Future Tax Changes

16th March 2016

On 6 April 2016 there are a number of changes coming into effect. Set out below is a summary of the main allowances and tax bands applicable for the 2016/17 tax year as well as other changes to pensions :

Allowances

* Personal allowance is reduced where income is above this limit. The allowance is reduced by £1 for every £2 above the limit.

Tax bands

Of particular relevance to savers, the new tax year sees the introduction of two new allowances; the Dividend Allowance and the Personal Savings Allowance.  The Dividend Allowance means individuals will not have to pay tax on the first £5,000 of dividend income they receive. The notional 10% tax credit which presently applies to dividends will be abolished and dividends above £5,000 will be taxed at 7.5% (for basic rate taxpayers), 32.5% (for higher rate taxpayers), and 38.1% (for additional rate taxpayers). Dividends received by pensions and ISAs will be unaffected.

The new Personal Savings Allowance means that basic rate taxpayers will not have to pay tax on the first £1,000 of savings income they receive and higher rate taxpayers will not have tax to pay on their first £500 of savings income.

The interaction of these new allowances with ISA creates the opportunity for many investors to pay very little, if any, tax on their savings in retirement.

Annual & Lifetime Allowances

There are new limits to the Lifetime Allowance (LTA) that may affect your employees. The current allowance is £1.25 million. However, from 6 April 2016, this will reduce to £1 million.

Also a new tapered annual allowance for high earners is to be introduced from April. Individuals who have income greater than £150,000 will have their annual allowance for that tax year restricted. For every £2 of income that exceeds £150,000, £1 of annual allowance will be lost.  There is a cap to the tapering of £30,000, which means that the minimum tapered annual allowance is £10,000. However, the changes are complex and could have implications for your employees if for example:

• They have already built up significant pension benefits, either in relation to your workplace pension or with a previous employer.
• They pay or receive a high level of contribution to your workplace pension scheme or any other pension arrangement.
• They have total taxable income (from any source) in excess of £110,000 per annum.

 Secondary annuities

The government will remove the barriers to creating a secondary market for annuities, allowing individuals to sell their annuity income stream. They also plan to consult further on the details of the tax framework in Spring 2016.

State pension

For those who reached State Pension age before 6 April 2016 the triple-lock (the higher of price inflation, earnings growth or 2.5%) will remain and the full basic state pension will rise by £3.35, bringing it to £119.30 per week.

However for those reaching pension age on or after the 6th April 2016, the new single tier state pension will come into effect. It will be £155.65 per week and will depend on having 35 qualifying years of National Insurance contribution.  There will be a deduction for those who were contracted out of the Additional State Pension.

In reality, not everyone will be eligible for the maximum amount of the new state pension. Therefore, it is important for individuals to check their State Pension record and National Insurance contribution history early; if they have any gaps then they still may be able to make up the difference.

Those who are approaching retirement can make an enquiry to find out what they are going to receive by requesting a State Pension statement using a form called a BR19, which is available online or by calling the government helpline on 0345 3000 168.

Buy-to-let

The purchase of additional residential properties, such as buy-to-lets, will be subject to higher stamp duty, 3% above the current rates. Additionally, capital gains tax on the disposal of a second property will be required to be made within 30 days of the completion of the disposal as from April 2019.