There may be no Budget, but we still get allowance changes
9th March 2018
March has arrived and we have the traditional daffodils appearing, clocks going forward and the final push of snow disappearing, 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 a ‘State of the Nation’ comment than anything else. 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 to lose the March Budget. Press comments about what the Chancellor would or wouldn’t change always caused a little bit of tension. It doesn’t mean that nothing is changing, more that we have had a little more notice to deal with it.
This year sees amendments to some of the key allowances, all of which mean 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 increase further to £175,000, and along with the Nil Rate Band of £325,000, this should give a married couple a notional IHT allowance of £1M (£500,000 each).
This appears to be good news, but, 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 Estates 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 is increasing, due to indexation being added to the calculation when it was last reduced two years ago. A 3% inflation rate means that there will be an increased Lifetime Allowance level. For those affected by the LTA, this is good news, as it offers increased Tax-Free Cash and the opportunity to withdraw more pension before the LTA charge takes effect. Therefore, if you are looking to withdraw money from your pension, it may be wise to wait until after 5th April, when the amount, calculated as a percentage against the LTA, will be slightly less.
Dividend Allowance – Reduction 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. But in the longer term, it may be that a different remuneration package which includes higher employer pension contributions may be more beneficial. Once again, planning is clearly an important aspect.
Any investors affected by this may have to consider investments that pay a lower yield in the future, and it is clearly more important than ever to take advantage of your ISA Allowance, which is unaffected by the Dividend Allowance.
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.