Summer Budget 2015 – Commentary.

8th July 2015

The Chancellor has announced increases from April 2016 which take the personal allowance up to £11,000 and the higher rate threshold to £43,000. As well as bringing more people out of paying tax all together, basic rate taxpayers will be better off by £80 and higher rate taxpayers by £203 compared to the current tax year.

Also announced were simplified rules for the treatment of dividend income. The present tax credit system is to be replaced with a £5,000 tax free allowance for all but increased tax rates thereafter; 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers respectively. This is a welcome addition to the Personal Saving Allowances announced in the March 2015 Budget which provides all basic rate and higher rate taxpayers with a tax free allowance of £1,000 and £500 respectively for savings income (such as deposit interest). Incorporating all of these changes together could theoretically allow a non-taxpayer to receive up to £22,000 of savings and dividend income before they begin to pay any tax whatsoever. When you add ISA allowances into the equation, the Government is creating a simplified tax system for encourage saving.

As widely predicted, the inheritance tax (IHT) rules are to be changed from April 2017, offering each individual a family home allowance of £175,000 in addition to the IHT threshold of £325,000; meaning the total tax-free allowance for a surviving spouse or civil partner will be up to £1 million in 2020/21. This is so someone can pass their home on to their children or grandchildren tax-free after their death and this will be phased in from 2017/18. The allowance will be gradually withdrawn for estates worth more than £2 million.

This new IHT concession is to be funded by reducing the amount high earners can contribute into their pensions and receive tax relief. Most people can contribute up to £40,000 a year to their pension tax-free. From April 2016, this amount will be reduced for individuals with incomes of over £150,000 so that by the time someone is earning £210,000, the allowance has reduced to only £10,000.

Currently, individual landlords can deduct their costs, including mortgage interest, from their profits before they pay tax, giving them an advantage over other home buyers. Wealthier landlords receive tax relief at 40% and 45%. This tax relief will be restricted to 20% for all individuals by April 2020.

In addition, from April 2016, the ‘wear and tear allowance’, which allows landlords to reduce the tax they pay (regardless of whether they replace furnishings in their property) will also be replaced by a new system that only allows them to get tax relief when they replace furnishings.

The Government has also opened up a consultation aimed at strengthening the incentive to save through pensions. The consultation is open until 30 September 2015 and is welcoming thoughts on simplifying tax relief, perhaps by introducing a top-up scheme and also aligning pensions more with ISA i.e. tax-free access to the whole fund. We will update you on the outcomes of this consultation as soon as further details are available.

Jonathan Watts-Lay, Director, WEALTH at work – a leading provider of financial education, guidance and advice in the workplace responds, “The green paper looking at the possibility of scrapping the tax relief on pensions is fascinating as it seems to me to be aligning pension savings with the new ’Help to Buy ISA’. The truth is that we are not saving enough, so anything that can be done to make pensions simpler and more accessible has to be a good thing. There is a risk that removing the upfront tax relief may reduce the incentive to save but on the other hand, the fund could be accessed completely free of tax.”

He continues, “It is also good news that access to Pensions Wise has been extended to the over 50s. People need to understand as soon as possible what their retirement income will actually be, in the hope that if they can afford to contribute more then they will to improve their situation in retirement.”

He comments, “The introduction of new tax-free allowances for savings, including deposit interest and dividends on shares, is great news for savers. Theoretically, a non-tax payer could earn up to £22,000 of savings and dividend income before they begin to pay any tax whatsoever. To me, this seems to be a clear sign of the Government creating a savings charter.”

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