15 July 2015

Summer Budget 2015 - Pension Tax Relief

As previously announced, the Lifetime Allowance for pensions (which is the maximum value of pension you can hold and still get full tax relief) will be reduced from £1.25m to £1m from April 2016. As has happened in the past, those whose pensions are already over £1m will have protection available. From April 2018, the Lifetime Allowance will actually increase (in line with CPI).

The Annual Allowance limits how much you can contribute to pensions in a year. That is currently £40,000. For higher earners (over £150k including pension contributions AND over £110k excluding pension contributions) the Annual Allowance will be reduced progressively.

For the self-employed (who don't necessarily know their earnings until the end of the year) that could cause problems and result in a surprise Annual Allowance tax charge. Overall it may be worth putting as much in as possible in the current tax year - particularly if you are a higher earner.

There will be a consultation on a wider reform of pensions tax relief. More changes to confuse everyone!

Pension tax is complicated. Taking professional advice makes sense,

14 July 2015

Summer Budget 2015 - Dividend Taxation

This was not a change we saw coming! Dividends received on shares that you own outside of a tax wrapper like an ISA are currently received with a "tax credit" of 10%. That means that for basic rate taxpayers there is no further tax to pay (higher / additional rate taxpayers have more to pay).

From April 2016 that tax credit will be abolished and there will be a dividend tax allowance of £5,000 per year. New rates of tax will apply if you have dividend income over that - 7.5% for basic rate taxpayers, 32.5% / 38.1% for higher / additional rate taxpayers.

Whether an individual will be better or worse off will depend on the amount of dividends received. For investors, the Chancellor said that you would need more than £140,000 in shares (or funds) before being over the allowance. If income is needed there could be other ways of generating it more tax efficiently. But the key point must be to reinforce the good practice of protecting investments within a tax wrapper like an ISA as far as possible.

The bigger issue is for small companies where the business owners (often husband and wife) pay themselves a minimal salary but the bulk of their income comes as dividends. Dividend income between £5,000 and £43,000 (the new higher rate threshold) will be taxed at 7.5%, and 32.5% above £43,000. That negates the advantage of not having to pay National Insurance.

13 July 2015

Summer Budget 2015 - Inheritance Tax

One tax change George Osborne had been unable to make in coalition was to Inheritance Tax (IHT). The Budget puts that right. There is now a "Main residence nil rate band" - otherwise known as the "family home allowance". 

This is NOT a million pound IHT allowance, but is an additional allowance of £100,000 per person (initially) on top of the current £325,000 allowance. The additional allowance will only apply to a property which had been the deceased's main residence at some point. In addition it will only apply if the property is left to children or grandchildren - although there will be some protection if the property is sold from now, for example to downsize or move into residential care.

Eventually, and in certain circumstances, it will be possible to have assets to the value of £1m passed on within the IHT allowance. But that won't apply until 2020, and only if both of a couple are able to fully use their allowances, and only if the total estate value is less then £2m. For many people it would be risky to rely on, and existing IHT mitigation approaches should still be considered.

Rather than the complications of an additional allowance which only applies to certain assets, it would have been easier to have had the main allowance extended (instead of fixing it to 2021). However, my job as an adviser is to apply the rules effectively for my clients, not to make them!

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