Autumn Budget 2018
Autumn Budget 2018
The era of austerity coming to an end was heralded by Chancellor Philip Hammond in his third Budget (the first Monday budget since 1962). A dramatic improvement in the public finances gave Mr Hammond the opportunity to trumpet higher public spending on health, infrastructure and defence.
His Budget, however, was notable for its lack of ‘wow factor’. There were few tax increases – and where they did occur they were aimed at companies not households. There was a focus on trying to stimulate growth through enterprise and intellectual property. Not wanting to hit tech start-ups but notably targeting big digital companies.
There were few giveaways, aside from an increase in the tax-free personal allowance and higher-rate tax threshold there were no major tax announcements for individuals. Yet there was an undertone of Mr Hammonds characteristic cautious approach, with the Chancellor specifically saying he may have to upgrade the Spring Statement to a full Budget.
Pensions, savings and estate planning were largely untouched (for now), this could make it an opportune time to consider making the most of valuable tax allowances, reliefs and exemptions that already exist – as this could be a short-term window of opportunity, with just five months to go to Brexit (see the links section of our website www.hsp-ifa.com). While Mr Hammond avoided the temptation to tinker with the tax system, it may be short lived with the forthcoming uncertainty.
Here, we explain what changes were made in the Budget – and what we consider as advisers to be tax efficient.
Income tax and ISAs
A planned increase in the tax-free personal allowance from £11,850 to £12,500 and higher-rate threshold increasing to £50,000 will take place a year earlier than planned. Now they will occur in April 2019. The Chancellor had previously said these changes would be introduced in 2020-21. The higher-rate threshold will then be frozen in 2020-21.
This will be welcome for many taxpayers, yet, it will not help higher earners who start to lose their personal allowance when they earn over £100,000. At this level the personal allowance is reduced by £1 for every £2 of income above £100,000. This means your allowance is zero if your income is £123,700 or above currently moving to £125,000 in new tax year.
The impact of this is that it makes the tax-advantaged savings available in an ISA even more valuable. Investment returns are tax-free in an ISA. There is no income tax or capital gains tax (CGT) to pay – whether those returns come in the form of interest, dividends, or shares increasing in value.
This tax year adults can put up to £20,000 a year into ISAs (for a couple that is £40,000) and up to £4,260 a year into a Junior ISA for a child. The adult ISA annual subscription limit for 2019-20 will remain unchanged at £20,000. The annual subscription limit for Junior ISAs for 2019-20 will be increased in line with CPI to £4,368.
There was speculation that the Chancellor would do something fundamental with pensions having recently described tax relief on pensions as “eye-wateringly expensive”.
It was a relief for many that he had little to say on pensions. Some feared he may have cut the tax-free annual savings limit or introduced a flat-rate of tax relief.
The only notable change was an inflation-linked increase in the lifetime allowance to £1,055,000 in 2019-20 (from the existing £1,030,000). The lifetime allowance is the maximum amount of pension saving you can amass over a lifetime without incurring a tax charge.
Currently, pension contributions to schemes are made from income before tax is deducted, up to an annual limit of £40,000. However, recent reports suggest some higher earning savers have been caught out by the complex tax-relief rules applied to the annual allowance.
However, for higher earning individuals the tax relief rules are complex. The annual allowance is tapered for those with ‘adjusted income’ of over £150,000. The £40,000 allowance goes down by £1 for every £2 of income above £150,000 until it reaches a lower limit of £10,000.
This complexity means there is the danger that should you be a higher earner you may breach your annual allowance unwittingly leading to a tax charge.
There is little doubt that the current or a future chancellor will be tempted to take another look at pensions in the future. Nor does the current inaction reduce the need to be careful.
A report is due from the Office of Tax Simplification this autumn with a focus on the level of complexity in the current inheritance tax system. As such there was little mention of this in the budget
You do not have to wait until death to pass on wealth – as most people do. Transferring wealth while you are alive can have a transformative effect on your family’s life and reduce an inheritance tax (IHT) liability.
There are a number of annual gift allowances which you lose if you don’t make use of them before the tax year end. For example, you can give away £3,000 each year and this will not be subject to IHT. You can give as many gifts of up to £250 per person as you want during a tax year, if you haven’t used another exemption on the same person.
If a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away and ignored for IHT (a letter of intent could be needed as proof). It is also possible to make further tax-free gifts, but you must survive for seven years after making the gift to get the full benefit of it being outside of your estate for IHT purposes.
Other points to note
The Chancellor has imposed a crackdown on tax avoidance by contractors who the government thinks should be treated as employees but claim self-employed status. The government, in April 2017 introduced new rules to deter public sector employers and workers from using off-payroll working to reduce their tax liabilities. From 2020 this will be extended to the private sector. This move, which will involve reform of the anti-avoidance tax rule known as IR35, will be introduced in April 2020 and only apply to large and medium-sized organisations.
The Chancellor tightened the rules on Entrepreneurs Relief, which reduces capital gains tax for business owners when they sell up, extending the minimum qualifying period from 12 months to two years, rejecting calls to scrap it altogether.
The value of investments and any income from them can fall and you may get back less than you invested. Past performance is not a guide to future performance. This information is for illustrative purposes and is not intended as investment advice. Any tax advantages mentioned are based on personal circumstances and current legislation which are subject to change. The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, HSP Financial Planning Ltd is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore, you should not rely on this information without seeking professional advice from a qualified tax adviser.