The Irish World’s Personal Finance expert Kevin Clancy takes a closer look at last week’s Budget and how it affects individuals, owners of small businesses, and landlords.
After months of press speculation about possible fundamental change to the pensions, including on these pages, no significant changes were actually announced. There were some technical changes and the introduction of new saving schemes as well as more generous rates and allowances for many savers. All the current tax advantages and allowances for pensions remain in place, along with the previously announced reductions to the lifetime allowance and annual allowance for high earners. Higher rate taxpayers will still benefit from higher rate relief rather than a reduced rate that would have been likely under a flat rate system.
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TAX EFFICIENT INVESTMENTS
• The Lifetime ISA, which aims to help younger people onto the property ladder or into a pension takes a taxed/exempt/ exempt approach, but offers a 25 per cent Government bonus to top up savings, equating to 20 per cent basic rate tax relief. Adults under 40 will be able to open a Lifetime ISA from April next year. They’ll be able to save up to £4,000 a year from age 18 to 50, and receive a 25 per cent Government bonus added at the end of the tax year. So over a lifetime it will be possible to contribute a maximum of £128,000 and benefit from a maximum bonus of £32,000. Contributions to a Lifetime ISA will count towards the increased £20,000 ISA limit for 2017/2018.
• Savers will be able to withdraw funds including a Government bonus after 12 months to use towards the purchase of a first home valued at up to £450,000. They’ll also be able to withdraw funds including the bonus for any reason from age 60.
• Savers will also be able to access their funds at any time for other purposes, but will have to return the bonus with any interest or growth on the bonus to the Government and pay a 5 per cent charge.
• It will be possible to access the funds penalty free in the event of terminal illness.
• The inheritance tax treatment will be the same as for ISAs.
• Help to Buy ISAs, available since December 2015 and which allow first time buyers to save £200 a month towards their first home with an initial deposit of £1,000, will remain open to new savers up to 30 November 2019 and for new contributions until 2029. The Government tops up the savings by 25 per cent, up to a maximum of £3,000, paid when a property is purchased.
• While it will be possible to open both types of ISA, it will only be possible to use the Government bonus from one account towards buying a first home.
• It will be possible to transfer Help to Buy ISA funds into a Lifetime ISA during the 2017/2018 tax year only.
• The main ISA limit will remain at £15,240 for 2016/2017, but will increase to £20,000 for 2017/2018. The limit for Junior ISAs and Child Trust Funds will remain at £4,080 for 2016/2017.
• New flexible ISA rules come into effect from next month, 6 April, which will allow investors to pay withdrawals from a cash ISA back into the account before the end of the tax year, without reducing their subscription limit further. Offering this flexibility is optional for ISA providers.
This also covers:
• cash held in stocks and shares
• innovative finance ISAs and
• withdrawals from Help to Buy ISAs if an intend house purchase didn’t proceed.
Personal savings allowance
• A tax-free savings allowance of £1,000 is available from 6 April to those with taxable income of less than £43,000 i.e. basic-rate payers and below. Higher rate taxpayers benefit from a £500 tax-free allowance. Those earning over £150,000 are not entitled to an allowance.
The Lifetime ISA concept has the public appeal of simplicity simplicity compared with the complex tax treatment of pension savings. But the price could be that members lose out on employer contributions, higher rate tax relief and the opportunity of further boosting the value of contributions via the national insurance savings available from salary sacrifice.
They’ll normally have to wait until 60, not 55, to get full freedom to access their funds. Lifetime ISAs may appeal to self employed individuals, who often have to wait until preparing their accounts to calculate the amount of relevant UK earnings available to support tax relieved pension contributions.
In terms of the maximum contributions and bonuses available, it’s unlikely that most 18 year olds will have £4,000 available to save. Generous parents and grandparents might want to make efficient use of inheritance tax exemptions such as the £3,000 annual allowance and normal expenditure out of income to provide a helping hand.
Savers and investors generally will be pleased with a further generous increase to the overall ISA allowance. The personal savings allowance provides more incentive for savers with even higher rate taxpayers benefiting from an allowance.
However, it’s most generous for low earners who will potentially pay no tax on their savings where total taxable income is less than £17,000 in 2016/2017, after taking into account the £5,000 savings band. The flexible ISA rules allowing cash withdrawals to be returned to an ISA by the end of the tax year will help to maximise the benefits by removing an effective penalty on those who are forced to access their savings temporarily.
For more info on how the budget affects Capital Gains Tax, National Insurance and Business Rates, pick up a copy of this week’s The Irish World, available in your local retailer.