Written by: Dan Burnham
So Philip Hammond’s first, and only, Autumn Statement as Chancellor has been and gone. There were no big shocks or rabbits pulled from the hat, but sometimes boring and simple can be good. I have briefly summarised a few key points below.
The income tax personal allowance is to increase to £11,500 from 6th April 2017. At the same time, the threshold above which individuals pay 40% higher rate income tax will be increased to £45,000.
The National Insurance (NI) upper earnings limit will also be increased to match the higher rate income tax threshold. On earnings above this limit an individual pays a lower NI contribution rate of 2% rather than the standard rate of 12%. This increase in the limit will mean an increase in NI contributions for higher earners.
The tax advantages associated with salary sacrifice will be removed from 6th April 2017 except for arrangements relating to:
- Pension contributions
- Cycle to Work
- Ultra Low Emission Cars
All other employee benefits will no longer receive the tax and NI advantages of salary sacrifice, although there will be some protection for existing arrangements until April 2018 (April 2021 for cars and school fees).
Salary sacrifice for pension contributions will, for the moment, continue to be a very tax efficient way of arranging pension savings and could be used to avoid the NI increase for higher earners.
As previously announced, the ISA allowance will be £20,000 from 6th April 2017. The ability to shelter up to £20,000 each tax year from both income and capital gains tax is an incredibly attractive and efficient way to save.
The new Lifetime ISA (LISA) was not mentioned; however it is still on course to be introduced in April 2017 and made available to adults under the age of 40. Individuals will be able to contribute up to £4,000 per year and receive a 25% bonus from the government. Funds, including bonus, can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn from age 60 completely tax-free.
Hammond did announce that National Savings and Investments (NS&I) will be launching a market-leading three-year savings bond that will offer an interest rate of 2.2%. This, however, may be adjusted to reflect market conditions when the product is launched in spring 2017. The bond will have a minimum investment limit of £100 and a maximum investment of £3,000.
For most, the biggest takeaway is that no change was made to the existing pension tax relief regime. Whether the status quo will last is of course up for debate. There was much written before the March 2016 budget that the then Chancellor George Osborne was considering setting a flat rate of tax relief which would have benefitted basic rate taxpayers and cut reliefs for higher earners. The existing tax relief system cost the Treasury £48bn in 2014 to 2015, around two thirds of this tax relief goes to higher earners, and even a small reduction in this figure could raise significant funds for the Treasury. Given that Brexit is predicted to cost £58bn over the next five years, could a reduction in pension tax relief be used to cover a portion of this cost?
Of course it is impossible to predict what will happen, but with such a possibility being present, higher and additional rate taxpayers should look to make use of the tax relief on offer as far as possible.
The biggest surprise of Hammond’s statement was the proposed reduction of the Money Purchase Annual Allowance (MPAA) from £10,000 to £4,000, from April 2017. The MPAA is triggered whenever an individual flexibly accesses their pension benefits – for example taking pension income from flexi-access drawdown.
This will impair the ability of those who have begun drawing taxable pension benefits to boost their pension pot and reduce their tax bill, perhaps on part-time earnings. Its aim is to close a loophole but it makes work less attractive to the over 55s, which may be part of rebalancing things in favour of the young.
Hammond’s statement was more evolutionary than revolutionary. Some may say that, from a financial planning aspect, he only tinkered around the edges, but doing so misses a key point. The government still remains committed to incentivise individuals to save for the long-term. With an ISA allowance of £20,000 and, in most cases, the ability to receive tax relief on up to £40,000 of pension contributions, individuals can potentially save £60,000 in a tax efficient manner during 2016/17.
Neither should be considered the default ‘go-to’ option. The structuring of long-term savings is dependent on the individual’s circumstances.
The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Occupational pension schemes are regulated by The Pensions Regulator.