March commences and we have the traditional daffodils appearing, clocks will be going back and the final push of snow disappears as the ‘Beast from the East’ slips away. But, it seems that one of the March traditions has ceased for the time being as the Treasury have confirmed that the Spring Budget will be more of a ‘State of the Nation’ announcement. In their words,
“There will be no red box, no official document, no spending increases, no tax changes. The chancellor will publish updated economic forecasts – we expect the speech to last between 15 and 20 minutes.”
We can’t say that we are disappointed, it always caused a little bit of tension, with the ‘will he, won’t he’ comments in the press. It doesn’t mean that nothing is changing, more that we have had a little more notice to deal with these changes.
This year sees a lot of changes to some of the allowances, all of which ensures that good planning is more important than ever. Whilst there is an increase to the Personal allowance (£11,850 from £11,500), there are three other key changes to allowances that will come into effect from April 6th 2018, which we would like to draw to your attention.
Residence Nil Rate Band – Increase from £100,000 to £125,000.
This is the new allowance, launched in April 2017, which aims to take some or all of your home outside of IHT. By 2021, the allowance should be at £175,000 and along with the Nil Rate Band of £325,000, should give a married couple of notional IHT allowance of £1M (£500,000 each).
However, as is always the way with these things, the devil is in the detail. There are caveats concerning the ability to only pass the home to your direct descendants, rather than other family members and also very complicated rules on downsizing. Add in a level of tapering for properties above £2M and it is clear that careful planning is required to benefit fully from this.
Pension Lifetime Allowance (LTA) – Increase from £1,000,000 to £1,030,000
The Pension Lifetime Allowance is the maximum level that people can withdraw from their pension in total without paying a charge. For the first time since 2010, the allowance has increased, due to indexation being added to the calculation when it was last reduced two years back. A 3% inflation rate means that there is now an increased Lifetime Allowance level. For those affected by the LTA, this is good news. It means increased Tax Free Cash and the opportunity to withdraw more pension before the LTA charge takes effect. Additionally, if you are looking to withdraw money from your pension, it may be wise to wait until after 5th April, as it means that the amount, when calculated as a percentage against the LTA, will be slightly less.
Dividend Allowance – Reduce from £5,000 to £2,000
This will affect directors of limited companies and those who hold significant investment outside of an ISA or Pension wrapper. Directors will need advice around their current and future remuneration strategy. They should be asking whether a combination of dividends, salary and employer contributions into their pension would be more suitable. Even with the reduced dividend tax free allowance, Company Directors should still find that dividends will be slightly more attractive than taxable income due to the national insurance savings they provide. However, it may be that a different remuneration package which includes higher Employer Pension contributions may be more beneficial from tax year 18/19. Once again, planning is clearly an important aspect.
Those investors who are affected by this may want to consider taking more dividends this tax year rather than next to make use of the £5,000 allowance before it reduces to £2,000. After that, it is clearly more important than ever to take advantage of your ISA allowance. Should this allowance prove an issue, you may wish to consider investments that pay a lower yield.
These are three key allowance changes. Whilst this Government remain committed to not reducing direct tax levels, they are clearly finding other ways to amend the tax take. With the end of the Tax Year nearly upon us, it is crucial that we plan carefully to see if we can take advantage of these changes.