Personal allowance and income tax thresholds

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1 UK Budget 2015 As suspected, the UK Budget had little in the way of surprises. The Chancellor made clear that we are all in this together and it is essential that we continue to follow a clear, cautious financial strategy. The following article is a summary of the key changes relevant to our business. Income Tax Simon Mansell Budget 18 March 2015 Personal allowance and income tax thresholds Personal allowance The tax-free personal allowance is being increased to 10,800 in , and 11,000 in For higher rate taxpayers, the Government will also increase the threshold above which higher earners start paying 40% tax. It will increase to 42,700 in , and to 43,300 in Tax-free personal savings allowance From April 2016 a tax-free personal savings allowance of 1,000 will be introduced on the interest earned on savings. Therefore savers will be entitled to the first 1,000 of interest gross with no further liability. To be eligible for this allowance taxable income needs to be below the higher rate threshold. For those with income between the higher rate and additional rate threshold a reduced personal savings allowance of 500 is available. To facilitate this, banks and building societies will stop deducting 20% income tax from interest earned on savings from April 2016.

2 Annual tax return The Government will transform the tax system over the next Parliament by introducing digital tax accounts, removing the need for annual tax returns. Millions of individuals will have the information HMRC needs automatically uploaded into new digital tax accounts. By the end of the next Parliament over 50 million individuals and small businesses will be able to see and manage their tax affairs online. Digital tax accounts for all 5 million small businesses and the first 10 million individuals will be available by early By 2020, small businesses will be able to manage all their taxes together. Accounting software will be able to feed data straight into their digital tax account. The tax rates can be viewed in Appendix 1 at the end of this document. Pensions The lifetime allowance reduces to 1 million from April 2016 The total cost of income tax relief on pension savings grew 11% in the four years to April 2014, standing at 34.3 billion for the 2013/14 tax year. The Government is understandably concerned with this growth, especially with around two-thirds of pension tax relief going to higher or additional rate taxpayers. Therefore, to protect the public finances, the overall tax privileged pension saving an individual can accrue in their lifetime (the lifetime allowance) will reduce from 1.25m to 1m from 6 April A new transitional protection for pension rights already over 1m will be introduced, and will no doubt be named Fixed Protection 2016, or similar. From April 2018, the lifetime allowance will increase annually in line with CPI. Based on analysis of the Office of National Statistics Wealth and Assets Survey data, the Government estimates that this will only affect the top 4% of pension savers. Annuitants to be given the option to exit From April 2016 pensioners will, subject to agreement from their annuity provider, be able to sell the income they receive from their annuities to a third party in exchange for a lump sum. The annuitant can take the lump sum directly (subject to income tax), or it can be transferred to flexi-access drawdown or a flexible annuity product where income can be taken more gradually. The annuity provider will continue to pay the annuity income to the third party for the lifetime of the annuitant. The Government proposes that this change will only be available to annuities in the name of the annuity holder held outside an occupational pension scheme. This is because annuities bought by Trustees are generally a scheme asset, where the product and entitlement to the payments go to the scheme. Therefore, reassigning the income stream would have had an effect on the economic health of the entire pension scheme.

3 HMRC has launched a consultation on the measures needed to establish the market to sell and buy annuities The right to buy annuity payments will be for institutional investors. The Government does not consider annuity income purchased on the secondary market an appropriate investment for retail investors, owing to complexity and difficulty in determining a fair price. The Government will work with the FCA and will consult over the appropriate support to consumers as part of its wider consultation on the measure. This will include the extension of Pension Wise to support annuity holders thinking of selling their annuity income Funding for Pension Wise Additional funding of 19.5m in 2015/16 will be used to extend the availability of the state pension statement and pension tracing services. It will also be used to provide extra delivery capacity for Pension Wise. ISAs additional premium subscriptions In the 2014 Autumn Statement the Government announced that a surviving spouse/civil partner can inherit the value of their deceased spouse/civil partner s ISA accounts. The initial proposals stated that this allowance would only be available for use with the ISA provider with whom the deceased held their ISA account. However, HMRC has recently issued updated guidance confirming that the allowance can be moved to a new ISA manager who will accept the subscriptions which is great news for ISA investors. The new allowance known as an additional permitted subscription is available from 6 April 2015 where the deceased died on or after 3 December For more detail on these proposals please refer to Informer Digital. ISA Changes Changes to Cash ISAs Regulations will be introduced in Autumn 2015 to enable ISA savers to withdraw and replace money from their cash ISA in the same tax year without it counting towards their annual ISA subscription limit for that year. The introduction of a new Help To Buy ISA This type of ISA will only be available from banks and building societies and is designed for potential first-time buyers working hard to save up for their first home. Monthly contributions of up to 200 per month can be made. The maximum a customer can invest in this type of investment is 12,000. These will be eligible for a tax-free bonus from the Government of 25% up to a maximum Government contribution of 3,000. The bonus will only be calculated and paid when a first home is purchased.

4 Accounts are limited to one per person rather than one per home which means that individuals buying their first home together can both benefit. Individuals cannot contribute to both a Cash ISA and a new Help to Buy ISA. The Government bonus: can only be put towards a first home located in the UK with a purchase value of 450,000 or less in London and 250,000 or less in all other parts of the UK. cannot be used where the property is being purchased as a buy-to-let. This type of account will be available for a four-year period. Once opened there is no limit on the length of time the account can be held or the Government bonus claimed. An initial deposit of 1,000 can be made when the account is opened. Qualifying investment eligibility With effect from 1 July 2015, the list of qualifying investments for ISAs and Child Trust Funds will be extended to include listed bonds issued by Co-operative Societies and Community Benefit Societies and SME securities that are admitted to trading on a recognised stock exchange. A consultation will take place during Summer 2015 on further extending this list of qualifying investments to include debt securities and equities securities offered via crowd funding platforms. Inheritance Tax Multiple Trusts and same day additions Rysaffe lives on Following consultation on the draft legislation, the Government has made changes to the legislation so that the new rules apply when property is added to more than one relevant property trust on the same day. The revised legislation therefore provides that, where the value of the addition is 5,000 or less, there will not be a same day addition. The period of grace has been extended by 12 months for not applying the new rules about additions to existing trusts to a will executed before 10 December The exclusion will be limited to deaths before 6 April Relevant property trust tax changes The calculation of trust changes will be simplified by removing the requirement to include non-relevant property in the computation. Tax avoidance and tax evasion Tax Disclosure facilities Strengthening the Government s stance on offshore tax evasion, it is announced that a new Disclosure facility will be introduced after the closure of the existing Liechtenstein and Crown Dependencies Disclosure facilities. As a result of the new Disclosure facility, the existing ones will be shortened and will both now close on 15 December 2015.

5 The new Disclosure facility will introduce tougher terms than the existing facilities, including penalties of at least 30% and no guarantees around criminal investigation. Common Reporting Standards requirements for financial institutions and intermediaries/tax advisers Financial institutions and intermediaries/tax advisers are required to contact their UK resident customers with UK or Overseas accounts to explain the full impact of the Common Reporting Standards, the opportunities to disclose and the penalties that customers could face if they fail to disclose. Tax administration: regulations to implement the UK s automatic exchange of information agreements The Government has confirmed that, from the 1 January 2016, UK financial institutions will be required to identify accounts maintained for specified persons who are tax resident in jurisdictions with which the UK has entered into an agreement to exchange information about wide range of financial accounts and investments. The Regulations issued by the Treasury confirm the UK s compliance with the EU Revised Directive for Administrative Cooperation to improve tax compliance and the UK obligations under the Competent Authority Agreements with non-eu jurisdictions for the Common Reporting Standards (CRS). To date over 90 countries have committed to exchange information under the CRS with the first reporting due in Consultation update Some of the key measures which remain unchanged after consultation: CGT on disposal of residential property non-residents and private residence relief Disclosure of Tax Avoidance Scheme regime Enhanced civil penalties for offshore tax evasion Extending death relaxation to annuities International Non-resident CGT The Government issued an FAQ for Non-resident CGT and UK residential property QROPS/QNUPS clarification The Government laid a statutory instrument on 13 March 2015, The Overseas Pension Scheme (Miscellaneous Amendments) Legislation 2015, which has temporarily delayed the replacement of the 70% rule, which is a condition that some

6 overseas schemes need to meet in order to qualify as an overseas scheme or recognised overseas scheme. This means that those schemes which have to meet this condition to be a QROPS will not be able to offer the full flexibilities that will apply to UK registered pension schemes until it is replaced. The Government had intend to replace the 70% rule with one that required that the manager of the overseas scheme be regulated by a body where the scheme is established which regulates the management or provision of services by such schemes. The Government is concerned that the proposed amendment would not ensure that the principles behind allowing transfers to QROPS, without the deduction of tax, can continue to operate as Parliament intended. The Government s policy intention was to allow individuals leaving the UK permanently to simplify their affairs by permitting them to take their pension savings with them to their new country of residence. The Budget 2015 has provided no further clarity and we await further consultation. Appendix 1 Income tax bands of taxable income ( per year) Income tax bands of taxable income ( per year) Tax year Tax year Tax year Basic rate 0 31, , ,900 Higher rate 31, ,000 31, ,000 31, ,000 Additional rate Over 150,000 Over 150,000 Over 150,000 Income tax rates Tax year Tax year Basic rate 20% 20% Higher rate 40% 40% Additional rate 45% 45% Dividend ordinary rate (for dividends otherwise taxable at the basic rate (effective rate with tax 10% (0%) 10% (0%)

7 credit)) Dividend upper rate (for dividends otherwise taxable at the higher rate (effective rate with tax credit)) Dividend additional rate (for dividends otherwise taxable at the additional rate (effective rate with tax credit)) 32.5% (25%) 32.5% (25%) 37.5% (30.6%) 37.5% (30.6%) Special rates for trustees' income Tax year Tax year Standard rate on Up to 20%, depends on the type of income first 1,000 of income which would otherwise be taxable at the special rates for trustees Trust rate 45% Dividend trust rate 37.5% Income tax allowances ( per year) Personal allowance Tax year Tax year Tax year Born after 5 April ,000 10,600 10,800 Born after 5 April 1938 but before 6 April ,500 10,600 TBC Born before 6 April ,660 10,660 TBC Income limit for personal allowance 1 100, , ,000

8 Income limit for personal allowances (born before 6 April 1948) 2 27,000 27,700 TBC 3 Married couples allowance 3 Maximum amount of married couple s allowance 4 Minimum amount of married couple s allowance 8,165 8,355 TBC 2 3,140 3,220 TBC 2 Blind person s allowance Blind person s allowance 2,230 2,290 TBC 2 1. The personal allowance reduces where the individual's income is above this limit by 1 for every 2 above the limit. This applies regardless of the individual's date of birth. 2. These amounts are subject to indexation the annual increase in CPI. The values will be published in late 2015 and 2016 for the corresponding tax years. 3. Available to people born before 6 April Tax relief for this allowance is restricted to 10%. 4. This allowance reduces where the individual's income is above the income limit by 1 for every 2 above the income limit until it reaches the minimum amount. Any reduction applies after any reduction to the individual's personal allowance. This document is based on Temple Bar's interpretation of the law and practice as at 18/03/15. While this interpretation is believed to be correct, Temple Bar can give no guarantee in this respect or that tax reliefs and the tax treatment of investment funds will remain the same in the future. The value of any tax reliefs will depend on individual financial circumstances.

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