Budget 2016: A savings surprise
The Chancellor has spoken – but what did it all mean for the UK’s personal finances and small businesses? We sum up the key points.
Say what you like about Chancellor George Osborne – he is very good at springing surprises. We were all ready for a big overhaul of pension tax relief, and possibly the introduction of a new ‘pension ISA’ instead. Then all that was off the cards and we were told not to expect anything of the sort. So the big announcement on the day turned out to be… a pension ISA.
Well, he called it a Lifetime ISA, but the principle is pretty much the same. Pensions as we know them are safe, for now – but a new and interesting kind of savings account has joined them.
What is a Lifetime ISA?
The new Lifetime ISA, available from April 2017, will be like a hybrid of an ISA and a pension. Available only to the under-40s, it’s clearly designed to encourage saving among the young who might not yet be thinking about pensions. It offers the same level of top-up as a basic-rate pension, with £1 added for every £4 saved – the equivalent of 20 per cent tax relief, although it’s billed as a 25 per cent bonus (actually the same thing… it’s complicated!).
You will be able to pay up to £4,000 into your Lifetime ISA each year. It also offers tax-free growth and tax-free withdrawal (unlike a pension), making it the most tax-sheltered product out there. Another advantage, as far as younger people are concerned, is the ability to withdraw money from this ISA at any stage of life, not just at retirement. However, the main purpose of it is to help people to buy their first home or to save for retirement, so the top-up only applies in these circumstances. If money is withdrawn for any other reason, you wouldn’t receive the 25 per cent bonus. However, George Osborne also said you could withdraw money and pay it back in without losing your bonus.
Anyone who already has a Help-to-Buy ISA will be able to roll it into a Lifetime ISA without using up their annual allowance, so those already saving for a home won’t miss out.
The ISA will, however, have a 5 per cent exit penalty for withdrawals before the age of 60.
Don’t forget other savers, George
Not everyone will qualify for a Lifetime ISA, but the good news is that the ordinary ISA limit will rise from £15,000 to £20,000. Despite the prospect of all cash savings having tax-free interest soon for most savers, this is still very useful for higher earners and those who want to invest in stocks & shares. The broader advantages of an ISA should also be borne in mind.
Good news for investors (but more gloom for landlords)
In something of a bonanza, the Chancellor slashed capital gains tax (CGT) from 28 per cent to 20 per cent for higher rate taxpayers, and from 18 per cent to 10 per cent for basic rate taxpayers. This is great news for anyone investing in shares or other assets – though not for landlords, who will continue to pay the old levels of CGT.
Paying less income tax – but higher-rate pension savers beware
It was a surprise to see the Chancellor making income tax concession in spite of the continued deficit. From April 2017 the personal tax allowance is being raised to £11,000, while the higher-rate threshold will increase to £45,000.
However, there’s something to be wary of here, if you’re a borderline higher rate taxpayer. If this change means you will fall out of the higher rate band, this means you will also lose the ability to claim 40 per cent tax relief on pension contributions. This means that you may want to make some additional pension contributions before next April, to maximise the relief while you still have it. (Or you could just count on a pay rise!).
Small businesses get a boost
Other concessions came for SMEs and the self-employed, with corporation tax falling to 17 per cent by 2020. There’s also a new, fairer system of stamp duty on commercial properties (similar to the tapered stamp duty on residential properties): zero up to £150,000, 2 per cent on the next £100,000 and 5 per cent above £250,000.
Another gift came in the form of a new threshold for small business rate relief. From April 2017, small businesses that occupy property with a rateable value of £12,000 or less will pay no business rates – meaning big savings for up to 600,000 small businesses.
We will also see the end of type 2 National Insurance contributions, which will give the self-employed a tax boost. All in all, it has been a good Budget for entrepreneurs.
And the biggest surprise…
Fuel duty is still frozen! No-one saw that coming.
If you want to find out in more detail about how the Budget announcements might affect you personally, now is a great time to discuss them with a financial adviser. You can find a regulated, unbiased adviser near you using our smart search – look for yours today.