After the shock of Brexit and the subsequent change in government, Philip Hammond’s first Autumn Statement was eagerly anticipated and hotly debated. Many expected swinging cuts in the budget to pay for Brexit. Thankfully Hammond’s Autumn Statement contained a number of positive personal finance announcements that will benefit the majority of people.
The personal allowance will rise to £11,500 in 2017/2018 – up from £11,000 – and the higher rate threshold will rise to £45,000 from £43,000 currently. Hammond has indicated that both will rise to £12,500 and £50,000 respectively by 2020 (different bands will apply in Scotland as a result of devolved powers). Taken together, these changes will make a significant difference to many lower and middle-income earners and will even provide a modest improvement for higher earners.
On the downside, the progressive removal of the personal allowance on income above £100,000, widens slightly to between £100,000 and £123,000. People with earnings in this bracket should consider higher pension contributions to avoid the 60% tax rate.
The tax and National Insurance advantages of salary exchange schemes will be removed from April 2017, with only a few exceptions (pensions, childcare vouchers, the cycle-to-work scheme and ultra-low emission cars). As a result, employees exchanging salary for benefits will pay the same tax as those who pay for them out of post-tax income, although any existing arrangements in place before April 2017 are protected until April 2018. Larger arrangements for cars, accommodation and school fees are protected until April 2021.
The Chancellor also announced that the government will consider how benefits in kind are valued for tax purposes, with a consultation on employer-provided living accommodation and a call for evidence on the valuation of all other benefits in kind to be published in the 2017 Budget.
Currently, the general rule for valuing benefits is to use the cost to the employer of providing the benefit, which works very well for employees where benefits with a high market value can be provided at a low cost to the employer – for example subsidised schooling at independent schools for children of the teaching staff. In these cases, it is quite possible that the value of the taxable benefit will increase significantly.
The Government intends to cut corporation tax to 17% by 2020 and the rate will fall to 19% in April 2017. For owner-managed firms these changes will go some way to offsetting the new dividend taxation rates announced by the previous Chancellor.
From 1 April 2017 there will be a new (higher) VAT flat rate of 16.5% for ‘businesses with limited costs’, defined as companies whose costs of goods is less than 2% of turnover, or less than £1,000 per year. This is likely to affect professional services firms such as IT consultants, architects, solicitors and so on and it might be worth considering leaving the flat rate scheme and accounting for VAT conventionally.
No news is good news when it came to pension tax relief, which remained untouched. Hammond obviously thought it wasn’t the time for yet another pension shake-up, although it undoubtedly remains on the Government’s agenda. In light of this, now could be a good time to maximise funding and make the most of your higher or additional rate tax relief, especially if you fall into the 60% tax bracket.
The Chancellor announced just one cut to pension allowances. The Money Purchase Annual Allowance will be cut from £10,000 to £4,000 from April 2017. This only affects people who have already taken pension income from a defined contribution (DC) pension under the new pension freedoms regulations, but then continue to make further contributions to a DC scheme.
Some older DC pension schemes may only offer annuities or Uncrystallised Pension Funds Lump Sum (UFPLS) options at retirement. More modern, flexible pensions that offer the full range of income options can help by making sure that only the tax-free cash can be taken, allowing the standard Annual Allowance to be retained.
For those already in receipt of a state pension, it was confirmed that the generous triple lock will be maintained throughout the current parliament. But again, don’t expect this to continue in the long term as the triple lock is looking increasingly unsustainable and expensive for UK PLC finances.
Savings & investments
The ISA subscription limit will rise to £20,000 with effect from 6 April 2017, a significant increase on the current £15,240 limit.
NS&I will offer a new 3-year Investment Bond with an indicative rate of 2.2% from spring 2017. At only 0.6% higher than the current best-buy 3 year bond interest rate, however, savers with the maximum £3,000 to put aside for this period would only gain £18 extra interest per year, before tax. When compared to the serious impact that ultra-low interest rates are having on savers, this initiative is really no more than window dressing.
Investment bond owners who unwittingly face a large tax charge as a result of surrendering part of their bond will be able to apply to HMRC to have the charge recalculated on a ‘just and reasonable basis’ with effect from 6 April 2017. Despite this, prevention is better than cure and professional advice should continue to be sought on the most appropriate way to withdraw funds from this type of investment product.