9th July 2015 at 12:21pm
More tax-free income, fewer of us paying 40% income tax, and no massive surprises for pensions – the Summer Budget 2015 will affect our finances in 2016 and beyond. Our video had the headlines, now here’s more about what it means for you.
Pensions: More change
After the biggest pension changes in a generation came into effect this year, there was nothing to derail those new pension freedoms which have been enjoyed by over 85,000 UK consumers so far.
As expected, the Chancellor did announce a consultation into the future shape of tax rules for pension savings, giving us a great opportunity to work with the government to consider how the pension tax system could be made simpler.
Other pension changes for 2016 had already been highlighted in the March Budget. High earners with income over £150,000 won’t be able to pay as much into their pension and still get the same tax relief top-up. From next April, the £40,000 annual allowance will be gradually reduced, and will be cut to just £10,000 when your income reaches £210,000.
The cut in the lifetime allowance – how much you can build-up in your pension – from £1.25m to £1m is going ahead as planned from April 2016. We await more details of arrangements for those whose savings are already over this new limit which will give them some protection from the new tax charge next year.
News about annuities
If you’ve already bought an annuity – a fixed income guaranteed for life – you may be interested in a consultation which is looking at how you might be able to sell your annuity in exchange for a cash sum. There could be new rules on this in 2017, but it’s too early to say.
And changes to how you count what is paid into your pension might mean some people can pay in more than the usual annual amount this year.
The snappily named ‘pension input period’ is the timeframe you look at to see how much has been paid in –and it’s being set from April next year to match the tax year. This could be good news for some pension savers who may have more than one annual allowance of £40,000 available for 2015-16. If you think you could use this, do speak to an expert to keep you on track. We’ll cover this in more detail in a case study in a future blog.
Tax-free income could be up to £17,000
From April next year, £17,000 of your income could be tax-free, depending on where it comes from.
The main tax-free personal allowance is going up to £11,000. There will also be a new, tax-free dividend allowance of £5,000. This is the income you get from a portfolio of investments, but if your dividend income is above this figure, new tax rates will apply.
There’s also a new personal savings allowance of £1,000, which means bank and building society interest earned up to this amount is tax-free if you are a basic rate taxpayer. Higher rate taxpayers could have up to £16,500 tax-free, as their personal savings allowance is £500 rather than £1,000.
Are you better off?
It’s good news that basic rate taxpayers will be £80 better off next year, and higher rate taxpayers will be £203 better off, with these Budget changes. Fewer of us will pay tax at 40% because the starting point goes up to £43,000.
Inheritance tax-free allowance up to £1m – for some
The new inheritance tax allowance of up to £1m will be welcomed by some, but not all. Married couples or civil partners with children or grandchildren will be the main winners.
The new allowance is phased in from 2017 and relies on property being passed to direct descendants, but not nieces or nephews for example. The full £1m allowance will only apply to married couples or civil partners by 2020 if property is passed on to their children or grandchildren.
More new rules are also expected to cover the situation where someone downsizes from the family home so that cash rather than a house is passed on. It’s not a simple inheritance tax allowance and careful planning will be needed to check whether Wills need updated to take these changes into account.
Changes to tax breaks for landlords
Two changes will affect you if you are a buy-to-let landlord. First off, the generous tax relief for mortgage interest is being phased out over four years from 2017, so you’ll only get basic rate tax relief.
And from April next year, the 10% wear and tear allowance ends and you’ll only be able to deduct costs on your tax return which you actually incur. These changes reflect concerns raised by the
Bank of England that the buy-to-let mortgage sector is overheating.
That’s it for this Summer Budget 2015 update – please post below if you have any questions.
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 July 2015. Your personal circumstances also have an impact on tax treatment.