Chancellor Philip Hammond's 2017 Budget announcement last week provided details on how the Government will steer the economy through Britain's divorce from the European Union, ahead of Article 50 being triggered later this month.
Whilst delivering his first (and last) Spring Budget in the House of Commons, he said he was "building the foundations of a stronger, fairer, more global Britain", with changes that have ramifications for investors, business owners and pension savers.
Here is what the Chancellor announced, who it will affect and how:
In a dramatic crackdown, the budget turned to those looking to move their pensions overseas. For some, it could mean tax charges that wipe out a quarter of their funds.
Unless strict new criteria is met savers who wish to transfer their UK pension pots to a Qualifying Recognised Overseas Pension Scheme (‘QROPS’) now face a 25% tax charge.
The new measure, which came into effect on 9th of March 2017 will have the greatest impact on residents outside of the European Economic Area (‘EEA’).
The policy is also likely to reduce QROPS transfers to jurisdictions such as Gibraltar and Malta, which are popular with expatriates.
However, the 25% tax charge will not apply if both the individual and the offshore pension scheme are in the same country or both are within the EEA, or the QROPS is provided by the individual’s employer.
Nevertheless, should the person’s circumstances subsequently change within five years of the pension transfer, it will be necessary to reassess whether an overseas transfer charge applies.
The government also announced that any payments out of funds transferred to a QROPS on or after 6th of April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is residing. This means that UK tax charges would also apply to a tax-free offshore pension transfer if, within five tax years, an individual becomes a resident in a different country or if income is taken within the first five tax years.
The government also confirmed that it was to push ahead with a cut to the Money Purchase Annual Allowance (‘MPAA’), which will restrict future pension saving for over-55s who have made the most of the pension freedoms.
The pension freedoms, announced three years ago, gave savers the opportunity to spend defined contribution pension savings as they wished from the age of 55, subject to tax paid at their marginal rate instead of the 55% charge previously required.
The move to cut the MPAA from £10,000 to £4,000 from April 6th was announced in the Autumn Budget and was aimed at restricting opportunities for over-55s to recycle pensions tax relief. But it sparked widespread opposition in the pensions industry.
It was also revealed that the government had raised nearly five times as much tax revenue from the pension freedoms as it had first anticipated, after over-55s cashed in more of their pensions at a faster rate than expected.
While the Treasury had estimated an extra £300m in tax in the 2015-16 tax year because of the pension freedoms, it ended up raising £1.5bn.
The £1.1bn it now expects to raise this tax year is itself almost double the initial £600m estimate.
Dividend allowance slashed
In addition to the national insurance changes, the chancellor also said he wanted to bridge the gap between the amount of tax paid by employed and self-employed people. To achieve this, Mr Hammond has slashed the tax-free dividend allowance from £5,000 to £2,000 from 2018.
The measure is designed to limit the ability of self-employed people to take advantage of this tax break by paying themselves in dividends. However, this will also affect investors holding shares outside individual savings accounts (‘ISAs’) or pension wrappers.
The government’s Budget document highlighted that it has recently increased the amount that investors can hold tax-free in an Isa to £20,000 — a measure due to come into effect on April 6 2017.
While experts were united on the increased importance of using tax-efficient wrappers (e.g. an Isa), in light of the reduced dividend allowance, they were divided on the impact on investors.
Top earners might, however, be an exception, following the recent rise in dividend tax rates. Experts say that someone earning at least £170,000 and taking dividends out of their company would pay more tax than if they were self-employed.
● Self-employed national insurance: In a move that overshadowed his core aim of delivering a fiscally tight Budget to Brexit-proof the British economy, the Chancellor increased national insurance contributions for the self-employed. Theresa May temporarily suspended the new legislation for self-employed workers until the autumn. On 15 March 2017, Philip Hammond announced a U-turn and dropped plans to increase national insurance contributions (NICs) for the self-employed, agreeing that it breached the wording of the Conservatives’ 2015 manifesto pledge.
● Education: The Government is to continue with its free schools’ expansion plan by investing another £320m towards the opening of new schools, despite fierce criticism from industry leaders. Additionally, Chancellor Phillip Hammond has put aside £260m for much-needed repairs to school buildings. A further £1bn in extra funding was also announced for schools, including £500m for new T-level vocational exams.
● Childcare: The tax-free childcare (TFC) policy, which provides parents with children under the age of 12 with up to £2,000 a year per child to help towards childcare costs, will be rolled out from April 2017. The government also confirmed that parents with children who are three and four years old will see their free childcare entitlement increase from 15 - 30 hours a week from September 2017.
● NS&I Savings bond: Mr Hammond confirmed that the National Savings & Investments bond will be available from the autumn, and will pay 2.2% on deposits up to £3,000.
● Personal allowances: In 2017-18, the personal income tax allowance for England, Wales and Northern Ireland rises to £11,500 (and the allowance will reach £12,500 by the 2019-20 tax year). The higher-rate threshold will increase to £45,000.
● Tax avoidance: New penalties for people who facilitate tax avoidance as part of a drive to ensure fairness in the tax system. The government announced there would be “tough” penalties for professional enablers of tax avoidance ploys that were later defeated in court.
● Roads: Transport spending of £90 million for the North and £23 million for the Midlands to address issues on roads. There will also be a new £690 million competition for English councils to tackle urban congestion. However, there was no funding announced for preventative road maintenance such as addressing potholes.
● NHS: Hospitals will be awarded £325 million to implement their sustainability and transformation plans and another £100 million will be put into a new triaging projects in England to help free up hospital beds.
● Social Care: Around £2 billion was announced for social care in England over three years. The deal involves £1 billion in 2017/18 as Mr Hammond acknowledged the system is clearly under pressure which in turn puts pressure on the NHS.
● Business Rates: The Chancellor said business rates would not be abolished amid a looming hit to high street firms, but promised to reform the current revaluation process. He also announced any business coming out of small business rate relief with have rate increases capped at a maximum of more than £50 a month. Businesses with a turnover of less than £83,000 will have an extra year before the “making tax digital” reforms come in. Pubs have also been given £1,000 discount and local authorities have been given £300million fund to cushion the blow of rate rises on a case by case basis.
● Mobile phones: Consumers will face higher costs for using mobile devices outside the EU, after the Treasury imposed 20% value added tax on roaming telecoms services.
● Rent-a-room relief: A consultation will be held on proposals to redesign rent-a-room relief to ensure it is better targeted to support affordable longer-term lettings. It’s thought the changes could affect up to 52,000 Airbnb hosts around Britain, with an increase in tax of between £400 and £3,300 a year if the Government decides to scrap rent-a-room relief for short term lettings. No timescale for the consultation has been set.
● Taxation of benefits in kind: The government is to publish a call for evidence on exemptions and valuation methodology for the income tax and employer national insurance contribution treatment of benefits in kind.
● Parental benefits for self-employed: The government will consider whether there is a case for greater parity in parental benefits between the employed and self-employed. Currently, the self-employed qualify for maternity allowance at the flat rate of £139.58 (or 90% of their earnings if lower) for 39 weeks during maternity. Employees receive the same amount in statutory maternity pay for the last 33 weeks, but during the first six weeks, they qualify for 90% of their pay as SMP.
● Sin taxes: No increases in alcohol or tobacco duties on top of those previously announced. Tobacco will rise by 2% above retail price index (RPI), and duty on beer, cider, wine and spirits will increase in line with RPI. Fuel duty has been frozen for another year.
● Non-dom rules: Extension of the rules governing non-doms bringing overseas monies to the UK could see more cash flow into the country. There will be a two-year respite on the rules on repatriating mixed funds, comprising more than one type of income or capital.
● Consumer protection: Plans were announced to end the cycle of “subscription traps”, where people sign up for a paid-for service without meaning to, such as when a paid subscription starts automatically after a free trial has ended. New measures to be considered in a green paper in the summer.
● Return to work fund: £5m to support people returning to work following a career break.
This content is for information and guidance purposes only. It does not constitution any legal or financial advice and should not be relied on as legal or financial advice in relation to a particular situation. The content herein reflects information available as at 15th of March 2017.