Richard Libberton offers a guide to the big changes for the new tax year from 6 April 2016
Lifetime Allowance (LTA)
The Lifetime allowance will reduce from £1.25m to £1m on 6 April 2016. There will be two forms of protection available for pension savers, namely Fixed Protection (2016) and Individual Protection (2016). Anyone may opt for Fixed Protection if they think they will be impacted by the reduction in the lifetime allowance either now or in the future.
However, on-going pensions savings must cease from 5 April 2016, giving them a last opportunity to make a one-off contribution. In return for forsaking further pension contributions, HMRC will allow the saver to enjoy a protected lifetime allowance of £1.25m.
Individual Protection offers further cover against the fall in the lifetime allowance, this time for those with funds of £1m or more on 5 April 2016, subject to an overall maximum of £1.25m. Under this option, pensions savings are allowed to continue allowing savers access to valuable on-going tax relief.
For those considering Fixed Protection, they must act before 5 April 2016 and ensure that they cease making contributions before the end of this tax year.
The summer budget created an opportunity for pensions savers to boost savings to a maximum of £80,000. This is only available in the tax year 2015/16 and is a result of the Government aligning over-complicated ‘pension input periods’ with the tax year. From 6 April 2016, the annual allowance for 2016/17 will be £40,000 and unused allowances from the previous three years may be carried forward.
Those considering drawing pension income using the new pensions freedoms should consider making a final pension contribution and taking full advantage of the annual allowance and carry forward rules. Any income taken ‘flexibly’ under the new regime means that ongoing pension savings are restricted to the money purchase annual allowance (MPAA) of £10,000. Furthermore, unused carry forward cannot be used once the MPAA has been triggered.
Higher earners should act now to maximise pension savings before the introduction of the tapered annual allowance, which comes in on 6 April 2016. The annual allowance of £40,000 will be reduced by £1 for every £2 of ‘adjusted income’ over £150,000 until reaching an annual allowance of £10,000. There is a further complication in a second test, where ‘threshold income’ of £110,000 and under will mean that the full annual allowance of £40,000 is preserved.
ISAs remain popular and the maximum savings permitted in an ISA is £15,240 in 2015/16. This allowance may not be carried forward and will be lost if not fully subscribed. Investors should ensure that they have maximised this opportunity before the end of the tax year. There are a number of investment opportunities within the ISA wrapper, offering tax-free income and growth. From April 2016, peer-to-peer lending will be allowable through the Innovate Finance ISA.
Also effective from 6 April 2016 is the ability to make withdrawals from a cash ISA (or the cash element of a stocks and shares ISA) and replace them within the same tax year without affecting annual subscription limits.
Parents and others may wish to take advantage of the Junior ISA limit of £4,080.
From 6 April 2016, the new personal savings allowance (PSA) will be introduced, meaning that a basic rate taxpayer can have savings income of £1,000 tax-free. Higher taxpayers will have an allowance of £500. The PSA is in addition to the personal allowance.
Interest that is already received tax-free won’t affect the PSA, meaning that ISA interest and Premium Bond winnings will not count against the PSA limit.
Also, from 6 April 2016 interest will be paid gross, meaning savers who do not pay tax on their savings no longer need to register to have the interest paid without the deduction of tax.
Capital Gains tax
Everyone is entitled to a CGT annual exemption. For 2015/16 this is £11,100 and gains in excess of this amount are presently taxed at 18% for a basic rate taxpayer and 28% for a higher rate taxpayer.
If any investor has already made gains above the exemption, it may be worth disposing of loss making investments before the end of the tax year 2015/16 to offset against the gains.
In the latest budget, the Chancellor will slash the CGT rates to 10% and 20% respectively from April 2016. This means that any large disposals could be delayed until the new tax year to benefit from the lower rates of tax. Landlords do not benefit from the tax cut and will still have to pay 18% or 28% on any sales.
Much of IHT planning is not aligned with tax year end planning. It is however important to note that gifts up to the value of £3,000 in a tax year are exempt from IHT. If there was no such gift in the previous tax year a gift of £6,000 is possible, meaning that a couple may potentially gift up to £12,000.
Child benefit is withdrawn if either partner has income of £50,000 or more. Child benefit is removed completely if either partner is earning more than £60,000. However, the effect may be reduced or even eliminated by making a pension contribution in this tax year, which effectively extends the individual’s basic rate tax band.
The government are abolishing the arcane 10% tax credit on UK dividends. In its place and effective from 6 April 2016, a new allowance gives investors up to £5,000 worth of dividends, tax free. Above £5,000, individuals will pay tax depending on whether they are basic, higher or additional tax payers. Higher rate tax payers with dividend paying portfolios should assess their existing tax wrapper. Perhaps investing directly in stocks and receiving the dividend income direct within the new allowance would be more tax efficient for them.
The new allowance is really a zero rate tax band for dividends and is not in addition to the basic rate band for 2016/17.
The new single-tier state pension will start on 6 April and contracting-out will end. With demise of contracting-out, those lucky enough to be still accruing benefits in a defined benefit scheme will see their national insurance contributions rise on their take home pay.
Richard Libberton is a private wealth manager at Anderson Strathern Asset Management.