Budget 2016 predictions on pensions, Isas and tax
With the Budget just a few days away Moneywise looks at what the experts are predicting.
Of course no-one knows for certain what Chancellor George Osborne will deliver on 16 March - we’ve seen some rabbits pulled out of the hat in previous years, such as the pension freedoms, so ensure you check Moneywise.co.uk and follow @Moneywiseonline on Twitter for news on the big day.
Earlier this month Mr Osborne shocked many by backtracking on plans to reform the tax treatment of pensions – see the Government U-turn on pensions tax relief.
Speculation had been mounting as to whether he would introduce a new flat rate of tax relief on contributions of between 25% and 33%, or a pensions Isa, which would have had a lower rate of tax relief on contributions but would pay out tax free.
However, Richard Parkin, head of pensions at Fidelity International says: “We expect this is action postponed rather than action abandoned.”
While Tom McPhail, leading pensions expert and head of retirement policy at Hargreaves Lansdown, adds “there is still plenty of wriggle room for changes in the Budget”.
Some experts believe Mr Osborne may reduce the amount people can save into their pension.
David Smith, director of financial planning at Tilney Bestinvest says: “It is possible that further reductions in the annual allowance could be made; that is the amount that an individual can save into a pension each year, thus significantly reducing the amount of tax relief available. Perhaps he will reduce the annual allowance to £30,000 [it’s currently £40,000/year].
“The tapered annual allowance, the restriction on the amount of pension savings for the highest earners, could see the threshold of earnings above which it is implemented reduced from £150,000 to say £100,000.”
Steven Cameron, director of pensions, at Aegon UK adds: “We may see further reductions to the sums people can pay into pensions, either through the lifetime or annual allowance [the lifetime allowance is already being reduced this April from £1.25m to £1m].
“There could also be changes to the tax paid when taking pension lump sums.
“The Chancellor may also announce the outcome of the Treasury and FCA’s Financial Advice Market Review, and this could open up new routes for advice, guidance and support including on pensions. We may also see next steps towards the secondary annuity market.”
AXA Self Investor says the ability to make pension contributions via salary sacrifice could also be targeted.
Income tax and National Insurance
Mr Smith says: “The coupling of income tax and National Insurance could yet be the next port of call to help out with the Chancellor’s balance sheet. Many have called for this proposal in order to simplify an antiquated personal tax regime.”
However, Andrew Watters, senior tax partner at Thomas Eggar believes this isn’t the year for the change. “While it would make lots of sense to integrate national insurance into income tax, the effect would be to raise the headline rate of income tax.
“In a Budget where there is already going to be a lot of nasty medicine to swallow, this is unlikely to be the year of such rationalisation.”
Wealth manager Brewin Dolphin says increases to the income tax allowance may be delayed. You can currently earn £10,600 a year before paying any tax, which is due to rise to £11,000 in 2016/17 and to £11,200 in 2017/18.
On the other hand, Axa Self Investor says Mr Osborne could increase the personal allowance as it’s proved a popular policy.
Insurance premium tax (IPT) and fuel duty
Edmund King OBE, AA president, is concerned the Chancellor may consider IPT and fuel duty hikes to be a ‘quick win’ to increase revenues.
IPT already rose from 6% to 9.5% on 1 November 2015, which the AA says added up to £18 to the average quoted premium for a car insurance policy.
John O’Roarke, managing director of LV= says: “IPT is not a tax on insurance companies – it’s a tax on insurance products which is paid directly by customers – effectively penalising them for doing the right thing and protecting the things they value most. We therefore urge the Treasury not to introduce a further increase.”
Fuel duty meanwhile, which is included in the price you pay for petrol, is currently 57.95p/litre for unleaded and diesel. It’s been frozen at this price since March 2011.
Individual savings accounts (Isas)
Axa’s Mr Lowcock says we might see an improvement on the “unnecessarily complex” Isa inheritance rules where a surviving spouse inherits the Isa allowance. But he adds that little else is expected on Isas.
Stamp duty and first-time buyer schemes
David Hollingworth, from mortgage broker London and Country, says there’s unlikely to be radical stamp duty changes introduced in this Budget given the new stamp duty rates introduced in December 2014 and new buy-to-let rates coming into force next month.
However, he says Mr Osborne could potentially announce plans to expand on various property schemes that encourage new homes to be built and help first-time buyers to get on the property ladder.
A tax-efficient way of receiving staff benefits, where an employee agrees to forego a proportion of their salary for an equivalent contribution into their pension scheme or in exchange for company car, gym membership, childcare vouchers or private medical insurance. A salary sacrifice scheme is a matter of employment law, not tax law, and is often entered by an employee who is about to move into the higher 40% tax bracket.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.