Summer Budget 2015 – Commentary.

8th July 2015

In the Summer Budget today, the Chancellor confirmed that there would be an increase in the tax free personal allowance to £11,000 from April 2016, with the aim of providing further increases to £12,500 by 2020. The higher rate threshold for income tax will increase to £43,000 from the present £42,385, with the aim of a rise to £50,000 over the same period.

The inheritance tax threshold for estates including residential property will also substantially increase from £325,000 to £500,000 from 2017 when a home is transferred to children or grandchildren. This would give a married couple a shared £1m threshold but this additional allowance will be tapered for estates valued at over £2m.

This move is to be funded by a tapering of tax relief on pension contributions for those earning more than £150,000, with those earning £210,000 able to contribute just £10,000 to their pension without suffering an annual allowance tax charge.

Jonathan Watts-Lay, Director, WEALTH at work – a leading provider of financial education, guidance and advice in the workplace comments, “It comes as no shock that the Government is to restrict pension tax relief for high earners. High earners will not be able to get the same tax benefits as before. Therefore, it is important to consider alternative tax reliefs available such as the use of ISA.”

From April 2016, there will be a new tax free allowance for dividends of £5,000 a year. For dividend income above the allowance new tax rates of 7.5%, 32.5% and 38.1% will apply for basic, higher and additional rate tax payers, respectively. The changes will not impact pension schemes or ISAs.

A green paper has been issued titled, ‘strengthening the incentive to save: a consultation on pension tax relief’ which seeks views on potential radical changes which include no tax relief on pension contributions, a flat contribution from the Government and benefits to be tax free on exit.

Watts-Lay adds, “It will be interesting to see what will come out of the green paper. I fully support any reforms which will simplify the system and encourage retirement savings.”

Following the successful launch of Pension Wise in April 2015, the Government is extending access to the free and impartial guidance service to those aged 50 and above, and is launching a comprehensive nationwide marketing campaign to further raise awareness of the service.

Watts-Lay comments, “Whilst it’s a positive move to reduce the age that individuals can access Pension Wise, we still firmly believe that employees should start planning at least 10 years before their anticipated retirement”.

It has also been announced that existing annuity holders should have the freedom to sell their annuity income. The Government will set out plans for a secondary annuities market in the autumn, and agrees with respondents to the recent consultation that implementation should be delayed until 2017 to ensure there is an in-depth package to support consumers in making their decision.

Watts-Lay continues, “Once introduced, it could be good news – allowing individuals to sell the income they receive for a cash lump sum. However, the ‘sting in the tail’ is what value they are likely to be able to get, and in reality this may not be good.  However, caution is required because once the money has gone, it’s gone.”

Further coverage can be found in Personnel Today.