25th November 2015 at 4:46pm
If you are a 40% or 45% taxpayer, have pension savings nearing the £1m mark, dividends which form a significant part of your income – or you have an additional property – today’s Autumn Statement sets the scene for your tax landscape from 6 April 2016.
Here’s what you need to know from today’s statement as well as recent announcements.
More stamp duty on additional properties
If you’re buying a second home or buy-to-let property, you’ll need to pay an extra 3% in stamp duty from 1 April 2016, except for properties in Scotland. Smaller properties won’t be caught by this as the extra stamp duty only applies on properties worth more than £40,000.
High earners hit by cut to pension annual allowance
If your income is over £150,000, the amount you can pay into a pension from 6 April 2016 reduces from £40,000 a year. Once your income reaches £210,000, your annual allowance will be cut by 75% to £10,000. There is a sliding scale in between based on a £1 reduction in the annual allowance for every £2 of income.
If you’re affected by this, what can you do? There are tax consequences if you get this wrong so consider speaking to an expert.
If you’re in a workplace pension, talk to your pension scheme administrators for information which may be specific to your employer.
Lifetime allowance cut for pensions
The cut in the lifetime allowance from £1.25m to £1m is going ahead as planned from 6 April 2016. This limits how much you can build-up in your pension before certain tax charges might apply.
If you’re near this level of pension savings and want to protect the higher £1.25m limit, from Summer 2016 there are two options open to you online through HM Revenue and Customs. Full details are still to be announced.
If you are near the £1m limit, you will need to consider whether continuing to pay into a pension is still important to you. And if you are planning to take withdrawals from your £1m+ pension before the protection is available in the Summer, speak to an expert as there are options which could mean the lifetime allowance charge may not apply, depending on how much you are taking out.
2016 could see changes to pension tax relief
The Government has been consulting on possible changes to the pension tax relief system. We expect any changes on this to be announced in the March Budget in 2016. If you want to maximise what you pay into your pension before then, to make the most of 40% or 45% tax relief and to beat the reducing annual allowance, you might be able to use the carry forward rules. These allow you to make use of any unused annual allowance from the last three years and could mean as much as £220,000 going into your pension.
Pensions can be complex and we recommend you speak to an expert to avoid tripping up on the detail or you could be penalised by tax charges. We’ll be covering the detail in the future as there are some quirks with the new rules which are best illustrated with case studies.
ISA allowances confirmed
From 6 April 2016, the amount that can go into an ISA stays at £15,240 and £4,080 for a JISA. This can be used for stocks and shares, cash, or both. If you’re approaching retirement and looking to maximise what you pay into your pension, you might want to consider whether your ISA savings could boost your pension, as our case study explains. Do remember, transferring this kind of money into your pension is not for everyone.
New £5,000 dividend tax allowance
If you hold shares outside an ISA or pension, the new tax-free dividend allowance will affect you from 6 April 2016. The good news is you’ll no longer pay income tax on dividend income up to £5,000, even if you are a 40% or 45% taxpayer.
If you have a larger portfolio, the slice of dividend income above this will be taxed at:
• 7.5% (basic rate)
• 32.5% (higher rate)
• 38.1% (additional rate).
The full tax will be due as the 10% tax credit is being abolished.
Viewing the tax allowance changes as a whole, if you’re generating retirement income you could have up to £33,100 of tax-free income or gains from 6 April, which provides plenty of scope to use your savings and investments in a tax efficient way. We’ve put together this graphic to illustrate this.
Quicker online tax payments
The benefits of quick online transactions work both ways, as the Government is now looking at how to receive faster tax payments. Landlords should watch out for changes by 2020, where it may be necessary to keep your tax affairs up-to-date online at least quarterly via the new digital tax account.
This same focus on accelerating tax payments looks set to apply to capital gains tax on selling residential property. From April 2019, the time limit for paying capital gains tax drops to 30 days, compared to up to 22 months at the moment. A consultation will flesh out the details before then.
If you have buy-to-let properties, managing your cashflow and retaining cash to pay for tax bills will become ever more important.
That’s it for this Autumn Statement update – post below if you have any questions.
For more information on the Autumn Statement, read our other blog here.
The information in this blog or any response to comments should not be regarded as financial advice. A Stocks and Shares ISA and a personal pension are investments. Their value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future. The information here is based on our understanding in November 2015. Your personal circumstances also have an impact on tax treatment.