down from £1.25m.

Last April, the allowance was cut from £1.5m to £1.25m and it was only 3 years ago (2011/12) the allowance stood at £1.8m.  Despite only affecting a minority of pension savers, index-linked increases will not be introduced until 2018 so in real terms, the allowance will continue to fall for a few more years.

Extending freedom to annuities

As announced earlier this week, five million pensioners will be able to cash in their retirement deals to help people stuck with annuities that they don’t want., extending to them the same freedoms that have already been offered to those approaching retirement from April.

Removing restrictions will allow pensioners to either take the cash as a lump sum or place it into ‘income drawdown’ to use the proceeds more gradually.

Pensioners who sell their annuity income will be taxed at their marginal rate.

Watts-Lay continues, “For some, it could be good news that the new pensions flexibility has been extended to five million people who have already bought annuities, by allowing them to sell the income they receive for a cash lump sum. However, the ‘sting in the tail’ is what value they are likely to be able to get, and in reality this may not be good.  It won’t be a case of getting back what you invested less what’s been paid out.  The payment will require underwriting by the annuity provider and the values offered may not to be very attractive.  Prudence is also required because once the money has gone, it’s gone, and how is the income to be replaced.”

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