The Budget - 16 March 2016: Key Highlights

18 March 2016

Against a backdrop of potential economic 'storm clouds' gathering again, with the outlook for growth in the world economy revised down and "materially weaker",and productivity growth decelerating in the vast majority of countries, The Chancellor of the Exchequer, George Osborne, delivered his Budget at 12.30pm on 16 March 2016.

His eighth Budget as Chancellor, the theme was very much 'putting stability first' and acting now, rather than paying later. However, the Chancellor was firm in his view that the UK can hold its course and lead the world with long term solutions to long term problems.

As always, there is lots of detail in the Budget and in this blog. Chapters Financial has prepared some new Tax Cards for the tax year 2016/2017. Please contact us if you would like a copy.

UK Growth Forecasts

The Chancellor announced that the latest international forecasts expect the British economy to grow faster this year than any other major advanced economy in the world. However, and importantly, the Office for Budget Responsibility (OBR) has downgraded its forecast for UK economic growth in 2015 from 2.40% to 2.20% - the drag from the financial crisis has not fully eased as expected. Growth of 2.0% in 2016 is forecast, with 2.2% expected in 2017 and 2.1% in each of the following three years.

These reduced growth figures will inevitably reduce UK tax revenues, putting further pressure on the Chancellor.

The EU and the UK's June 2016 Referendum

The OBR is explicit in its view that these forecasts are predicated on Britain remaining in the EU. Whilst the OBR remains clear of political debate, it does note that a vote to leave in the forthcoming referendum on 23 June 2016 could usher in an extended period of uncertainty regarding the exact terms of Britain's future relationship with the EU which, in turn, could have negative implications for business and consumer confidence and could result in further market volatility. 'Could', not necessarily 'would'…time will tell. Chapters Financial will prepare a blog on the EU referendum in April 2016.

Pensions & Lifetime ISA (LISA)

In terms of changes to personal taxation and pensions, we did not see the major changes to pensions tax relief that some had been predicting. In addition, the tax-free cash lump sum is still safe (for now) and no further cuts to the Annual Allowance or Lifetime Allowance were announced. As noted below, those under 40 will be given a new way of saving for their retirement or for a house purchase with the Lifetime ISA (or LISA for short). The tax-free personal allowance will rise, as will the level at which higher rate income tax starts, and capital gains tax (CGT) is to be cut significantly. The ISA allowance is to rise as well from April 2017 to £20,000 from the current level of £15,240.

Other Taxes & Duties

A range of measures to raise money from tackling tax avoidance and evasion have been announced, as have actions to extract more tax from multinational companies in the UK. The funds collected from larger firms (an expected £9.0bn in extra revenue) will be used to help smaller firms by funding measures such as a cut in corporation tax, which is due to fall from the current rate of 20% to 17% by April 2020.

Fuel duty has been frozen for the sixth year in a row, with the Chancellor noting that families paid the cost when oil prices rocketed, so they should be allowed to benefit from the historically low prices now. Tobacco duty will continue to rise as expected and a floor on the price of cigarettes is to be announced. Beer and cider duty is frozen, as is duty on whisky and other spirits. However, a new sugar levy on the soft drinks industry will be introduced in two years' time, raising a predicted £520m which will be spent on funding sport in primary schools.

Financial Planning

We have listed below the main points that could affect your financial planning and your household income. These are as follows:

Pensions and savings

No changes announced to the existing system of personal pension taxation or the HMRC Lifetime and Annual Allowances for pension savings. We do think that this may well be a temporary 'stay of execution' – watch this space.

A new Lifetime ISA will come into effect from April 2017, allowing those aged between 18 and 40 to save up to £4,000 a year until their age of 50. Contributions into the Lifetime ISA will receive a government bonus of £1 for every £4 contributed, up to a maximum of £1,000 a year. The accumulated fund value can be used towards a deposit on a first home worth up to £450,000 or to save for retirement.

    • Accounts are one per person, not one per home.
    • For those with Help to Buy ISAs, these funds can be transferred into the Lifetime ISA from 2017, or saving into both can continue. However, the bonus from one fund only can be used to buy a house.
    • Individuals will be able to withdraw the savings at any time before the age of 60 for any other purpose, but will then lose the government bonus, and any interest / growth on this, and will also have to pay a 5.0% charge. The Government is exploring whether to allow people to replace their contributions at a later date and to retain the bonus.
    • After the age of 60, individuals can take out all the savings tax-free.
  • The Government will ensure that a 'pensions dashboard' is designed, funded and launched by the pensions industry by 2019 to allow an individual to view all their retirement savings in one place.
  • ISA allowance to rise from £15,240 to £20,000 in April 2017.

Personal Taxation

The tax-free personal allowance for income tax is to rise to £11,500 in April 2017. The current level is £10,600, rising to £11,000 in April 2016. This tax cut will benefit 31 million people and 1.3 million of the lowest paid will be taken out of tax altogether.

From April 2017, the threshold at which people start to pay higher rate tax will rise to £45,000 (£42,385 now and rising to £43,000 from April 2016).

Capital gains tax is to be cut to encourage individuals to invest in business. CGT rates in the UK are now one of the highest in the developed world, at 28% for higher rate tax payers and 18% for basic rate tax payers. These rates will reduce from 06 April 2016 to 20% for higher rate tax payers and 10% for basic rate tax payers.

    • Residential property isn't included in this cut and will still be taxed at current rates (e.g. a second home or a buy-to-let property). CGT doesn't apply to your main home.

The standard rate of Insurance Premium Tax (IPT) is to rise by 0.5% to a rate of 10% (the second increase to IPT in under nine months) and the funds raised will be used to pay for increases in flood defence spending.

Tax on bond funds: from April 2017, bond fund managers will no longer automatically collect 20% tax from income payments to investors. Interest from OEICs, authorized unit trusts, investment trust companies and peer-to-peer loans may be paid without deduction of income tax. This is to help investors benefit from the new Personal Savings Allowance which, from April 2016, will see basic-rate taxpayers being exempt from tax on the first £1,000 of interest (£500 for higher rate taxpayers).

Self-employed and small businesses

  • Class 2 National Insurance Contributions will be abolished entirely, benefiting approximately three million self-employed workers from April 2018. Self-employed people will only pay Class 4 National Insurance Contributions from April 2018 and these will be reformed to allow the self-employed to continue to build their entitlement to the State Pension and other contributory benefits.
  • Corporation tax is to be cut further. The current rate is 20% and this is planned to fall to 17% by April 2020.
  • Business rates will be cut: from April 2017, small businesses that occupy property with a rateable value of £12,000 or less will pay no business rates (the current level is a rateable value of £6,000 or less). There will also be a tapered rate of relief on properties worth up to £15,000.
  • The way stamp duty on freehold commercial property and leasehold premium transactions is calculated will change from 17 March 2016. These rates currently apply to the whole transaction value. The new rates and tax bands will be 0% for the portion of the transaction value up to £150,000; 2% between £150,001 and £250,000 and 5% above £350,000.

Financial advice and guidance

  • The existing £150 income tax and National Insurance relief for employer-arranged pension advice will increase to £500.
  • The Government will consult on introducing a Pensions Advice Allowance which would allow people below the age of 55 to withdraw up to £500 tax free from their defined contribution (money purchase) pension to redeem against the cost of financial advice.
  • The delivery of public financial guidance will be restructured, with the Money Advice Service, The Pensions Advisory Service and Pension Wise being replaced with new bodies following a further review.

We appreciate there is a lot to consider in the Budget 2016 announcements and, as always, no individual advice is provided during the course of this blog. If you would like advice on the changes announced in the Budget 2016 then please contact the team at Chapters Financial Limited at our Woking or Guildford offices.

Also, if you would like one of our new 2016/2017 Tax Cards, then please contact us.

Vicky Fulcher

Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899