Key facts from the Spring Budget 2017
8 March 2017
Highlights from Philip Hammond’s Spring Budget speech.
The Chancellor Philip Hammond commended his Budget to the House of Commons as one providing a strong and stable platform for Brexit negotiations, underpinning the “continuing resilience of the UK economy” with growth expected to be higher and borrowing lower than forecast in November and “making Britain the best place in the world to do business”.
The independent Office for Budget Responsibility (OBR) raised its economic growth forecasts for this year and now expects the UK economy to grow 2% rather than 1.4%, the Chancellor said.
In 2018 growth is forecast to slow to 1.6%, before rising to 1.7%, then 1.9% in 2020 and back to 2% in 2021.
The OBR has forecast inflation would hit 2.4% this year and then fall to 2.3% in 2018 and 2% in 2019. The Bank of England has a 2% inflation target.
It was announced that corporation tax rates would reduce to 19% in April 2017 and to 17% in April 2020.
In 2017/18, the personal allowance – the threshold at which people start to pay income tax – is rising to £11,500 and to £12,500 by 2020, and the higher tax rate threshold increases to £45,000.
The main rate of Class 4 National Insurance contributions is to increase from current rate of 9% to 10% in April 2018 and 11% in April 2019.
The Chancellor said this will raise £145m a year by 2021-22 at an average cost of 60p a week to those affected
There were no changes to income tax, VAT or other National Insurance categories
Sean McCann, chartered financial planner at NFU Mutual, said: “The National Insurance announcement could make pension contributions even more attractive to entrepreneurs who wish to take money out of their company in a tax efficient way. Company pension contributions via salary sacrifice are not only tax efficient, they also don’t attract National Insurance and can be accessed from age 55.”
Cut to dividend allowance
The tax-free dividend allowance of £5,000 introduced in the 2016 Budget by then Chancellor George Osborne, will be cut to £2,000 from April 2018.
This will make shareholders and directors of small private firms worse off by £3,000 a year, plus they will have to pay the 7.5% increase in the tax rates on dividends taken in access of the new £2,000 allowance, which was introduced last April.
The Chancellor emphasised the fact that the allowance benefited those able to invest over the ISA limit, which he pointed out would rise to £20,000 in April 2017, or who incorporated in order to reduce their tax liabilities.
Andy Zanelli, senior technical consultant at Ascentric, said: “Many savers have looked to dividends for income in the current low inflation, low interest rate environment . They have adjusted their savings accordingly, only to see this latest change impose an additional tax of £225 for a basic rate taxpayer, £975 for a higher rate taxpayer and £1143 for additional rate taxpayer.
“This is another radical change to a recently introduced allowance. Savers need to think yet again about which tax wrapper and flavour of income will give them the best tax outcome.”
Hopes and fears re pensions
Hopes that the Chancellor would recognise that the Money Purchase Annual Allowance (MPAA) reduction to £4,000 was against the spirit of Pensions Freedoms, and importantly, could adversely affect people who draw upon their pensions but need to continue to work and pay into their pension to fund their later their retirement, were not forthcoming in action.
Les Cameron, head of technical at the Prudential, said: “The Government has confirmed it will respond to the consultation on the reduction to the Money Purchase Annual Allowance (MPAA) on 20 March 2017. It has also published the policy paper which makes it look like it’s going ahead with the original proposals.
“The Government is concerned about abuse of the tax system however the proposed reduction to the MPAA may see many ordinary savers who have accessed their pensions caught by the new limit. Someone earning the national average income and who is a member of a good-quality workplace pension could easily be caught out. Some may have to choose to reduce their pension contributions to avoid the tax charge for breaching the new £4,000 limit.”
Andrew Tully, pensions technical director, Retirement Advantage added: “The wide scale pension changes introduced from April 2015 were designed to give people much more freedom over how and when they can withdraw their pension pot. This restriction to the Money Purchase Annual Allowance is a significant restriction to that freedom. People will need to carefully consider before they take benefits if there is a possibility they or their employer may want to make future pension contributions above a relatively low limit of £4,000 a year.
“However people’s circumstances change so it isn’t always possible to know what the future may hold, and I can see people being caught out by this change. It greatly restricts the ability to alter plans as you move through retirement.”
Alan Morahan, managing director DC Consultant, Punter Southall Aspire added:
“People who flexibly accessed their pensions with the reasonable expectation that they would be able to contribute up to £10,000 a year towards their retirement could now find themselves either hit with an unexpected tax charge or have to change their plans for future pension contributions.
We certainly know of instances where employees have flexibly accessed small pension pots but continue to participate in their employer’s pension scheme. Someone with earnings of greater than £40,000 and total pension contributions, including employer contributions, of 10% will now be liable to the annual allowance tax charge. Most will not even be aware of this charge and will inadvertently fall foul of the legislation.”
Fortunately, fears that the Chancellor could cut pensions tax relief were not fulfilled.
As part of the crackdown on tax evasion, the Chancellor introduced a 25% tax charge on money paid into a pension (QROPS) held in a country where the policyholder is not residing. This begins or money transferred on or after 9 March 2017.
Commenting on the change, AJ Bell’s Tom Selby said: “Broadly, it looks like there will only be an exemption to the tax charge where the individual and pension savings are in the same country, both are in the European Economic Area, or the QROPS is provided by the individual’s employer.
“QROPS were originally designed to make it easier for people leaving the UK to retire to another country and take their pension with them. However, the structure has increasingly been manipulated by those looking to artificially cut their tax bills.
“The introduction of a 25% levy for transfers to a country where the individual is not residing should act as a severe deterrent to abuse of the system.”
David Fairs, pensions partner at KPMG added that there could be some unintended consequences in the proposal to impose the 25 per cent tax .
“For example, someone emigrating to the US is not able to transfer their UK pension there because of an incompatibility of US and UK rules. An expat in that position might want to transfer their pension to an offshore centre so that they could convert their pension benefit into US dollars but they too will now face a hefty tax.”
Treasury raking in the cash
Treasury papers revealed that not only had the tax revenues from Pensions Freedoms exceeded expectations – by £1.2bn in 2015-2016 – but IHT receipts ar expected to grow to £6.2bn by 2021.
Commenting on the latter, Les Cameron, head of technical at Prudential, said: “Inheritance tax planning will continue to be a booming area of financial advice. News that IHT receipts will hit £6.2bn in 2021 will only increase consumers’ demand for inheritance tax planning.”
He added that the £3,000 gifting allowance had been frozen for over three decades so the earlier people started using it the more wealth they would be able to pass on to their families.
“One of the key things when IHT planning and gifting is ensuring the right blend of access and control you need on the money. If you’re happy you’ll never need the money again and you’re happy the person your gifting to can spend it as and when they wish, then it’s a simple as a bank transfer or a cheque. But if you may need access or want to control how and when the money is spent then you may want to look at some specialist investments or using different types of trust arrangement.”
Minimal effect on share prices
Ben Russon, vice president and portfolio manager, Franklin UK Equity Team, said: “Looking at the impact on UK Equities specifically, this Budget was largely a non-event. We did see some mild tinkering on certain points, but nothing that is likely to have any meaningful impact on share prices.
Clearly the reduction in the tax-free dividend allowance from £5,000 to £2,000 is an incremental negative for those investors that have sizable portfolios outside of tax-wrappers, and represents yet another example of the Government continually shifting the goalposts with regards to the long-terms savings industry.”
The pound hit a seven-week low against the USD just before the Budget, but rallied whilst Philip Hammond spoke. The FTSE All-Share also rallied in the immediate aftermath of the announcements.
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