Tax and Pension Legislative changes of 2015
The tax and pension legislative landscape rarely remains still for long. But 2015 heralded significant changes which could affect individuals, both now and in the future.
1. New pension income options
Radical changes last April heralded possibly the biggest shake-up to UK savings and pensions ever. Defined contribution (DC) pension savers now have more freedom, choice and flexibility than ever before over how they access their savings:
- There’s no longer any compulsion to buy an annuity;
- Anyone of pension age can now draw as much (or as little) from their pension pot as they choose at any time, with 25% tax free and the balance taxed as income in the year it’s taken.
The pension changes have revolutionised how individuals are able to take their pension savings. To unlock the full potential of these new rules, it requires a rethink of existing advice models and a modern flexible pension scheme which can facilitate all the new freedoms. There’s no obligation for every DC pension scheme or provider to offer them. Many pensions will have been around for years – designed with a very different retirement journey in mind.
2. Reduced Annual Allowance for accessing income flexibility
Accessing the new pension flexibility comes at a price – future pension funding to money purchase schemes will be capped at £10,000. It may seem a small price to pay for unrestricted access to a lifetime’s pension savings. Delve a little deeper and it becomes clear that, with careful planning, it needn’t be an issue at all.
3. Pension death benefit rules
The new pension death benefits rules means individuals can now consider how they can provide a legacy from their remaining pension pot. The changes will see pension pots become far more inheritable than ever before. Tax charges have been reduced and there is now greater freedom on who can carry on enjoying an income from unused funds.
4. Pension input periods aligned to tax year
Come the 6 April 2016, all Pension Input Periods (PIPs) will be aligned to the tax year. Going forward, all pension savings (both annual allowance and personal tax relief) will always be measured across the tax year. This makes it much easier for the vast majority of clients to understand how much they can pay into their pension each year.
But the interim changes could give some individuals two bites at the annual allowance (AA) cherry this tax year. Not everyone will benefit, but some individuals will have an extra AA of up to £40,000 to use before 6 April 2016.
5. Savings rate band
Offshore bonds were given a double tax boost. Changes to how savings income is taxed means a greater number of offshore bond savers will pay no tax on their bond gains.
The change saw the savings rate tax band extended to £5,000 and the tax rate cut from 10% to zero from April 2015.
Coming in April 2016
6. Lifetime allowance cut to £1M
Dealing with a cut to the Lifetime Allowance may seem a little like ‘Groundhog Day’ – we’ve been there before in 2014 and 2012. Once again we have fresh fixed and individual protections for those at risk of breaching the new £1M threshold.
But each subsequent cut brings the impact more and more into the mainstream – affecting a greater number of your clients, and increasing the need for advice.
7. Reduced Annual Allowance for high earners
Some high income individuals will face a cut in the amount of tax-efficient pension saving they can enjoy from 6 April 2016. This might be the trigger to maximise pension funding this tax year for individuals likely to be affected now or in the future. And remember that there’s the possibility of additional funding this year with the introduction of the special £80,000 annual allowance (AA). Just bear in mind the pending lifetime allowance cut to £1M.
8. New dividend allowance
There will be both winners and losers when the £5,000 annual dividend allowance is introduced in April. Higher rate taxpayers could be better off by up to £1,250 a year (£1,530 for additional rate taxpayers) but some basic rate taxpayers could be worse off by as much as £2,025.
The changes may trigger a review of individuals existing investments and a rethink of where future savings are accumulated.
9. Personal savings allowance
The new ‘Personal Savings Allowance’ will benefit both basic rate and higher rate taxpayers, irrespective of their level of earned income.
The allowance will be:
- Basic rate taxpayers: £1,000. So when combined with the personal allowance and savings rate band ,anyone with total income below £17,000 won’t have to pay tax on any of their savings. And those with higher incomes, but less than the £43,000 higher rate threshold will still benefit from £1,000 of tax free savings.
- Higher rate taxpayers: £500. Those with total income above £43,000 will be limited to a tax free allowance of £500.
- Additional rate taxpayers won’t benefit from the new allowance.
And in another positive note, savers will see interest paid gross, with no deduction of 20% tax at source by their bank or building society from April 2016.
Coming in April 2017
10. IHT residence nil rate band
The new IHT Residence Nil Rate Band (RNRB), which is in addition to an individual’s own nil rate band of £325,000, is to be introduced from April 2017. This additional nil rate band is only available where the main residence is passed down to direct descendants (i.e. children, grandchildren etc).
Individuals could save as much as £140,000 in IHT when the family home passes to children on death.
Source: Standard Life