Patrick Connolly of Chase de Vere provides commentary on the private client aspects of the chancellor’s spring 2017 budget.
Philip Hammond has delivered his first and last spring budget. Although it was a budget with relatively few measures compared with those of previous chancellors, it will still have significant implications for certain groups of people.
The backdrop to the budget is that the UK economy is performing reasonably well, although there are definite challenges ahead, including addressing our poor levels of productivity and huge level of national debt. Hammond stressed that he didn’t want to saddle our children with more debt – so there clearly weren’t going to be any extravagant giveaways.
The following personal finance measures will come into effect from April:
- personal income tax allowance will increase to £11,500
- higher rate tax threshold will rise to £45,000
- annual ISA allowance will go up to £20,000
- the phasing‑in process for the residence nil-rate band will begin
- the lifetime ISA will be introduced.
The three-year NS&I investment bond
The chancellor confirmed the terms for the new NS&I investment bond which was previously announced at the autumn statement. It will be available from April, for a period of 12 months, with an interest rate of 2.2 per cent over a period of three years. This is subject to a minimum investment of £100 and a maximum of £3,000.
While this might seem like positive news for many savers who have had to endure inadequate savings rates in recent years, its actual impact will be limited. It won’t pay income and so will be a drawback for many people. Even with the maximum amount invested, the total interest generated will be just £202.39 at the end of the three-year period.
Taxation of earnings and benefits
The big losers in the budget seemed to be self-employed workers. The previously announced abolition of flat rate class 2 national insurance contributions will proceed as planned from April 2018. However, at the time of the budget the chancellor announced that the their main rate of class 4 national insurance contributions would increase from nine per cent to 10 per cent in April 2018 and then to 11 per cent in April 2019. The combination of these two measures would have meant that anyone who is self-employed with annual profits above £16,250 would pay more tax.
However, on 15 March, just a week after the budget, it was announced that the plans to increase national insurance contributions for the self-employed had been scrapped, at least for the term of this parliament. A fairly dramatic u-turn by the government!
Those who are paid by dividends through their own companies or who receive taxable dividends of over £2,000 each year through a portfolio of shares or investment funds will be hit by a reduction in the dividend allowance, from £5,000 per annum to £2,000 per annum from April 2018. This allowance is the level of tax-free dividends individuals are allowed to receive, which is in addition to their personal income tax allowance. From an investor’s perspective, if we assume a share portfolio held outside of tax-efficient wrappers produces a yield of three per cent per annum, then those with an investment over £66,667 would be impacted by this change.
The government is consulting on benefits in kind, accommodation benefits and employee expenses.
Tax avoidance measures
Intermediaries will need to be aware of the reinforcement of an announcement made in the autumn statement; new penalties will be imposed for those who help others to use a tax avoidance arrangement, which is later defeated by HMRC. The message is pretty clear that professional advisers would be well served to err on the side of caution rather than trying to push the boundaries of the tax rules, as this could come back to bite them in the future.
On a similar basis, the government is introducing a 25 per cent charge on pension transfers into qualifying recognised overseas pension schemes (QROPS), where the scheme is outside of the European Economic Area and is not provided by the individual’s employer, to deter people from trying to reduce the amount of tax they pay when taking their pension benefits. This becomes effective as of 9 March 2017. In addition, once transferred, any withdrawals from funds transferred to a QROPS will be subject to UK taxation rules for a period of five years post transfer. There will be exemptions from this charge for those who ‘have a genuine need to transfer their pension’.
While the government is committing money to help address the social care issues in the UK, there must be some considerable doubt about how successful these will be as we struggle to cope with some major aspects of increasing longevity. A green paper on the financing of social care which is due later in the year is unlikely to change the fact that many people should still be making provision for their and their family’s possible care needs as part of their own financial planning.