Following on from the first blog in our 2017 Budget Summary series we look at other areas around Personal Tax that are affected by the announcements made by Chancellor Philip Hammond on Wednesday 8 March. In this blog, we focus on savings, pensions, tax-free childcare and Universal Credit.
Read our previous blog changes to Personal Tax – how this affects your personal allowance and tax rates for information on the personal allowance, tax bands and rates, and dividends.
Download our Spring Budget 2017 Summary for a complete look at the details of the Budget. Our full summary focuses on the issues likely to affect you, your family and your business.
Tax on savings income
Savings income is income such as bank and building society interest. The Savings Allowance (SA) was first introduced for the 2016/17 tax year and applies to savings income. The available SA in a tax year depends on the individual’s marginal rate of income tax. Broadly, individuals taxed at up to the basic rate of tax have an SA of £1,000. For higher rate taxpayers, the SA is £500 whilst no SA is due to additional rate taxpayers.
Individual Savings Accounts(ISAs)
The overall ISA savings limit is £15,240 for 2016/17 but will jump to £20,000 in 2017/18.
A new Lifetime ISA will be available from April 2017 for adults under the age of 40. Individuals will be able to contribute up to £4,000 per year, between ages 18 and 50, and receive a 25% bonus from the government. Funds, including the government bonus, can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn from age 60 completely tax free.
The increase in the overall ISA limit to £20,000 for 2017/18 is partly due to the introduction of the Lifetime ISA. There will, therefore, be four types of ISAs for many adults from April 2017 – cash ISAs, stocks and shares ISAs, Innovative Finance ISAs (allowing investment into peer to peer loans) and the Lifetime ISA. Money can be placed into one of each kind of ISA each tax year. There is a fifth type of ISA – a Help to Buy ISA. Help to Buy ISAs are a type of cash ISA and potentially provide a bonus to savers if the funds are used to help to buy a first home.
Money Purchase Annual Allowance
The Money Purchase Annual Allowance (MPAA) will be reduced from £10,000 to £4,000 from 6 April 2017. The MPAA counters an individual using the flexibilities around accessing a money purchase pension arrangement as a means to avoid tax on their current earnings, by diverting their salary into their pension scheme, gaining tax relief, and then effectively withdrawing 25% tax free. It also restricts the extent to which individuals can gain a second round of tax relief by withdrawing savings and reinvesting them into their pension. The MPAA is currently £10,000 and applies to individuals who have flexibly accessed their money purchase pension savings.
The ‘annual allowance’ sets the maximum amount of tax efficient pension contributions. The normal annual allowance is £40,000. The Money Purchase Annual Allowance was introduced in 2015, to restrict the annual allowance to £10,000 when an individual has taken income from a pension scheme.
Find out more about how Baker Watkin can help you with your Personal Tax.
Phased roll out of Tax-Free Childcare
The Chancellor has confirmed that Tax-Free Childcare will be rolled out from April 2017.
Tax-Free Childcare will be gradually rolled out for children under 12. Under the scheme, the relief will be 20% of the costs of childcare up to a total of £10,000 per child per year. The scheme will, therefore, be worth a maximum of £2,000 per child (£4,000 for a disabled child). It is expected that all parents in the household will have to meet the following conditions:
- meet a minimum income level based on the equivalent of working 16 hours a week at
National Minimum Wage or National Living Wage rates:
- each earn less than £100,000 a year and
- not already be receiving support through tax credits or Universal Credit.
The existing scheme, Employer-Supported Childcare, will remain open to new entrants until April 2018 to support the transition between the schemes.
The government has also confirmed that from September 2017, the free childcare offer will double from 15 to 30 hours a week for working families with three and four-year-olds in England. In total, this is worth up to £5,000 for each child.
Universal Credit is a state benefit designed to support those on low income or out of work. An individual’s entitlement to the benefit is made up of a number of elements to reflect their personal circumstances. Their entitlement is tapered at a rate of 65% where claimants earn above the work allowances. The current taper rate for those who claim Universal Credit means their credit will be withdrawn at a rate of 65 pence for every extra £1 earned.
From April 2017, the taper rate that applies to Universal Credit will be reduced from 65% to 63%.
Property and trading income allowances
From April 2017, the government will introduce new £1,000 allowances for property and trading income. Individuals with property or trading income below £1,000 will no longer need to declare or pay tax on that income. Those with income above the allowance will be able to calculate their taxable profit either by deducting their expenses in the normal way or by simply deducting the relevant allowance. The trading allowance will also apply to certain miscellaneous income from providing assets or services. Any income which attracts rent-a-room relief will not be eligible for either of the allowances.
The next blog in our Budget Summary series will look at Business Tax