With perhaps five years for voters to forget before the next ballot, a strong enough parliamentary majority to take decisive action, and plenty of new spending promises to fund, those watching Chancellor Rishi Sunak’s first Budget may have been waiting for the other shoe to drop. In the end, the government mostly decided against any major tax rises, instead funding an expansion of government spending through extra borrowing.
Pre-Budget rumours suggested that pensions might be in the crosshairs, but for most people the fundamentals of pensions remain untouched, their status as the bedrock of retirement planning unchanged. The standard Lifetime Allowance will continue to increase in line with inflation (to a very precise £1,073,100 next tax year), the standard Annual Allowance remains at £40,000 (with carry forward available for up to three years) and there were no changes of any kind to the rules governing tax relief on contributions, tax-free cash at retirement or pension death benefits.
Unfortunately, the tapering away of the standard Annual Allowance for high earners (restricting how much they can pay into pensions) also seems here to stay. In good news, the relevant thresholds will increase by £90,000 from the 2020/21 tax year, reducing the number of people the taper affects. The taper will only apply to those whose ‘adjusted income’ (broadly all taxable income plus employer pension contributions) exceeds £240,000 and whose ‘threshold income’ (broadly all taxable income less your own pension contributions) exceeds £200,000. In bad news, the taper will now go down to a lower floor of just £4,000 (compared to £10,000 currently) for those with adjusted incomes over £312,000, making pension contributions almost off limits altogether for the highest earners.
Ironically, given these changes have been brought about by their representations, some high-flying medical professionals may be worse off as a result of the taper changes, as temporary measures for the current tax year only (that are not to be extended) offered them near total indemnity from the tax charges related to Annual Allowance breaches. More widely, as long as the taper exists, for some, the answer to the apparently simple question of “how much can I contribute to pensions?” may be impenetrably complex for those without the best advisors.
Turning to ISAs, some savers and investors may be disappointed that the annual ISA allowance will remain frozen at £20,000 for a fourth tax year running, but pleasingly the Budget committed to increasing the ISA allowance in line with inflation from the 2021/22 tax year onwards. Surprisingly, there will be a huge increase in the annual amount that can be contributed to Junior ISAs (and Child Trust Funds), from £4,368 currently to £9,000 from next month.
Entrepreneur’s Relief was described by the Chancellor as “expensive, ineffective and unfair”, but was not abolished as some had feared, and instead the lifetime limit on qualifying gains was reduced from £10m yesterday to £1m today. Besides the annual exemption for gains rising to £12,300 next tax year, there were no changes to Capital Gains Tax (CGT), though buy-to-let and second property owners should beware a raft of previously announced changes to CGT that come into effect for residential property from 6 April onwards. On the subject of property, a new 2% Stamp Duty Land Tax surcharge for non-UK resident buyers will be introduced in April next year, but there were no “mansion taxes” announced.
Meanwhile, Inheritance Tax was conspicuous by its absence, particularly as the Chancellor seems to have passed up (at least for now) the opportunity to implement any of the simplifications proposed by the Office of Tax Simplification last year. Still, as previously announced, the Residence Nil Rate Band will increase to £175,000 in April, allowing some (but by no means all due to the taper) married couples to pass up to £1m to their children tax-free on death.
A very small number of holders of offshore bonds may be affected by the government legislating to tighten up the top slicing relief rules (from 11 March 2020 onwards), such that these operate as HMRC had intended all along, and the government will press on with rolling out previously announced plans for IR35 in the private sector next month. There were no changes affecting Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EISs).
Finally, as previously promised, all income tax thresholds and rates will remain the same next tax year, the amount you can earn before paying National Insurance will increase to £9,500 for both employees and the self-employed (a tax cut of up to £104 per worker), and corporation tax will remain at 19% rather than being cut to 17% as had once been planned.
On the whole, and under the circumstances, we think that a fairly benign Budget will be welcomed by most savers and investors, but a pension allowance of just £4,000 for the highest earners yet a Junior ISA allowance of £9,000 for their children seems most unusual. It may be those children that are happiest today.
Join us for a webinar on Friday 13 March at 12.00 midday – 12.45pm, where we will explore the highlights from the Budget and will discuss what this means for clients from a financial planning and investment perspective.
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