WEALTH at work comments on last week’s Budget announcement

guidance

Income tax

For individuals, there were no changes to income tax allowances other than what was already known; the income tax personal allowance will increase from £11,000 to £11,500 with effect from 6 April 2017.   The higher rate threshold will increase by £2,000 from £43,000 to £45,000 again from April 2017.  The Chancellor reaffirmed the Government’s commitment to having a personal tax allowance of £12,500 and a £50,000 higher rate tax threshold by the end of this Parliament.

ISA allowance increased and LISA reconfirmed

As previously announced, the government will increase the ISA limit from £15,240 to £20,000 in April 2017.

Also from 6 April, savers can put up to £4,000 a year into a Lifetime Individual Savings Account (LISA), which will be topped up with a 25% government ‘bonus’, making a maximum of £5,000 saved each year.

The LISA will be available for individuals under age 40 can be used for buying a first home (up to a value of £450k) at any time from 12 months after opening the account, or taken from age 60 without penalty, tax free. If accessed before then, the government bonus will be lost, along with any interest or growth on this amount. It will also be subject to a 5% penalty charge.

Jonathan Watts-Lay, Director, WEALTH at work, a leading provider of financial education, guidance and advice in the workplace, comments; “There are concerns that the LISA will compete with workplace pensions and undermine auto-enrolments success in encouraging people to save, but I don’t think this is the case. Pensions should, of course, remain an integral part of saving. Yet other choices such as the LISA should not be seen as a threat, as they may in fact encourage employees to develop a savings habit, which ultimately could benefit pension savings. After all, the LISA is a great option for those who want to save for a deposit on their first home due to the guaranteed bonus.”

Dividend allowance reduced

The government will reduce the tax-free dividend allowance for shareholders from £5,000 to £2,000 with effect from April 2018.

Watts-Lay comments; “The reduction means that more share owners could potentially have to pay tax on the dividends received above this new allowance.

ISAs are very useful as the dividends from shares held in ISAs remain tax free and the increase in the ISA allowance to £20,000 from April 2017 will be a great help as they play a big part in creating a tax-efficient investment strategy, especially as they not only shelter investment income from tax but also capital gains.  Additionally, there is no need to keep records of ISA returns for the taxman as these investments don’t have to be declared on a self-assessment tax return.”

New NS&I investment bond

The government reconfirmed that the new NS&I savings investment bond will be available from April 2017. The Investment Bond will offer a market-leading rate of 2.2% over a term of 3 years and will be available for 12 months.  The bond will be open to those aged 16 and over, subject to a minimum investment limit of £100 and a maximum investment limit of £3,000.

Childcare

It was reconfirmed that working parents with 3 & 4 year olds will have free childcare allowance doubled to 30 hours per week from September 2017 under the new scheme.

Parents who are already members of the current Child Care Voucher system can continue in it, providing employers still provide access to it; new members will also have the opportunity to join the current scheme until April 2018.The new system, called ‘Tax-Free Childcare’, will be available online and the State will contribute 20p for every 80p that parents spend on childcare. The maximum State contribution per year will be £2,000 per child (or £4,000 for disabled children). Parents must be in work to qualify and earning just over £100 per week, but no more than £100,000 per year.

Watts-Lay comments; “Whether parents are better off with the old or new scheme depends on factors including how much they earn, how much they spend on qualifying childcare, whether both parents work, how old their children are, and how many children they have.  Tax Free Childcare will only be available to parents with children up to the age of 12 (17 if disabled), whereas the current Childcare Voucher system is available to children up to the age of 15 (16 if disabled); so those with older children could lose out. There will also be no National Insurance (NI) saving under the Tax Free Childcare system; therefore employed parents with lower childcare costs could be worse off.   Unlike the current Childcare Voucher system, Tax Free Childcare does not rely on employers offering the scheme to parents.  This is good news for those who work for companies that don’t offer the childcare voucher system and the self-employed.

I’ve heard from many employees who are confused by the options, however many companies are now incorporating this into their financial educations programmes.”

Master Trusts

The government will amend the tax registration process for master trust pension schemes to align with the Pensions Regulator’s new authorisation and supervision regime. This will help to boost consumer protection and improve compliance.

Money Purchase Annual Allowance

The Chancellor confirmed that the money purchase annual allowance will be reduced to £4,000 from April 2017. This restricts the amount of tax relieved contributions an individual can make in a year into a money purchase pension, if they have flexibly accessed their pension savings.

State Pension

The Chancellor confirmed that the new flat-rate pension will rise by 2.5% in April 2017 seeing weekly payments increase to £159.55 from £155.65, while the old state pension will rise to £122.30 from £119.30.

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