Budget briefing – what do you need to know?
The Chancellor of the Exchequer, George Osborne, has just announced his latest Budget. Here at Marchwood, we’ve put together a short report for you so you don’t have to wade through pages and pages of in depth analysis in the weekend papers (although you’re welcome to do that if you wish!) So what will be the main changes that could affect your personal finances?
Digital tax accounts will be introduced and self-assessment tax returns will be scrapped. Tax details will be held in one place and this will operate in a similar way to an online bank account. Information on pensions, employment income and savings income will automatically be collated to calculate the tax liability. The first of these accounts will be available from early 2016 although individuals who want to submit paper tax returns can continue to do so for now.
Income tax personal allowance
The income tax personal allowance will increase from £10,600 to £10,800 from 6th April 2016 and then to £11,000 from 6th April 2017.
Personal savings allowance
A Personal Savings Allowance – in effect ‘tax-free savings’ – will be introduced of up to £1,000 of a basic rate taxpayer’s savings income, and up to £500 of a higher rate taxpayer’s savings income each year from 6th April 2016. The Personal Savings Allowance will be in addition to the tax advantages available through ISAs (see below).
Personal tax & National Insurance bands
The higher rate tax threshold above which higher rate tax applies will increase from £42,385 to £42,700 from 6 April 2016 and then to £43,300 on 6 April 2017. Class 2 National Insurance contributions are to be scrapped for the self-employed. The Government will consult on the detail on timing of these reforms later in 2015.
ISAs – additional flexibility
As long as ISA cash is taken out and replaced during the same tax year, such a move will no longer count towards the annual ISA contribution limit (which is due to rise to £15,240 this coming April). “With the fully flexible ISA, people will have complete freedom to take money out, and put it back in later in the year, without losing any of their tax-free entitlement” announced George Osborne. However, this new flexibility will apply to cash ISAs only, and not to stocks and shares ISAs. The change will be introduced this autumn after consultation.
Help to buy ISA
To help first time buyers save a deposit for a property, the government is launching ‘help to buy ISAs’ in autumn 2015. For every £200 a first time buyer saves, the government will provide a £50 bonus up to a maximum bonus of £3,000 on £12,000 of savings. Savers will have access to their own money and will be able to withdraw funds from their account if they need them for another purpose but the bonus will only be made available for home purchase.
The investment limit for premium bonds is rising to £50,000 from 1 June 2015.
For those saving towards retirement, the announcement that pensioners will be able to trade in their annuities to release cash is a welcome move. It gives people even more flexibility and choice, and puts them in full control of their retirement income. However many people will be looking for guidance and support so that they make the right decision for their long-term financial health. This policy will not come in until 2016, so there is time for insurers to work out how they will actually provide cash in return for traded-in annuities.
The lifetime allowance (LTA) for pension saving
In a move that will probably be seen as making sure that older, wealthier voters do not benefit from all the Budget changes, the maximum lifetime allowance for tax-free pension savings has been cut again, this time to £1 million. (It has been reduced regularly from £1.8 million back in 2011). A £1 million pension pot seems a huge amount to most people, but – according to industry calculations – if you started your pension at age 30, and invested £793 per month in a medium risk portfolio* you could hit the £1m limit by the age of 68. Pension savings of this level might seem high, but this will include any contributions from your employer, and at least 20% tax relief from the government.
*Nutmeg calculations based on monthly contributions of £793 over 38 years. Figures assume an annualised return of 4.8%, after fees, on a pension portfolio made up of 65% equities (developed and emerging markets) and 35% government and corporate bonds.