Spring Budget 2017 Highlights

This first Spring Budget was also Philip Hammond’s last as he intends to move future budgets to the Autumn.

Just as it was in the 2016 Autumn statement, one of his challenges was to lessen fears surrounding Brexit and the prospect of contagion from any wider global instability over the coming year. It was therefore little surprise that the measures in this budget were not amongst the most radical or far-reaching of recent years.

Here we will pick out some of the key points of interest from a financial planning perspective.

Dividend Taxation

Dividends are paid with a 10% tax credit and it used to be the case that this satisfied the tax requirement for basic rate taxpayers. A year ago, this regime was changed and it became the case that the 10% tax credit would no longer satisfy basic rate tax requirements, rather, every taxpayer would have a £5,000 dividend allowance; there would be no tax to pay on annual dividends below this level. Dividends over £5000 would become taxable.

The Chancellor has now announced this allowance will reduce to £2,000 from 6 April 2018. If dividend income is less than £2,000 no tax will be due. However, on any excess over £2,000, tax will be paid at the following rates which remain unchanged:

• 7.5% for basic rate taxpayers;
• 32.5% for higher rate taxpayers; and,
• 38.1% for additional rate taxpayers.

This reduction in the dividend allowance makes it even more important that you are using your tax wrappers effectively so that you are not paying more tax than you need to. Dividends from ISAs for example, whilst not escaping the 10% tax credit, are not liable for the extra taxes and will not use up your dividend allowance. Speak to an adviser for more information and to ensure your tax wrappers are being used properly.
If you are a company owner and pay yourself in dividends then you may wish to make an appointment with your accountant to ensure that this is still the best way to remunerate yourself.

Inheritance Tax

It was confirmed that the nil rate band of £325,000 will remain frozen until April 2021.
The promised additional nil rate band for a residence passed to a direct descendant will begin to be phased in from April 2017. This will also apply if a residence has been sold to downsize on or after 8th July 2015 where the proceeds are passed on to a direct descendent.
Contrary to the impression given by many recent newspaper headlines, this is a complicated piece of legislation. Many people who suspect they will be eligible will not qualify or may only qualify for a reduced allowance. We will shortly publish a simplified summary of the rules but until then you can read the HMRC explanation here.
Please talk to your adviser if you are want to discuss inheritance tax or your eligibility for the residence nil rate band.

ISA and Lifetime ISA

The annual ISA allowance will increase to £20,000 for the tax year 2017/18 and the Junior ISA will increase to £4,128.
The last Spring Budget introduced the Lifetime ISA (LISA) which launches on April 6th 2017. You can pay in to a LISA between ages 18 to 40. The government adds a bonus of 25% to any contributions made until age 50. Money paid into a LISA also counts towards the normal ISA allowance. So if £4,000 is paid into a LISA only £16,000 can be paid into other ISAs this year. The LISA can be used to purchase a first home or for retirement from age 60 onwards.
Money taken out of a LISA other than for the purchase of a first home or for retirement, will suffer a 25% penalty of the total amount withdrawn.
N.B. This is not the same as the government taking back the 25% bonus. For example, if you contributed £800 to a LISA and got your 25% government bonus you would have a total of £1000. But if you withdrew the money before 60 for purposes other than first home purchase, you would receive back £1000 – 25% = £750.

Pensions

The pensions landscape changed dramatically in April 2015 with the introduction of flexible rules. These rules allowed for individuals to take as much income from their personal pensions as they wished, subject to tax and the size of their pension pot. Before 2015 there had been a cap on the income you could receive from your pension.
Before you take income from your pension you are entitled to contribute up to 100% of your earnings to a pension, subject to a limit of £40,000 this is your annual allowance. Once you choose to access your pension benefits flexibly under the new rules, your allowance is reduced, previously to £10,000, this is called the Money Purchase Annual Allowance. The money purchase annual allowance (MPAA) will reduce from £10,000 to £4,000 from 6 April 2017.
There were also a number of changes made to the treatment of overseas pensions. If you feel these changes may effect you then please contact your adviser.

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