2017 Spring Budget Update – What it means for you

March Budget 2017

No significant tax or pensions changes in the Budget that will have any immediate impact.

In an attempt to make the tax system fairer, two main changes will come into effect from April 2018.

Reduction to the dividend allowance

The annual dividend allowance introduced last year will remain at £5,000 for the 2017/18 tax year, but will then drop to £2,000 from April 2018. In particular, this will hit small and medium sized business owners who take their profits as a dividend.

Employer pension contributions will become an even more attractive way of extracting profits from a business.

Increase in NICs for the self-employed

The self-employed class 4 National Insurance contributions will increase from 9% to 10% from April 2018, with a further increase to 11% from April 2019. This will close the tax gap between the self-employed and employed.

This coincides with the removal of the flat rate class 2 NICs for the self-employed from April 2018.

Self-employed individuals have been eligible for the same flat rate state pension as employees since April 2016, and so the increases will go some way to paying for this.

Further Changes

QROPS clampdown gets overseas pension transfers back to basics

A new 25% tax charge on some QROPS transfers effectively restricts penalty-free movement of tax-relieved UK pension funds overseas strictly to the ‘vanilla’ circumstances originally envisaged.

There’s no change for those seeking genuine pension portability by moving their pension savings overseas:

  • *to their employer’s occupational pension scheme; or
  • *to their country of residence; or
  • *within the EEA.

But the tax clampdown, which applies to transfers requested after 8 March 2017, will hit those moving their pension to ‘third party’ jurisdictions to avoid UK tax. And anyone whose status changes within 5 years of a transfer, such that they fall outside the penalty-free categories, faces a tax charge after the event – reducing scope for ‘jurisdiction hopping’.

As well as recovering tax for the Exchequer, this should also help protect UK pension savers against overseas pension scammers. 

Tax avoidance deterrents strengthened

As part of the Government’s objective to stop the loss of tax revenues through avoidance schemes, it confirmed that a financial penalty on the enablers of a scheme that fails the GAAR test will be introduced from July. Enablers include anyone involved in the design or promotion of a scheme and who may ultimately benefit from a client using the scheme, for example, by charging them a fee. The penalty could be as much as the amount of tax avoided.

The intention is clearly to deter anyone in the supply chain from getting involved in the first place, killing such schemes at first base.

Social care: green paper and red light to ‘death tax’

Demographics continue to drive the search for innovative solutions for long term care funding. The government will set out proposals for future funding of social care in a green paper to be published later this year. The Chancellor confirmed that a ‘death tax’ (a flat rate charge applicable to all estates) would not be among the measures considered.

Rates, allowances and what we already knew

Here’s a reminder of what we already knew was coming in 2017/18 which you may need to consider:

  • 2017/18 tax rates and bands confirmed
The personal allowance for 2017/18 is confirmed as £11,500 and the higher rate threshold will rise to £45,000. Increases are planned to £12,500 and £50,000 respectively by 2020.
  • The increase to the higher rate threshold will not apply in Scotland where the threshold will remain at £43,000.
  • The individual capital gains tax allowance will increase to £11,300.
  • IHT residence nil rate band
From April, your clients may be entitled to an extra £100,000 IHT nil rate band where the family home passes to direct descendants on death.
  • Lifetime ISA introduction
Under 40s will have a new savings option which can help them to get a foothold on the property ladder. Up to £4,000 a year can be paid into the Lifetime ISA and this will receive a 25% Government Bonus. Most first time house buyers can access their fund tax free prior to age 60.
  • £20k ISA allowance – The ISA savings allowance is set to receive an above inflation increase. Savers will be able to enjoy an additional £4,760 of tax free savings.
  • Reduced Money Purchase Annual Allowance (MPAA) – The MPAA is to be cut from £10,000 to £4,000 from April 2017. This only affects those who have accessed their DC pension under the new pension flexibilities and wish to continue paying into their pension. Those only accessing their tax free cash, or who were already in capped drawdown and haven’t exceeded the cap, will keep the full £40,000 allowance.
  • Corporation Tax cut
The rate of Corporation Tax will be cut from 20% to 19% from 1 April, with a further cut to 17% to follow in April 2020. Business owners may want to consider accelerated pension funding ahead of any rate cut to reduce profits which would otherwise by taxed at the higher rate.

This information is an extraction from information provided by the Standard Life Website. For more details please refer to the originator.