The Chancellor of the Exchequer gave his Budget to Parliament on 19 March 2014
The Chancellor outlined his views on the UK economy with positive figures on GDP growth, deficit reduction, government borrowing and overall debt.
He announced his intention to continue to cap welfare spending and to ensure that all pay their taxes as they are due.
He advised that he would double the Investment Allowance for companies to £500k pa.
On the individual savings front, the Chancellor increased the ISA allowance to £15k from 1 July 2014 and introduced flexibility on investment into cash or stocks and shares for existing and new ISAs.
On pensions, the Chancellor increased, from 27 March 2014, the capped drawdown amount from 120% to 150% of the GAD rate and lowered the amount of secure pension income required for flexible drawdown to £12k from £20k pa.
The Chancellor also indicated that by April 2015, he would remove the requirement for any secure pension income for flexible drawdown allowing any individual to draw from their pension at will subject only to income tax.
Overall, we can say that with increased options at retirement, changes in legislation and investment markets, the need for quality financial planning and investment advice remains as strong as ever.
More details are included below in our full report.
A BUDGET FOR MAKERS, DOERS AND SAVERS
In Wednesday’s budget George Osborne raised his growth forecast and provided welcome news for lower taxes, higher savings allowances, lower fuel bills and significant changes for pensions.
The Office for Budget Responsibility increased forecasts for economic growth predicting 2.7% this year. Borrowing is expected to fall to £108 billion this year and, Mr Osborne says the deficit will be 6.6% of GDP.
Below, we’ve highlighted the key areas that may affect you but, as always, the detail can take time to emerge, so once we’ve spent some time digesting everything we’ll keep you updated with further information.
PENSIONS
In order to provide individuals with increased choice and flexibility when they come to access their pension savings, the Budget announces some changes to pensions, some of which are immediate.
From 27 March 2014 the current rules on how people access their pension will be fundamentally altered:
• The minimum income requirement for flexible drawdown will be reduced from £20,000 to £12,000.
• The maximum trivial commutation lump sum, will be increased from £18,000 to £30,000. In addition, the maximum size of a small pension pot which can be taken as a lump sum, regardless of total pension wealth, will also be increased from £2,000 to £10,000; and the number of personal pots that can be taken under these rules will be increased from two to three.
• The capped drawdown limit will also be raised from 120% to 150% of an equivalent annuity.
In addition:
Radical legislation will be introduced to allow those with Defined Contribution pension savings to draw down from them from age 55 from April 2015, subject to their marginal rate of income tax and their pension scheme rules. The pension commencement lump sum will remain tax-free, and any income taken after this time can be taken without limit and taxed at the pension saver’s marginal rate.
The Government will consult on how best to implement this, and will also consult on a proposal to raise the age at which an individual can take their private pension savings from 55 to 57 in 2028, at the point that the State Pension age increases to 67.
The Chancellor’s Budget brings no changes to pensions tax relief. From 6 April 2014, the annual allowance will still be reducing from £50,000 to £40,000; and the lifetime allowance will be reduced from £1.5 million to £1.25 million.
For consumers there will be greater choice and the need to make bigger decisions about their retirement provisioning. Cantab Asset Management is well-placed to advise our clients on these choices and decisions.
The changes, which affect individual annuities only, represent a further transfer of risk – the government is effectively transferring longevity risk, or the risk of outliving pension savings, to the individual. We expect that savers will therefore increase provisioning for their retirement.
PENSIONER BOND
The Government has also announced a new Pensioner Bond, available to everyone over 65, paying “market-leading” rates of 2.8% for one-year bond and 4% for three-year bond – up to £10,000 to be saved in each bond. The bond from National Savings and Investment (NS&I), will be available from 1 January 2015.
INCOME TAX
Personal Allowance
As stated in the last Budget, the income tax personal allowance for 2014/2015 will be increased to £10,000 with effect from 6 April 2014, and the basic rate limit will be reduced from £32,010 to £31,865.
For 2015/2016, the personal allowance for those born after 5 April 1948 will be increased to £10,500, and the basic rate limit will be further reduced to £31,785, which means that over 3 million of the lowest paid will not pay any income tax.
Higher rate income tax payers are better off – The higher rate income tax threshold will increase to £41,865 in 2014/2015 and £42,285 in 2015/2016.
Transferable tax allowance for married couples
With effect from 6 April 2015 a spouse or civil partner who is not liable to income tax above the basic rate will be able to transfer up to £1,050 of their personal allowance to their spouse/civil partner, provided that the recipient of the transfer is not liable to income tax above the basic rate.
Personal allowances for non-residents
The Government plans to hold a consultation on whether the personal allowance could be restricted to only be available to UK residents and those living overseas who have strong economic connections in the UK (as is the case in many other countries, including most of the EU), in a bid to ensure that the use of this allowance is well targeted.
The starting rate of tax for savings
From 6 April 2015 the starting rate of tax for savings income (such as bank or building society interest) will be reduced from 10% to 0%, and the maximum amount of taxable savings income that can be eligible for this starting rate will be increased from £2,880 to £5,000.
In effect, this will mean that an individual will not be taxed on any interest they receive, provided their total taxable income for 2015/2016 does not exceed £15,500. In other words, with effect from 6 April 2015, if a person’s total taxable income will be below the total of their tax-free personal allowance plus the £5,000 starting rate limit for savings, they can register to have interest paid on their accounts without tax deducted, using form R85.
CAPITAL GAINS TAX
CGT annual exempt amount
The annual exemption for individuals will increase by 1% a year in 2014/2015 and 2015/2016 to £11,000 from 6 April 2014 and £11,100 with effect from 6 April 2015. The exemption for most trusts will also increase to £5,500 for 2014/2015 and £5,550 for 2015/2016.
CGT non-residents and UK residential property
As announced in Autumn Statement 2013, legislation will be introduced in finance bill 2015 to charge CGT on future gains made by non-residents disposing of UK residential property. A consultation on how best to produce the charge will be published shortly after the Budget. It is intended that these changes will be effective from April 2015.
INHERITANCE TAX
IHT – Nil Rate Band
This will remain unchanged at £325,000 and it is intended that this remains frozen until 2019 at the earliest.
Inheritance tax (IHT) exemptions
The Government will consult on options to extend the IHT exemption for armed forces personnel who die on active service to all emergency service personnel who die in the line of duty, or whose death is hastened by injury incurred in the line of duty. Legislation will be in the Finance Bill 2015.
Inheritance Tax (IHT): Simplification of trust charges and the division of the nil-rate band
The Government will consult on revised proposals for simplifying the calculation of the IHT trust charges and dividing the nil-rate band available to trusts created by the same settlor. Legislation will be introduced in finance bill 2015
Inheritance tax: liabilities and foreign currency bank accounts
The Treasury intends to amend the new rules introduced in Finance Act 2013 dealing with liabilities so that foreign currency accounts in UK banks are treated in a similar way as excluded property for the purposes of restricting the deduction of a liability.
This is intended to close a loophole that allows the new rules to be sidestepped and a deduction for a liability to be allowed where the borrowed funds are deposited in a foreign currency account in a UK bank, which is disregarded for IHT purposes. The change will apply to liabilities incurred at any time but only where the death has occurred on or after the date of Royal Assent to Finance Bill 2014.
TAX AVOIDANCE
Disclosure of Tax Avoidance Schemes (DOTAS) – The Government will consult on extensions to the DOTAS “hallmarks” (the descriptions of schemes required to be disclosed) to be introduced by secondary legislation later in 2014, and proposals to strengthen HMRC’s powers to tackle non-compliance with the rules, with a view to legislating in a future finance bill.
CORPORATION TAX
Corporation tax will to fall to 20% from April 2015 as previously announced.
ISA ALLOWANCES
ISA allowances will increase from the start of the new tax year on 6 April 2014 to £11,880 of which £5,940 can be saved in cash.
However, from the 1 July 2014 the need to distinguish between the cash and stocks and shares elements will be removed, with an increased £15,000 limit brought in which can be fully invested in either cash or stocks and shares. ISAs are also going to be more flexible and transfers, in either direction, between cash and stocks and shares ISAs will also be allowed.
Junior ISA and Child Trust Fund (CTFs) limits will increase by £120 to £3,840 with effect from the 6 April. These limits will increase again on the 1 July to £4,000.
OTHER SAVINGS
The 10p tax rate for savers is abolished.
Cap on Premium Bonds to be lifted from £30,000 to £40,000 in June and £50,000 next year.
Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.
