What's new in the new tax year?

by Alexander Beard, on Apr 26, 2016 5:48:47 AM


In this article we provide a reminder of the various changes that have taken place from 6th April which will have an impact on the financial planning world. This includes changes in the areas of pensions, taxation and savings.

Pensions

  • Lifetime allowance – has reduced from £1.25m to £1m. Two new protections are available (Individual Protection 2016 and Fixed Protection 2016) and although there is no application deadline the protection must be applied for and a reference number obtained before benefits are crystallised (and for fixed protection, pension funding must have stopped at 5th April 2016)
  • Dependants with a drawdown pot no longer have to use all of this fund before age 23 or pay tax charges of up to 70% on any lump sum payment – they can continue to access their funds as they wish after their 23rd birthday (this measure will take effect from the day after the Finance Bill 2016 receives Royal Assent)
  • Tapered annual allowance takes effect – relevant to those with both adjusted income over £150k (all taxable income including employer pension contributions) and threshold income over £110k (all taxable income excluding all pension contributions – employer and employee)
      • For those affected every £2 of adjusted income over £150k reduces the AA by £1
      • The maximum reduction to the AA is £30k to bring the AA down to a minimum of £10k (the minimum of £10k applies once adjusted income reaches £210k)
      • Carry forward from previous tax years remains available in the usual way (unused relief from 2013/14 to 2015/16 can be carried forward to 2016/17)
  • Pension Input Periods (PIP) are all aligned with the tax year and can’t be altered
  • Pension lump sum death benefits on death after 75 – now taxable at recipient’s marginal rate(s) instead of at 45%
  • DC pensions already in payment can be paid as a trivial commutation lump sum if total pension savings would be £30,000 or less; as tax free cash would have already been paid out in these circumstances, the lump sum will be taxable at the member’s marginal rate
  • Contracting out for Defined Benefit schemes has ended - members will no longer receive the 1.4% NI rebate and will pay higher NICs
      • Employers will also pay higher NI and there is a mechanism for them to reduce scheme benefits to reflect these higher costs, if they wish
      • The employer must consult with members if they do reduce benefits
  • Pension Protection Fund (PPF) compensation cap has risen from £34,401.19 to £37,420.42
  • Public Sector pensions in payment won’t increase in 2016/17 as the CPI figure on which the increase is based was -0.1%; Career Average schemes will have pensionable earnings linked to CPI revalued at a rate of -0.1%; where they are linked to national average earnings they will increase by 2%
  • New state pension is in force for those who reach state pension age from 6th April onwards
  • Member-borne commission now banned for pension schemes set up for auto-enrolment or to be considered as suitable for auto-enrolment
      • This ban does not currently apply to existing commission arrangements, although future legislation is expected to come into force later in 2016 banning this as well
  • In workplace DC schemes used for auto-enrolment, charges for active and deferred members must be the same, ie. no more active member discounts
  • Auto enrolment qualifying earnings band for 2016/17 is £5,824 - £43,000 and the earnings trigger remains at £10,000
  • Pension Credit - the Savings Credit element has ended for those reaching state pension age from 6th April onwards (except existing recipients)

Taxation

  • Personal Savings Allowance has started - first £1,000 of income from interest is tax free, reducing to £500 for higher rate taxpayers and £0 for additional rate taxpayers
      • This is in addition to the £5,000 starting rate limit for savings income which is available in whole or in part to those whose earned and pension income is below £16,000
  • Banks, building societies and National Savings & Investments are no longer deducting basic rate tax at source from interest payments
      • Any taxable interest should be declared via self assessment
      • As an interim measure, trustees and personal representatives will not need to notify HMRC of savings interest income for the 2016/17 tax year, if the trust or estate has no other income and the tax liability on the savings interest income is under £100
  • Dividend allowance is in place and the dividend tax credit is abolished
      • Users will be able to receive £5,000 worth of dividends tax free and any excess will be charged at a rate of 7.5% (basic rate); 32.5% (higher rate); and 38.1% (additional rate)
      • Total dividend income will still count towards earnings and could push users into higher tax brackets
      • Dividends inside pensions/ISAs are now non-taxable rather than being deemed to have technically paid 10% tax (meaning no difference for the pension/ISA holder)
  • Income Tax Allowances and National Insurance limits – personal allowance £11,000, higher rate tax kicks in after the first £32k of taxable income (therefore for someone eligible for a full personal allowance, once income exceeds £43k), additional rate once income goes over £150k
  • Personal allowance reduces once income exceeds £100k (income after deducting own pension contributions) and is lost completely at £122k and above
  • Upper earnings limit for class 1 NI has risen from £815 to £827 per week (£43,000 per year)
  • Capital Gains Tax – has reduced to 20% (from 28%) for gains in higher and additional rate bands and to 10% (from 18%) for gains in basic rate band
  • Stamp Duty for buy-to-let and other additional residential properties has increased by 3%
  • Marriage allowance, the tax free amount which people can transfer to their husband, wife or civil partner has increased to £1,100
  • Rent a room relief where people rent out a furnished room in their home has increased to £7,500 (having been £4,250 for years)

Savings

  • Savers can now take money out of a flexible ISA (cash ISA or the cash element of a stocks and shares ISA) and put it back in later in the same tax year without using up further ISA allowance

Employers

  • Employers no longer pay employer NI for apprentices aged under 25 who are paid below £43,000pa; employers already do not have to pay NI on under 21s on the same basis
  • Businesses and charities have had their employer NI bill cut by another £1,000 as the employment allowance has risen from £2,000 to £3,000
  • Charities can claim a 25% government top up through the Gift Aid Small Donations Scheme on up to £8,000 – a £3,000 increase
  • National Living Wage of £7.20 an hour has been introduced for workers aged 25 and above
Topics:EmployeesPensionsSavingsTaxUK