Technical Bulletin: Summer Budget 2015
Only three months after Budget 2015, George Osborne, the Chancellor delivered his Summer Budget – and the first of the new Conservative Government – on 8 July. It included some expected manifesto promises, but also a few surprises.
Below is a summary of the main budget changes.
Green Paper on pensions tax relief
Rumours the Government was going to make controversial changes to pensions tax relief were partly proved true with the launch of a consultation paper on pensions tax relief. At the heart of the consultation is the question of whether to move to a system where pensions contributions are taxed, but pension receipts will be tax free, bringing pensions in line with ISAs. The consultation closes on 30 September 2015.
At a time of increasing life expectancy and a general inadequacy in individual pension savings, it is imperative we encourage people to save as much as they can into their pension. Any disturbance to pensions tax risks putting employers and employees off pension saving. Quite simply we cannot take that risk.
There is also the bigger question of why we want pensions to be like ISAs. Saving is not a homogenous block, and we need different types of saving vehicle to target different saving aims. Disciplined long-term savings are needed to fund retirement, whereas more flexible savings are better for shorter-term needs.
Cut in pensions tax relief for very high earners
As expected, pensions tax relief will be cut for the very high earners to fund the new IHT proposals. The Treasury confirmed those earning over £150,000 would see their annual allowance tapered to a minimum of £10,000. For every £2 of adjusted income over £150,000, the annual allowance will fall by £1 down to a minimum of £10,000 for those earning over £210,000. However, the changes will now affect those with an adjusted annual income – including their own and their employer’s pension contributions – of over £150,000, and an income (excluding pension contributions) of over £110,000.
Shifting the goal posts over the definition of adjusted annual income means many more people will see their pensions tax relief cut. As many clients – such as self-employed or those receiving end of tax year bonuses - won’t know their adjusted income, including pension contributions, until after the end of the tax year, planning pension contributions is going to be difficult. Advice is going to be essential to manage this conundrum.
Review of dividend taxation
The Chancellor has proposed replacing dividend tax credits by a £5,000 tax-free allowance and setting the dividend tax rate at 7.5%, 32.5% and 38.1%. The Treasury expects the effect will be those earning over £140,000 to pay more, 85% of taxpayers will see no change or be better off, while over one million people will be better off. Dividends from pensions and ISAs will remain tax-free. The changes will mean smaller businesses and their owners need to review remuneration and investment packages.
Buy-to-let mortgage interest relief to be restricted
Mortgage interest relief is to be restricted to the basic rate of tax, rather than marginal rate. This will increase costs for buy-to-let landlords, many of whom use their properties as part of their retirement plans.
Second-hand annuity market
The consultation on developing a second-hand annuity market closed on 18 June. The Treasury has now more-or-less conceded it will go ahead by announcing that plans for the market are delayed from 2016 to 2017. We expect more detail in the Autumn.
There had been rumours ahead of the Budget of the possibility of banning salary sacrifice, but generally it had been agreed that although it would save tax for the Treasury it would be tricky to implement. Instead, of an outright ban, the Treasury has announced it will actively monitor the growth of salary sacrifice schemes and their effect on tax receipts.
Pension Wise was launched earlier this year to help people under their options at retirement. Originally offered to those aged 55 and over, it is now to be extended to people aged 50 and over. The Treasury has also confirmed a national advertising campaign.