Say whatever you like about our Chancellor – he’s pretty good at providing a few surprises. We had all been ready to see big changes in pension tax relief, and perhaps the creation of a brand new ‘pension ISA’ . Then, suddenly, that was cancelled and now we were told to no longer expect anything like that. And so the big release ended up… Well… a ‘Pension ISA’?
Well, it’s not a pension ISA it’s a Lifetime ISA, however the principle is in fact the same. Pensions as we all know them are currently safe, however a new type of savings product has joined the list of options available.
Just what is the Lifetime ISA?
The latest Lifetime ISA, which is available from Apr 2017, is going to be a mixture of the ISA and the pension. Offered only to those under the age of 40, it is obviously created to encourage saving for the young who may well not yet be considering pensions. It provides the identical amount of top-up you get through basic-rate pension, with one pound added for every four pounds saved – the same as 20 % tax relief, even though it’s marketed as a 25 % bonus….it’s complicated!
You’ll be able to invest as much as four thousand pounds into the Lifetime ISA every year. Additionally, it provides tax-free returns and tax-free withdrawals which differs from pensions, which makes it one of the most tax-sheltered product available. A further advantage, where younger individuals are concerned, will be the capability to withdraw money at any stage of life, not simply at retirement. However, the primary reason for it is to help individuals buy their 1st home as well as to save for old age, therefore the top-up solely applies for these scenarios. If cash is taken for different reasons, you would not get the 25 % bonus. However, The Chancellor also said you may withdraw funds and then pay them back in and still receive the bonus.
Should you already have a Help-to-Buy ISA you are able to roll it within the Lifetime ISA without needing to use up further annual allowance, so if you are already saving towards a home won’t lose out.
There will, however, be a 5 % penalty for withdrawals prior to age 60.
What about those that don’t qualify George?
Not everybody will be eligible for a Lifetime ISA, however good news in the form of ISA limit increase from £15,000 to £20,000 was announced. In spite of the prospect of most cash savings getting tax-free interest soon for the majority of savers, this is certainly still extremely helpful for higher earners and people who wish to purchase stocks & shares. The broader benefits of an ISA also need to be considered.
Great news for investors and professional property owners too
The Chancellor reduced capital gains tax from 28 % to 20 % for HR taxpayers, and from 18 % to 10 % for BR taxpayers. This is certainly very good news for those investing in shares and other assets, as well as possibly an olive branch for professional property owners. Buy-to-letters have had a tough time recently, but this tax cut could see an increase of sale of rental properties by people who wish to cash in a few of their assets, sell second homes, or simply leave the rental game.
Income tax cuts – but HR pension savers be warned
It was surprising to discover the Chancellor was making income tax concession despite the ongoing deficit. From Apr 2017 the individual tax allowance will be raised to £11,500, whilst the HR threshold increases to £45,000.
However, if you are a borderline HR taxpayer there is something to be aware of. This change could mean you are no longer a HR tax payer, therefore you also lose the 40 % tax relief on your pension contributions. So you may need to make additional pension contributions prior to next April, to optimise tax relief while it is still available!!.
A boost for small business
Some other incentives came for SMEs as well as the self-employed, corporation tax is falling to 17 % by 2020. There is also a new calculation of stamp duty for business properties, just like the tapered stamp duty on personal homes.. zero to £150k, 2 % on the next £100k and 5 % above £250,000.
A further gift arrived in a new limit for small business rate relief. From Apr 2017, small companies that inhabit property having a rateable value of £12k or less will not be subject to business rates – which means big savings for approximately 600,000 small companies.
We are going to also see type 2 NI contributions end, which is going to provide the self-employed a boost. Overall, it’s been an excellent Budget for business owners.