This summary is not intended as a full review of the 2015 budget, as I am sure you will read the wider details in the newspapers and online. This is, instead, a summary highlighting the key changes that affect pensions, savings and investments.
The Chancellor confirmed that the new Pension Freedom will go ahead as expected in April 2015. Please see my previous post on this subject for full details: http://www.prw-chartered.co.uk/new-pension-freedom/.
An additional “freedom” announced is the proposal for people in receipt of annuities to sell their annuity to an annuity provider for a lump sum from 2016/17. The lump sum can be taken as cash, transferred to a pension plan or used to buy a different annuity. These changes are currently subject to consultation, and whilst the principle of more freedom is welcome, there is a significant risk of people making poor decisions when offered a lump sum.
Pension Lifetime Allowance
The Lifetime Allowance is being reduced from £1.25 million to £1 million in 2016/17. Transitional Protection will be available to fix the allowance at £1.25 million, but the details of this protection have not been announced. From 2018/19, the allowance will be indexed in line with CPI.
In 2010/11, the Lifetime Allowance was £1.8 million. It has since become the subject of a major attack and in our view undermines the pension system. It is also counterproductive to have a Lifetime Allowance on Defined Contribution pension pots, as it penalises good investment growth. As there is an Annual Allowance, a Lifetime Allowance is unnecessary.
Fortunately, no further reductions in the Annual Allowance have been announced, but if Labour are elected they have stated it will be reduced from £40,000 to £30,000.
The Personal Allowance was confirmed as £10,600 from April 2015. In April 2016, it will increase to £10,800 and in April 2017 it will increase to £11,000.
Personal Savings Allowance
From April 2016, a proposed new Personal Savings Allowance will be introduced. Basic rate taxpayers will not pay any tax on the first £1,000 of savings interest. Higher rate taxpayers will not pay any tax on the first £500 of savings interest.
A Basic rate taxpayer with a balance of £100,000 earning 1% per annum interest will therefore not pay any tax on the interest. This seems to make Cash ISAs even less attractive than they already are.
In addition, as previously announced, the savings rate of income tax will reduce from 10% to 0% and the Savings Rate Band will increase from £2,880 to £5,000. This affects people whose main source of income is bank interest.
If you had no other income, after April 2015 the first £15,600 of savings income will be tax free. After April 2016, the first £16,600 will be tax free. However, if your other income exceeds £15,600, you will not benefit from this band of income tax.
A significant change for many is the fact that from April 2016, interest on savings will be paid gross. There will be no deduction of 20% tax at source.
The change to gross interest makes the 3 year NS&I 65+ Guaranteed Growth Bond even more attractive. The 1 year issue will not benefit from the change, as income will arise in 2015/16. However, income arising in 2016/17 and 2018/19 on the 3 year bond, which pays 4%, will be paid gross and for most will be tax free.
Higher Rate Tax threshold
As previously announced, Higher Rate tax will apply to income in excess of £42,385 from April 2015. From April 2016, it will increase to £42,700 and from April 2017 it will increase to £43,300.
From the “autumn” of 2015, money can be withdrawn from a Cash ISA and then paid back in, without if affecting the ISA allowance. However, the new payments into the ISA would have to be made within the same tax year as the withdrawal. This does not apply to Stocks & Shares ISAs.
“Help to Buy” ISAs have also been proposed from autumn 2015 for First Time Buyers. For each £200 invested into the Cash ISA, £50 tax relief will be added, up to a maximum relief of £3,000, giving a total of £15,000 to be put towards a deposit. To qualify, the property purchase price must be no more than £250,000, or £450,000 if it is in London.
David Penney APFS