UK Chancellor delivers budget for the “next generation”
01 April, 2016
<em>1 Apri, 2016</em>
After Chancellor George Osborne’s radical pension freedoms introduced last year, he had been expected to introduce even more sweeping changes to UK pensions’ legislation in the Budget delivered on 16 March 2016. Mr. Osborne had been considering introducing either a flat rate of tax relief on pension contributions (which would have negatively affected higher rate tax payers in the UK) or a pension ISA which would have ended upfront tax relief on pension contributions.
However, in a surprise announcement shortly before the Budget, it was confirmed that the Budget would not include any radical changes to UK pensions’ tax relief. It was widely reported that the shelving of plans to overhaul pensions’ tax relief was due to fears of upsetting Conservative MPs ahead of the Brexit referendum in June this year.
The pensions industry are welcoming the status quo for now which ends months of intense speculation about what changes were to be announced. Despite not introducing swingeing changes to pension taxation, in an effort to help younger people and lower earners save more, the Lifetime ISA was introduced (referred to by some as the “LISA”).
The LISA will be introduced from April 2017 and enable any person under 40 to save up to £4,000 per year. In return, the UK government will give a 25% bonus on this money. Contributions can continue to be made with the bonus until age 50. Money in the LISA can be saved until age 60 and can be used as retirement income or can be withdrawn to buy a first home. The government will set a limit for property purchased using the LISA at £450,000. Certain restrictions on drawing down the LISA will also apply. The total amount that can be saved each year into all ISAs will be increased from £15,240 to £20,000 from April 2017.
While generally well received, the LISA does little to help the “squeezed middle” of 40-55 years olds in the UK who are not saving enough for retirement. In addition, some worry that by adding another savings option, the LISA creates general pension confusion as people struggle to determine which savings option is best for them in the short and long term. For US taxpayers, as for US tax purposes, UK ISA’s do not receive the tax deferred roll-up status that they do for solely UK taxpayers, the LISA is unlikely to be attractive in any event.
Other key announcements in the March Budget regarding UK pensions included some technical amendments required to correctly implement the new pension freedoms. Examples include:
- Re-aligning the tax treatment of serious ill-health lump sums with lump sum death benefits so that they can be paid tax-free when someone is aged under 75 and has less than a year to live, but has already accessed their pension
- Making serious ill health lump sums taxable at an individual’s marginal rate of tax when paid to individuals aged 75 and over
- Enabling dependents with flexi-access drawdown pensions to continue with drawdown when they turn 23 rather than having to take their funds as lump sums.
Other key announcement which could impact UK expatriates include:
- The Personal Allowance will increase to £11,500 and the higher e threshold will rise to £45,000 in April 2017. The Personal Allowance is the amount of income you can earn before starting to pay income tax. This is currently £10,600, rising to £11,000 in 2016 and now to £11,500 in April 2017. The point at which the higher rate of income tax will be paid will increase to £43,000 in 2016 and £45,000 in April 2017
- The higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10% from April 2016. However these lower rates will not be applied to gains on residential property or carried interest. An extra 8% is added in such circumstances. This means, for example, that the new Capital Gains Tax charge on non-residents on the disposal of residential property will still be charged at 28%