18th March 2015 at 4:41pm
Today’s Budget completes a year of positive news for savers, with the emphasis on new flexibility.
Together with earlier announcements which apply from 6th April, the picture is an encouraging one with tax efficient and flexible options to build, access and pass on more of the money you’ve worked hard to save. This blog focuses on what’s happening on 6th April, rather than future proposals. Here’s what it means for you.
Flexible pensions and more choice arrive on 6th April 2015
From 6 April, if you are age 55 or more and have the type of flexible pension where you save into your own ‘pot’, you can spend your savings when and how you want to. But there’s no need to feel pressured into making a quick decision or taking it all in one go. You could end up paying more tax than you need to – don’t sleepwalk into a tax bill.
The death tax charge of 55% is scrapped from 6 April, which means your pension savings can be passed on to your loved ones with less or no tax to pay. If you die before age 75, your pension is passed on free of tax. And if you die after the age of 75, the income tax rate of the beneficiary applies to whatever money they decide to take out from the pension pot they inherit, which could be 0%, 20%, 40% or 45%. Pensions can be passed on again and again, with the income tax rate reset by the age of each pension beneficiary.
This new pension flexibility doesn’t apply if you’ve already bought a fixed income, called an annuity. Whether you’ll have more options with your existing annuity depends on new proposals announced just before the Budget and highlighted by the Chancellor today. New rules are expected in 2016 which could create a way for you to sell-on your annuity, in return for a cash sum. It’s too early to say how this could work in practice and we’ll return to the annuity proposals on the blog in the months ahead.
Lifetime pension limit reducing in future
Today’s Budget did contain news of a proposed restriction on the savings which can be built-up in a pension before a tax charge applies. It is proposed that the lifetime limit will be reduced from £1.25 million to £1 million in April 2016. The good news is there will be steps you can take to protect your higher savings limit and we’ll cover the details in a future blog. Only 4% of savers currently approaching retirement have a pension pot worth more than £1m.
ISAs and Junior ISAs get a boost
ISAs change in two ways from 6 April.
The ISA allowance goes up to £15,240 from £15,000. And with the changes made in 2014, you can now transfer old Cash ISAs to Stocks and Shares ISAs, and vice versa, giving you more control and flexibility over your savings.
The second change benefits married couples and civil partners. When someone dies (on or after 3 December 2014), the value of their ISAs when they die becomes an inheritable ISA allowance for their surviving spouse or civil partner, which can be claimed from 6 April 2015. For those couples who have planned their savings together, this means the tax benefits of saving last longer.
Junior ISAs are also due to accept transfers from Child Trust Funds from 6 April. This opens up more options for the parents of the 6 million children who have these older savings accounts, as covered in this blog in more detail. The savings limit for a Junior ISA or Child Trust Fund goes up to £4,080 from 6 April.
There is also a proposal for Cash ISAs to be made more flexible from this autumn, to allow top-ups to replace withdrawals within the same tax year. A consultation will now take place and we’ll keep you updated on this in the months ahead on the blog.
Help to Buy ISA
A new type of Cash ISA is due to be created in the autumn, to support savers who are building-up cash for a house deposit. An important point to note is that the government’s proposed 25% boost – a top-up of up to £3,000 per person – is only paid when you buy your first home. If you save up to £12,000 in this new Help to Buy ISA, the government has proposed it will give you £3,000. We’ll update you as the detail becomes clearer towards the autumn.
Income tax cuts
Several measures take effect from 6 April which may put more cash in your pocket, in particular if you have a low income.
First off, there’s a new transferable income tax allowance for married couples and civil partners, which could benefit over 4 million couples. It doesn’t apply where either of the couple pays tax at 40% or 45%. If you claim this allowance, you could be £212 better off overall. Couples could qualify if one of them has income under £10,600 for tax year 2015/16 and if both were born on or after 6 April 1938. There’s a case study and information here about how to claim this online.
A second change will help you if your total income is under £15,600. No tax will be due on your savings income, which means you can ask your bank or building society to register you for tax-free interest, using form R85.
There was also good news for everyone earning under £100,000. From 6 April, 20% tax payers will pay £120 less tax because the new £10,600 personal allowance comes in. The tax cut for higher rate tax payers will be £104. That’s because of the combined effect of the new personal allowance and threshold for 40% tax.
From 6 April, the new higher starting point for 40% income tax is £42,385, which means £520 more of your income is taxed at 20% instead of 40%.
And your tax-free personal allowance moves up to £10,600, if you were born on or after 6 April 1938.
Easier tax returns online
Finally, there will be more help with our online tax returns, as digital tax accounts are launched in 2016 by HM Revenue and Customs. If you’re one of the 10 million people who file a tax return, you’ll find more of the information is completed for you in future, making tax returns easier, which is welcome.
That’s it for this Budget 2015 blog. If you have any questions about what these changes mean for you, please post below. Find out more and stay involved on our Budget 2016 page.
The information in this blog or any response to comments should not be regarded as financial advice. This blog was updated on 19 March 2015 to change the income tax transferable allowance figures.
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 March 2015. Your personal circumstances also have an impact on tax treatment.
This blog has now been updated to include accessible links to information about Budget 2016.